Microeconomic Analysis

On the basis of time, the equilibrium between two variables in microeconomics is divided into three parts as micro-statics, comparative-micro-statics and micro dynamic which are also called types of microeconomics. The types of Microeconomics are explained separately as stated below. 

1- Micro-statics

Micro statics refers to the static relationship between microeconomic variables at the same point or period of time. In other words, it explains the situation of equilibrium between different variables at a certain point or period of time. when the value of economic variables are related to the same point of time, the functional relationship between variables is said to be statics. It is expressed as Dt =fPt & St = fPt.

The equilibrium condition of a particular point of time is  Dt = St ,   at Pt


Dt = demand, at a point of time,

St = supply, at that point of time,

Pt = Price at that point of time,

The concept of micro statics  has been illustrated in the following figure- 3.1 as; The figure shows the equilibrium of the market in a certain point of time. Both the demand curve DD and supply curve SS have intersected each other at point E in a particular point in time. So E is the point of equilibrium which relates two variables, the price (0P) and quantity (0Q) at that particular point of time. This is a static analysis.

2- Comparative Micro-statics
As time passes, there is a change in the conditions of demand and supply. This change in demand and supply brings a change even in the equilibrium condition. This type of change in equilibrium at different points of time is the study of comparative micro statics. Therefore comparative micro statics is the study of different equilibriums at different points of time. Comparative micro-statistics compares one equilibrium with another equilibrium but it does not study about the process of how one equilibrium breaks and another equilibrium establishes.
The comparative micro static can also be shown in the figure-3.2 below. In the figure, E is the initial equilibrium, where the equilibrium price is 0P and equilibrium quantity is 0Q. When the demand rises from DD to D1D1, the new point of equilibrium shifts from E to E1 where the equilibrium price is 0P1 and equilibrium quantity is 0Q1. The comparative study of the two equilibrium points E, E1 is the comparative micro statics but this study does not explain the process of how a new equilibrium attains.

3- Micro Dynamics

There is always change in time. This change in time brings about the changes in the price, quantity demanded & supplied of a commodity. Consequently there is also a change in the equilibrium position. Therefore, micro dynamics refers to that situation of the equilibrium in which an equilibrium of different variables goes through disequilibrium and a new equilibrium establishes. Hence, micro dynamics is the study of the process which shows how the initial equilibrium breaks and new equilibrium attains. Micro dynamics can also be illustrated by the following figure given below..


In figure 3.3, E is the initial point of equilibrium at which 0P price & 0Q quantity are the equilibrium price &  equilibrium quantity. Now let us suppose that there is an increase in income. The increase in income causes an increase in demand which results in a shift in demand curve from DD to D1D1. This brings about a disequilibrium in the market and the series of disequilibrium persists until the new equilibrium reached at point E1.

Let’s start the process from disequilibrium to the new equilibrium. The increase in demand can not be fulfilled by increasing in supply immediately. So the price level rises from 0P to 0P4 by EA. This rise in price encourages the suppliers to increase in supply from 0Q to 0Q3. Now, supply is more than demand by AB and 0Q3 quantity is demanded only at price 0P1. So the price falls from 0P4 to 0P1. This fall in price causes a fall in supply from 0Q3 to 0Q1 or the supply is equal to 0Q1 but demand is still higher than supply which pushes the price up from 0P1 to 0P3. Again the suppliers are encouraged to increase supply. This process continues again & again until the final point of equilibrium E1 is reached at price 0P2 & quantity at 0Q2. This is how micro dynamics explains the process of how an equilibrium breaks and the new point of equilibrium is established.  

Post a Comment