Question

Define or Explain the Concepts.
Micro economic theories are based on certain assumptions.

Answer 1

Micro - economics is based on certain assumptions. But the assumptions are unrealistic. The assumptions are as follows:
(a) Rationality : Micro - economics assumes that all individuals behave in a rational manner for instance a consumer makes best use of his income to derive maximum possible satisfaction. Also a producer makes best use of resource to maximise profit. But in reality decisions may be influenced by emotions, values preference and so on.
(b) Full employment and Laissez-Faire : The study of micro economics is based on assumption of full employment and Laissez-Faire. Full employment is an exception and Laissez-Faire (complete freedom) is no longer practised.
(c) Ceteris Paribas : Micro - economics is based on assumption other things being equal. E.g. law of demand states that other things remaining the same, the quantity demanded of a product is inversely related to its price.
(d) Perfect mobility of Resources : Micro economics assumes that there is perfect mobility of factors of production. Producers are free to enter any industry which provides maximum returns on investment, labor is free to enter in any profession which provides maximum return on his service.