Question

Define or Explain the following concepts.

1) Micro Economics

2) Partial equilibrium

3) Economic efficiency

4) Individual economic unit

5) Resource allocation

Answer 1

1) Microeconomics is the study of behaviour of individual economic units, basically consumers and firms, which interact in the market of different goods and services. It analyses how consumers make their consumption choices and take decisions, given their incomes and prices of goods and services. Similarly, it analyses how firms decide how much to produce by applying different input combinations. It also helps in determining prices, in both the commodity and factor markets, based on the demand and supply analysis. Thus, microeconomics is a study that basically focuses on the behaviour of individual economic units.

2) Partial equilibrium is an equilibrium situation achieved taking into consideration only a part of the market condition. That is, it is the equilibrium with regard to an individual unit assuming the effect of other units and variables constant. In other words, it is based on the assumption of “other things remaining constant”. It neglects the interdependence among variables. Thus, microeconomic analysis is regarded as partial equilibrium.

3) Economic efficiency can be defined as a situation in which welfare of the society is maximised. Microeconomics focuses on utilising scarce resources in a way that the public/social welfare is maximised. Economic efficiency involves attainment of efficiency along the following three aspects.

1. Production efficiency: It refers to producing the maximum amount of output from the available resources.
2. Consumption efficiency: It refers to distributing the produced goods and services among the various consumers in such a manner that the overall social welfare is maximised.
3. Overall economic efficiency: It refers to efficiency with regard to the production mix. In other words, it refers to producing that combination of goods and services that provide maximum satisfaction to the people.

4) Individual economic unit refers to a single variable such as an individual firm, a particular household, the price of an individual commodity and wages/income of an individual. The behaviour of individual economic units is studied under microeconomics.

5) Resource allocation refers to the distribution of resources among competing groups. These resources may be natural resources, money, labour, etc., which the producers use in production processes to produce goods. Resource allocation involves making decisions regarding how the resources should be allocated to each group such that they can be utilised in the best possible manner providing maximum gains to the society. The decision regarding resource allocation is particularly important because resources are scarce and also have competing uses. Thus, effort must be made to use them efficiently and optimally.