Question

Discuss the importance of Micro Economics.

Answer 1

The theoretical and the practical importance of Micro economics is as explained below:
(1) Working of a Free Market Economy: In such an economy, economic decisions such as what to produce, how much to produce, how to produce, etc. are taken up by private individuals. These decisions are based on consumer's preference or demand for product.
(2) Optimum Allocation of Resources: It explains how the resources are allocated and utilised optimally to produce various goods and services in a capitalist economy. Optimum allocation of resources results in maximum production without waste of scarce resource.
(3) Price Determination: It explains how prices of goods and factors of production are determined in the product and factor market through market mechanism.
(4) Useful to Government: It is useful in formulating and evaluating economic policies including pricing and distribution policies that promote economic welfare. It is useful in determining tax policy, public expenditure policy etc.
(5) Public Finance: It is also useful in analysing the impact of direct tax and indirect tax on economic welfare. allocation of resources, etc.
(6) International Trade: Micro economics also explains gains from international trade, effects of tariffs, factors affecting exchange rate, etc.
(7) Basis of Welfare Economics: It explains how optimum use of resources can be made to increase the welfare of the society by eliminating inefficiency in production.
(8) Model Building: Micro economics builds simple model which helps us in understanding complex economic situations. Decisions taken by the individual agents are the basis for the working of the economy.