Question

Give reasons or explain the following statements.

1) Micro Economics is also known as price theory.

2) Micro Economics studies individual economic unit.

3) Micro Economics analyses partial equilibrium.

4) Micro Economic theories are based on certain assumptions.

5) Marginalism principle is used as a tool of analysis in micro economics.

Answer 1

1) We know that in microeconomics we study the behaviour of individual economic units such as the consumer and the producer. The basic aim of such a study is to determine the prices (in the commodities and factor markets). It is for this reason that microeconomics is also known as the price theory.

2) Microeconomics is a study that focuses on the behaviour of an individual economic units such as the consumer and the producer. 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. The basic focus of such a study is the determination of prices in the factor and the commodities market.

3) Microeconomics is based on partial equilibrium analysis. That is, while analysing each of the units/variables the effect of other units is assumed to be constant. In other words, it is based on the assumption of ceteris paribus. To put in simple words, it analyses each of the units is isolation while ignoring the interdependence among them. Such an analysis is known as partial equilibrium analysis.

4) Microeconomic theories are based on assumptions such as full employment, perfect competition, a laissez-faire style of working (no government intervention) and ceteris paribus. These assumptions help in understanding the relationship between any two variables. However, these assumptions may or may not exist in the real world.

5) Marginalism principle focuses on studying the change in total amount when one additional unit is added to it. This additional unit is called the marginal unit. All microeconomic decisions are based on this concept.