Micro Economics is the study of the economic actions of individuals and small groups of . individuals. According to Boulding, “The study of particular firm, particular household, individual price, wage, income, individual industry, particular commodity, is Micro Economics.”
Micro Economics is an important method of economic analysis. It has both theoretical and practical importance:
(a) Helpful in the efficient employment of resources-allocation of resources: Micro Economics deals with the economizing of scarce resources with efficiency. The principal problem faced by modern Governments is the allocation of resources among competing wants. In this sense, Micro Economics is used by the Government in the efficient employment of resources and achieving economic growth With stability.
(b) Helps in understanding the working of the economy: Micro Economics is of utmost importance in understanding the working of a free economy. In such an economy, there is no agency to plan and coordinate the working of the economic system. The decisions like how to produce, what do produce etc., are taken by producers mid consumers without any outside influence.
(c) Provide tools for economic policies: Micro economics provides analytical tools for evaluating the economic policies of an Economy. Price mechanism or market mechanism is the tool which helps us in this respect. Micro Economics thus helps in formulating correct price policies.
(d) Useful in understanding the problems of Taxation: The study of micro economics helps in understanding some of the problems of taxation. It is used to explain the welfare implications of a tax. It studies the distribution of incidence of a commodity tax (excise duty/sales tax) between sellers and consumers.
(e) Helpful in International Trade: In the field of international trade, it is used to explain the gains from international trade, balance of payments and the determination of the foreign exchange rate.
(f) Helps us to know Market structure: The study of Micro Economics is useful in understanding the different market conditions like perfect competitive market, monopoly, duopoly, oligopoly etc.
(g) Construction and use of economic models: Micro Economics constructs and uses simple models for understanding the actual economic phenomena. It helps not only to describe the actual economic situation, but also suggests policies that would bring in the desired results;
(h) The basis of predictions: Micro Economic theory can be used as the basis for prediction. This does not mean that it will enable us to predict the future. It will enable the user to make conditional predictions.
(i) Solution to the problem of choice: The study of Micro Economics helps to find solution to the problem of choice by providing various guidelines for proper allocation of scarce resources.
(j) Helps business executives: Micro Economics helps the business executives in the attainment of maximum productivity with existing resources. It is with its help that one is able to know the consumer demands and calculate the cost of production.
(k) Helps in formulation of economic planning: In order to solve the basic problems of an economy, conscious planning is required. The knowledge of micro economics helps the members of National Planning Commission to frame aims and objectives based on the availability of resources.
(l) Expands intellectual capacity of Human mind:- The study of economics helps individuals to develop their thinking and intelligence to take appropriate decisions in their daily life.
(m) To examine the conditions of economic welfare: Micro Economics can be used to examine the conditions of economic welfare. Welfare economics is related to maximization of social welfare. The study of Micro Economics may be the greatest help in raising the standard of living of the population.
(n) Helps different sections of the society: The knowledge of Micro Economics is very important to know the different sections of the society like poor, middle class, rich, male and female population, skilled and unskilled labourers etc. It helps us to understand the problems of these sections and to arrive at proper Solutions. Thus, Micro Economics is considered as an efficient method of problem solving.
