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Introduction to Microeconomics

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  • Last Updated : 16 May, 2022

Microeconomics is a branch of economics studying the behavior of an individual economic unit. Adam Smith is known as the father of economics and microeconomics. Microeconomics help in contemplating the attributes of different decision-makers in an economy like individuals, enterprises, and households. In simple terms, microeconomics help in understanding why and how different goods have different values, how individuals make certain decisions, and how do they cooperate with each other. 

Economy is a system providing individuals with the means to work and earn a living to satisfy their needs and wants. They can do so through the process of manufacturing, consumption, investment, and exchange.

Economic Problem

Economic problem is the problem of choosing from among different options that arise because of three major reasons limited resources, unlimited human wants, and alternative use of the limited resources. 

  1. Scarcity of resources: Resources such as capital, land, labor, etc., are limited in an economy as compared to their demand. Therefore, an economy cannot manufacture everything they want which creates an economic problem. 
  2. Unlimited human wants: An individual’s wants never end, they always want something and can never be satisfied completely. As soon as they accomplish one want, another arises. Their priorities are also different and hence create an economic problem. 
  3. Alternate uses: The resources available in the economy are not only scarce, but they also have alternate uses. It means that a resource can be used in different ways, which makes the need to choose among the available resources essential, ultimately giving rise to the economic problem.

 

Economics is the study of a way in which a society decides or chooses to use the limited resources with alternate uses for the production of goods and services and to ultimately distribute the produce among different sections of the society. Simply put, economics is about choosing among different alternatives in the presence of scarcity. 

Positive Economics and Normative Economics

Positive economics is the study of the facts of life. It means that it deals with the real life economic problems as they are and how these problems are solved.

However, normative economics deals with finding out solutions to economic problems. Simply put, it answers the question ‘what ought to be done.’ 

Microeconomics and Macroeconomics

Microeconomics

The term ‘micro’ in microeconomics is derived from the Greek word ‘mikros’ meaning ‘small.’ It was founded by the father of economics, Adam Smith. Microeconomics is the study of the individual units of an economy. It means that in microeconomics, we study the behavior and choices made by individual businesses and consumers with the changes in different aspects of goods and services in an economy. The four major components of microeconomics are consumer behavior, market supply and demand, individual preferences driving producers, and market-specific labor markets. It helps in determining how one can achieve equilibrium at a small scale. For example, consumer equilibrium, individual demand, individual supply, individual savings, price determination of a commodity, etc. 

Macroeconomics

The term ‘macros’ in macroeconomics is derived from the Greek word ‘makros’ meaning ‘large.’ Macroeconomics is the study of the economy as a whole. It means that in macroeconomics, we study the behavior and choices made by the whole economy with the changes in different aspects of goods and services in an economy. Hence, its main focus is on the aggregate growth and correlation of an economy. The major components of macroeconomics are unemployment, inflation, and national output. It helps in determining how to achieve equilibrium in the income and employment level of a country. For example, general price level, poverty, rate of unemployment, national income, aggregate supply, aggregate demand, etc. 

Central Problems of an Economy

As discussed earlier, an economic problem is a problem of choosing among different alternatives because of the limited resources, unlimited human wants, and alternative uses. The three central problems of an economy are What to produce, How to produce, and For whom to produce.

 

What to produce?

With limited resources, an economy cannot produce all goods and services. It has to choose among the different goods and services. Therefore, the first central problem of an economy includes selecting goods and services to produce and the number of units or quantity of each commodity to be produced. For example, a farmer has to make choice between different crops as to which he should grow on one piece of land. He can decide to grow one crop of the whole land or grow different proportions of more than one crop. 

How to produce?

After deciding what to produce, another central problem of how to manufacture the goods and services arises. It involves selecting a technique of production from among different techniques. Usually, there are two techniques of production, labor intensive techniques, and capital intensive techniques. The former technique involves more use of labor, and the latter involves more use of machines. An organization can decide the technique based on different factors like the nature of the product, size of the market, size of the location, budget, etc. For example, a poor farmer can adopt labor intensive techniques as they are cheap. However, a rich farmer can adopt capital intensive techniques as he can afford to purchase machines. 

For whom to produce? 

The last central problem of an economy after deciding what and how to produce is for whom to produce. As an economy cannot satisfy the needs and wants of every individual of the society, it has to make a decision for who to produce a commodity and service. Simply put, it involves deciding who should get how much of the goods and services, i.e., how much production should be done for the poor and how much for the rich. For example, an organization can decide to produce necessity goods for the poor section of society. However, another firm can decide to produce luxury goods for the rich section of society. 

Besides these problems, there are two more problems that arise in underdeveloped countries like India. These are the problems of the growth of resources and the problem of the underutilization of resources. 

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