Micro Economics – Introduction Notes

Micro Economics is a branch of economic analysis that studies the economic behaviour of an individual unit, it may be a person, household or a firm.

Managerial Economics refers to integration of economic theory with business practices and application of economic tools for management of a business.

According to Spencer and Siegelman, “Micro Economics is the integration of economic theory with business practices for the purpose of facilitating Decision Making and forward planning by Management”

Micro Economics studies individual units like an individual household, pricing of individual products, wages of individual workers, profits of an entrepreneur etc.

It studies how scarce resources can be utilized to obtain maximum output or satisfaction.

Nature / Characteristics of Micro Economics

(1) Micro economic in nature i.e. related to firms at an individual level.

  1. It is applied to problem solving at firm level.

  2. It deals with individual units it may be a person, firm or a group of firms

(2) It is pragmatic i.e. a practical subject

  1. Micro Economics goes beyond rigid and abstract theoretical framework to help managers in Decision Making

(3) It is Normative – i.e. descriptive as well as prescriptive

Micro Economics tells what is and what ought to be

(4) It is conceptual i.e. based on sound framework of economic concepts. It analyses business problems on the basis of established concepts.

(5) Micro Economics aims at Problem solving It aims at analyzing and solving managerial problems of business units.

(6) Micro Economics borrows from mathematical, operational, research, statistical and accounting principles and tools to analyze and determine relationships between various economic variables.

Scope of Micro Economics

It uses economic theories and concepts which are used to analyze the operational and environmental problems related to a business to take appropriate business decisions and formulate future plans.

Its scope lies in:

Demand Analysis and Forecasting

  1. Estimation of demand

  2. Forecast of sales in future

  3. Determinants of demand

Cost and Product Analysis

  1. Cost estimates

  2. Variation and types of costs (classification)

  3. Cost output relationships

  4. Economies and dis economies of scale

  5. Production

Pricing decision

  1. Various forms of markets

  2. Pricing policies

  3. Differential pricing

Profit Management

  1. Nature and measurement of profits

  2. Break even analysis

Capital Management

  1. Cost of capital

  2. Rate of return

  3. Selection of project helps in planning and control of capital expenditure

Analysis of Business Environment

  1. Income and employment theory

  2. Monetary and fiscal policies help in forecasting business climate

Business decisions related to economic concepts

  1. Production decision

  2. Inventory decision

  3. Cost decision

  4. Marketing decision

  5. Investment decision

  6. Personnel decision

Limitations of Micro Economics

  1. It fails to explain the working of the economy as a whole.

  2. It is based on assumptions like assumption of full employment.

  3. Something true for an individual may or may not be true for a group as a whole.

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