Page 11 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes
Fig. 1.1

Expenditure of Firms Factor Incomes of

Productive Market Resources Resources
Resources

Productive

Firms Consumers

Goods Services
and
Goods
Product and Expenditure
Services
Market
Consumption
Revenue
of
Firms

We reach the conclusion that microeconomics deals with the study of price theory, theory of individual
family, firm and industry, production theory and welfare theory.

Importance of Microeconomics
Microeconomics is an important mean in economic analysis which Keanz assumes as a necessary part
of one’s apparatus of thought. It has both theoretical and behavioural importance.
1. To understand the working of the economy: Microeconomics is very important in understanding
the working of a free economy. There is no organisation to plan and co-ordinate the economic system
in this kind of economy. The decision that how to produce, what to produce, for whom to produce,
how to distribute and what to consume, are taken by producers and consumers itself without
any external power. It concludes that in centrally planned economy, planning authority cannot
achieve proficient working in the absence of free entrepreneurial economy. As Learner has said,
“Microeconomics teaches us that complete simple working of the economy is impossible. Modern
economy is so complicated that no one centrally planned organisation can get all information and
it cannot provide every necessary suggestion for its efficient working.”
2. To provide tools for economic policies: Microeconomics provides analytical tools for the valuation
of economic policies of states. Price or value system is a tool, which helps in this function. In a mixed
economy, state operates many public utility services such as post office, railway, water, electricity, etc. In
this economical condition, central, state and regional government do not fix price on profit or loss basis.
Further, these prices affect the prices of other goods and services. There are public enterprises too, which
are operated on price-profit policy. Prices of goods manufactured by these effect prices of various goods
and services of private sectors. Some public enterprises are competitors of private enterprises and thus
their pricing policies are based on pricing-system. They cannot charge more price than private sector.
Microeconomics helps the government in formulating appropriate pricing policies and their valuation.

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