The word ‘micro’ means a millionth part. Micro economics is therefore the study of small parts of the economy. It studies the economic motives and behaviour of individual consumers and producers, and the principles involved in organizing and operating individual firms and industries. It studies how individual consumer, firm and industry attain equilibrium or optimum positions. A.P. Lerner says: “Micro economics consists of looking at the economy through a microscope, as it were, to see how the millions of cells in the body economic-the individuals, or households as consumers, and the individuals or firms as producers-play their parts in the working of the whole economic organism”.
Meaning and Definition of Micro Economics
According to K.E. Boulding___” Micro-economics is the study of a particular firms, particular households, individual prices, wages, incomes, individual industries and particular commodities”.
Micro is derived from the Greek word ‘micros’ meaning small. It seeks to explain the market for individual commodities and individual factors of production. It also tries to explain price determination of individual commodities and factors of production, It lays down the conditions of equilibrium of firms and industries. The analysis is based on the assumption of full employment of resources. The subject matter of micro economics may be summed up in four basic questions. They are:
- What goods shall be produced and in what quantities,
- How they shall be produced,
- To whom goods shall be produced and,
- Whether production and distribution of goods is efficient.
All these questions are answered by the price theory. The contents of price theory can be presented in a chart
Use and Significance of Micro Economics
- Understanding the operations of the economy: The greatest use of the price theory is the understanding of the economy. It explains how a free enterprise economy works and functions.
- Economic Welfare of people: Normative price theory is called welfare economics. The subject matter of welfare economics is the economics well-being of people as consumers and producers and the possible ways of improving that welfare.
- Economic Policy: Price theory provides analytical tools for economic policies affecting price and production. Economic policy means all the actions of the Government that are intended to influence the economy. The Government can evaluate the impact of its tax or expenditure policies on welfare.
- Managerial Economics: Another use of price theory is the application of its methods of analysis to business problems. Price theory n the service of business executives is known as managerial economics.