Uses of micro economics

Uses of micro economics

Micro economics is theoretically as well as practically important. It is theoretically important and useful because it provides different economic theories. One can acquire theoretical knowledge from microeconomics. In addition to this micro economics is very much helpful in practical fields. Different types of economic policies can be formulated on the basis of micro economics analysis. In order to formulate a specific policy in certain area, the policy maker should have the knowledge of that area at micro level. Otherwise effective policy cannot be formulated.

         The following points will represent theoretical as well as practical use of micro economics.

·         Understand the functioning or working of the market economy

Micro economics provides knowledge about how the market economy functions without the role of government. There are thousands of consumers, producers and resource owners in the market, who are interacting to each other. They are doing their economy activities freely without government intervention. Micro economics tells how a consumer reaches their equilibrium condition. Likewise how producers and resources owners attained equilibrium in their economic activities. Beside micro economics shows the interdependence of different economic agents to function like the economic effectively.

·         Efficient allocation of resources

Since, there is scarcity of resources, micro economics provides knowledge about how the limited resources are efficiently allocated so that consumers and producers reach their equilibrium position. If the resources are not efficiently allocated the unlimited wants of society cannot be satisfied.

    Micro economics provides knowledge about how the consumer are able to maximize utility with the help of limited resources. A particular consumer will be in equilibrium when marginal utility from different commodities are propotional to their respective prices. Suppose that consumer allocates his limited budget into two commodities x and y, if the following condition is satisfied then it will be the condition of efficient allocation of resources and consumer can maximize the level of satisfaction.

   MUx/Px=MU_y/P_y

Where ,

MU_x= marginal utility from commodity x

MU_y= marginal utility from commodity y

P_x= price of commodity x

P_y= price of commodity y

Similarly

A producer or business firm will be in equilibrium when the following condition is satisfied.

MP_k/MP_l=r/w

Where

MP_k= marginal product of capital

MP_l= marginal product of labour

R= rate of interest

W= wage rate

·         To provide tool for economic policies

Micro economics help to formulate suitable economic policies in different sectors of the economy. Price and policies, taxation policy, subsidies policy and other different economic policies are formulated in the particular sectors on the basis of micro economic analysis. These economic policies are helpful to promote social welfare.

·         Understand the situation of international trade

The real situation of international trade can be understood with the help of micro economics. From micro economics we can acquire knowledge about the level of export, import, balance payment and foreign exchange rate. How foreign exchange rate is determined is the concern of international trade. From micro economic analysis we can say that the foreign exchange rate is determined by demand foreign currency and supply of foreign currency.

·         To examine the condition of social and economic welfare

·         Business decision

1)      Price determination

2)      Optimal allocation of resources

3)      Demand forecasting

4)      Analysis of cost and revenue