Scope And Purpose Of Microeconomics And Its Significance In Business Decision Making

Microeconomics refers to the study of individualistic economic behavior at the time of making economic decisions. It studies an individual consumer, producer, manager or a firm, price of a particular commodity or a household.

The scope or the subject matter of microeconomics is concerned with:

  1. Commodity pricing
    The price of an individual commodity is determined by the market forces of demand and supply. Microeconomics is concerned with demand analysis i.e. individual consumer behavior, and supply analysis i.e. individual producer behavior.
  2. Factor pricing theory
    Microeconomics helps in determining the factor prices for land, labor, capital, and entrepreneurship in the form of rent, wage, interest, and profit respectively. Land, labor, capital, and entrepreneurship are the factors that contribute in the production process.
  3. Theory of economic welfare
    Welfare economics in microeconomics is concerned with solving the problems in improvement and attaining economic efficiency to maximize public welfare. It attempts to gain efficiency in production, consumption/distribution to attain overall efficiency and provides answers for ‘What to produce?’, ‘When to produce?’, ‘How to produce?’, and ‘For whom it is to be produced?’   

Significance of Microeconomics in Business Decision Making:

Microeconomics plays a vital role in assisting the business firms and business decision makers. Some of the major functions of microeconomics in business decision making are listed below:

Optimum utilization of resources

The study of microeconomics helps the decision makers to analyze and determine how the productive resources are allocated for various goods and services. It also helps in solving the producers’ dilemma of what to produce, how much to produce and for whom to produce.

Demand analysis

With the help of microeconomic analysis, business firms can forecast their level of demand within certain time interval. The demand for a commodity fluctuates depending upon various factors affecting it. Thus, business firms and decision makers can determine the level of demand for the commodity.

Cost analysis

Microeconomic theories explain various conditions of cost like fixed cost, variable cost, average cost, and marginal cost. Along with this, it also provides an analysis of the short run and long run costs that help the business decision makers determine cost of production and other related costs, so they can implement policies to cut down cost and increase their level of profit.

Free Market Economy

Microeconomics explains the operating of a free market economy where, an individual producer has the freedom to take economic decisions like what to produce, how to produce, or for whom to produce. Allocation of resources is determined by price or market mechanism i.e. interaction between demand and supply

Production decision optimization

Microeconomics deals with different production techniques that help to find out the optimal production decision which helps the decision makers to determine the factors needed in order to produce a certain product or a range of products.

Pricing policy

Microeconomic analysis provides business managers with a thorough knowledge of theories of production and pricing in order to ensure optimum profit for the firm in the long run.

Determination of Relative Prices of Products & Factors of production

Microeconomics helps in analyzing market mechanisms i.e. determinants of demand and supply which are responsible for the determining prices of commodities in the market. Along with this, it provides an insight on theories relating to prices of factor of rent, wage, interest, and profit.

Basis of Managerial Economics

Microeconomics used for the study of a business unit, but not the economy as a whole is known as managerial economics. The various tools used in microeconomics like cost and price determination, at an individual level becomes the foundation of managerial economics.

Basis of Welfare Economics

Microeconomics is not only concerned with analyzing economic condition but also with the maximization of social welfare. It studies how given resources are utilized to gain maximum benefit under various market conditions like monopoly, oligopoly, etc. Analysis of production efficiency, consumption efficiency and overall economic efficiency are conducted on the basis of microeconomics.

Formulation of Public Economic Policies

Microeconomics tools are useful for introducing policies relating to tax, tariff, debt, subsidy, etc. it helps the governmental bodies to fixate on tax rate, types of tax, and the amount of tax to be charged to buyers and sellers.

Helpful in Foreign Trade

Microeconomics is useful in explaining and determining the rate of foreign exchange between currencies, fixing international trade and tariff rules, defining the cause of disequilibrium in the balance of payment (BOP), and formulating policies to minimize it.