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ROLE OF MICROECONOMICS
Microeconomics (from Greek prefix mikro- meaning “small”) is a branch of economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms.
One goal of microeconomics is to analyze the market mechanisms that establish relative prices among goods and services and allocate limited resources among alternative uses. Microeconomics shows conditions under which free markets lead to desirable allocations. It also analyzes market failure, where markets fail to produce efficient results.
Microeconomics stands in contrast to macroeconomics, which involves “the sum total of economic activity, dealing with the issues of growth, inflation, and unemployment and with national policies relating to these issues”. Microeconomics also deals with the effects of economic policies (such as changing taxation levels) on the aforementioned aspects of the economy. Particularly in the wake of the Lucas critique, much of modern macroeconomic theory has been built upon ’micro foundations’—i.e. based upon basic assumptions about micro-level behavior.
In this chapter, you will learn about:
As President Abraham Lincoln famously said in his 1863 Gettysburg Address, democratic governments are supposed to be “of the people, by the people, and for the people.” Can we rely on democratic governments to enact sensible economic policies? After all, they react to voters, not to analyses of demand and supply curves. The main focus of an economics course is, naturally enough, to analyze the characteristics of markets and purely economic institutions. But political institutions also play a role in allocating society’s scarce resources, and economists have played an active role, along with other social scientists, in analyzing how such political institutions work.
Other chapters of this book discuss situations in which market forces can sometimes lead to undesirable results: monopoly, imperfect competition, and antitrust policy; negative and positive externalities; poverty and inequality of incomes; failures to provide insurance; and financial markets that may go from boom to bust. Many of these chapters suggest that government economic policies could be aimed at addressing these issues.
However, just as markets can face issues and problems that lead to undesirable outcomes, a democratic system of government can also make mistakes, either by enacting policies that do not benefit society as a whole or by failing to enact policies that would have benefited society as a whole. This chapter discusses some practical difficulties of democracy from an economic point of view: the actors in the political system are presumed to follow their own self-interest, which is not necessarily the same as the public good. For example, many of those who are eligible to vote do not, which obviously raises questions about whether a democratic system will reflect everyone’s interests. Benefits or costs of government action are sometimes concentrated on small groups, which in some cases may organize and have a disproportionately large impact on politics and in other cases may fail to organize and end up neglected. A legislator who worries about support from voters in his or her district may focus on spending projects specific to the district without sufficient concern for whether this spending is in the interest of the nation.
When more than two choices exist, the principle that the majority of voters should decide may not always make logical sense, because situations can arise where it becomes literally impossible to decide what the “majority” prefers. Government may also be slower than private firms to correct its mistakes, because government agencies do not face competition or the threat of new entry.
As the terms imply, Microeconomics focuses on micro or small segment of economy and it studies the decision making process and econtomic problems of individuals ( household, firm, industry etc) in an economy with respect to that how they use scarce means or resources at their disposal for satisfying their unlimted ends. On the other hand Macroeconomics looks at a larger picture and is study of economy as a whole.
In order to understand the concepts (Microeconomics and Macroeconomics) better, we can say that Microeconomics is the study of an individual human being, an individual household, an individual firm or an individual industry etc with respect to how they use/divide their given scarce means among the possible alternative uses/ends in order to maximize their gain or wellbeing. Microeconomic theory does not study the economy as a whole and instead studies the individuals and their gain maximizing behavior in any economy. Microeconomics studies and analyzes individual (human being, household, firm, industry etc.) behavior with respect to issues like production, consumption, distribution, price determination etc.
Macroeconomics on the other hand, studies the aggregate or overall economic behavior of households, firms, industries etc in any economy. It focuses on broader economic issues like business cycles, inlation, deflation, stagflation, issues related to economic growth and development, national income, employment, money and monetary policy, fiscal policy etc.
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