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uses of microeconomics

These simple models remove the complexities in economic analysis. Further, microeconomic analysis is applied to show the gain from international trade and to explain the factors which determine the distribution of this gain among the participant countries. The importance of microeconomics can be analyses on the basis of following headings: The power of giant firms or a combination of firms over the output and price of a product constitutes the problem of monopoly. 10] Simple models It helps in explaining and fixing international trade and tariff rules, causes of disequilibrium in balance of payments, effects of factors deciding exchange rates impact of tariffs on prices etc. Modern economy is so complex that a central planning authority will find it too difficult to get all the information required for the optimum allocation of resources and to give directions to thousands of production units with various peculiar problems of their own so as to ensure efficiency in the use of resources. External economics prevail when the production or consumption of a commodity by an individual benefits other individuals and external diseconomies prevail when the production or consumption of a commodity by him harms other individuals. Copyright 10. Content Filtrations 6. Limitations / Disadvantages of Micro economics. Microeconomics occupies a vital place in economics and it has both theoretical and practical importance. Content Guidelines 2. Thus, not only does microeconomic theory describe the actual operation of the economy, it has also a normative role in that it suggests policies to eradicate “inefficiency” from the economic system so as to maximize the satisfaction or welfare of the people. ADVERTISEMENTS: Importance and Uses of Microeconomics! Micro economics is useful in explaining how market mechanism determines price in a free market economy. Micro economics uses simple models to understand actual economic phenomenon. Micro economics explains  efficient allocation and utilisation of resources to produce various types of goods and services. Privacy Policy 8. Report a Violation, Interdependence between Micro and Macro Economics, Microeconomics: Useful notes on Microeconomics (With Diagram). As Professor Watson says, “microeconomic theory explains the composition or allocation of total production, why more of some things are produced than of others.” He further remarks that microeconomic theory has many uses. He writes, “Microeconomic theory facilitates the understanding of what would be a hopelessly complicated confusion of billions of facts by construction simplified models of Behaviour which are sufficiently similar to the actual phenomena to be of help in understanding them. For whom etc to produce are taken by producers without any commanding force but with the market forces of demand and supply. It also makes important and useful policy recommendations to regulate monopoly so as to attain economic efficiency or maximum welfare. Further, it tells us how the goods and services produced are distributed among the various people for consumption, through price or market mechanism. It helps the government in fixing the tax rate and the type of tax as well as the amount of tax to be levied on the buyer and the seller. It also studies how taxes affect social welfare. 8] Foreign trade It explains and analysis how a country can gain from international trade. The article includes matters related to Uses, Importance, applications, and Limitations of Microeconomics. These models at the same time enable the economists to explain the degree to which the actual phenomena depart from certain ideal constructions that would most completely achieve individual and social objectives. Micro economics helps business planning ie helps the business community to plan their costs, production etc in anticipation of demand in order to maximize profits. Importance / Uses / Significance / Advantages of Micro economics. Like monopoly, monopoly (that is, when a large buyer or a combination of buyers exercises control over the price) also leads to the loss of welfare and, therefore, needs to be controlled. Moreover, as described above, microeconomic theory explains the conditions of efficiency in consumption and production and highlights the factors which are responsible for the departure from the efficiency or economic optimum. It is in this context that a large part of microeconomic theory is concerned with showing the nature of departures from perfect competition and, therefore, from welfare optimum (economic efficiency). 12] Basis of macro economics Microeconomics occupies a vital place in economics and it has both theoretical and practical importance. Micro economics explains the operating of a free enterprise economy where the individual has the freedom to take his own economic decisions.All economic decisions such as what, how, how much, where, when. 3] Business planning These simple models remove the complexities in economic analysis. It is the microeconomic analysis which is used to explain the factors which determine the distribution of the incidence or burden of a commodity tax between producers or sellers on the one hand and the consumers on the others. Microeconomic theory shows that welfare optimum of economic efficiency is achieved when there prevails perfect competition in the product and factor markets. Microeconomics has many theoretical and practical importance. Departure from perfect competition leads to a lower level of welfare, that is, involves loss of economic efficiency. 1] Individual behavior analysis In spite of the popularity of macroeconomics these days, microeconomics retains its importance, theoretical as well as practical. Perfect competition is said to exist when there are so many sellers and buyers in the market that no individual seller or buyer is in a position to influence the price of product or factor. Microeconomics shows how monopoly leads to misallocation of resources and, therefore, involves loss of economic efficiency or welfare. It is microeconomics that tells us how a free- market economy with its millions of consumers and producers work to decide about the allocation of productive resources among the thousands of goods and services. Besides, microeconomics finds application in the various problems of international economics. Image Guidelines 5. On the basis of this, microeconomic theory suggests suitable policies to promote economic efficiency and welfare of the people. These would have to include directives for adjusting to continual charges in the availabilities of millions of productive resources and intermediate products, in the known methods of producing everything everywhere, and in the quantities and qualities of the many items to be consumed or to be added to society’s productive equipment. MIcroeconomics has great uses. Microeconomic analysis is also useful applied to the various applied branches of economics such as Public Finance, International Economics. Due to this even the neo-classical economists had concentrated on micro-economics. This vast task can be achieve and in the past has been achieved, only by the development of a decentralized system whereby the millions of products and consumers and induced to act in the general interest without the intervention of anybody at the centre with instructions as to what one should make and how and what one should consume.”.

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