Importance of Microeconomics
Microeconomics and Macroeconomics are two major disciplines in Economics. Microeconomics deals with the behavior of individuals, firms and households in decision making and allocation of resources whereas macroeconomics deals with the macro perspective i.e. the overall economy. Macro perspective of the economy involves the markets, businesses, consumers and the governments.
Microeconomics explains the behavior of the micro unit of the economy i.e. individuals. Hence, it has a great significance in understanding the economy as a whole. The following reasons are why microeconomics is importance:
Microeconomics studies the behavior of the smallest unit of economy i.e. an individual or an entity. It studies how this unit processes the information, allocates its resources and makes choices. Microeconomics studies how an individual or an entity interacts in the market and deals with scarcity.
All this information is essential for businesses in decision making. Based on how an individual or an entity behaves, businesses allocate their resources for optimal usage, analyze the demand in the market, calculate the cost, determine the pricing decision, position their product/services.
Understanding the working of the economy
Microeconomics studies the basic unit of economics. It studies micro variables and analyzes how these variables help or affect individuals in making choices. Individual behavior and choices in aggregate shapes the working of the economy.
The individual demand leads to aggregate market demand. Tax policies and public finances, international policies, international trade, financial market, trade of financial instruments etc. are basic events in an economy and all events, policies root to one last thing i.e. micro variables.
Formulating Economic Policies
The study of microeconomic components is important in designing economic policies. Microeconomics studies the behavior of an individual or an entity. Information about the behavior is very much useful in forming tax-related policies and other different public finance related policies.
Microeconomic factors collect data for macroeconomic policies. The need and demand of certain factors may have an impact on import and export policies by the government. Similarly, sudden changes in micro economic factors may lead to changing of tax policies, tariff policies, exemption policies, pricing policies etc.
Efficient allocation of resources
“Resources are scarce”, this is the primary consideration in economics. Different microeconomic theories explain and suggest conditions for optimal consumption and production of resources.
Efficient allocation of resources includes what to produce, how to produce and how much to produce. Microeconomics analyze what, how and how much by carefully understanding the demand and supply concept. Microeconomics considers demand, supply and utility factors for optimal allocation of resources.
Understanding the human behavior
Microeconomics is about availability of resources and response of an individual or an entity for making choices based on the availability of resources. Such decision of making choices help in understanding the human behavior and their responses towards different alter environment,
Microeconomics concepts and theories like law of diminishing marginal utility, demand and supply theory, indifference curve, game theory, biases etc. help everyone understand about human behavior. All the market implications and business operations are based on the analysis of such human behavior.