It is highly helpful in the formulation of economic policies that will promote the welfare of the masses. Micro economics is useful in explaining how market mechanism determines price in a free market economy. What are the uses of microeconomics in business decision making? Limitations / Disadvantages of Micro economics. To quote Professor Lerner again, “Microeconomics teaches us that completely ‘direct’ running of the economy is impossible—that a modern economy is so complex that no central planning body can obtain all the information and give out all the directives necessary for its efficient operation. Micro economics uses simple models to understand actual economic phenomenon. It not only analyses economic conditions but also studies social needs under different market conditions like monopoly, oligopoly etc. Resources are already scarce ie less in quantity. It also brings to light the fact that the functioning of a completely centrally directed economy with efficiency is impossible. Whether devaluation will succeed in correcting the disequilibrium in the balance of payments depends upon the elasticity’s of demand and supply of exports and imports. They, thus, help not only to describe the actual economic situation but to suggest policies that would most successfully and most efficiently bring about desired results and to predict the outcomes of such policies and other events. 6] Free enterprise economy Micro economics helps in formulating various economic policies [price policy, tax policy etc] and economic plans for economic welfare of the people and to promote all round economic development. 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. 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. 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. Till recently, especially before Keynesian Revolution, the body of economics consisted mainly of microeconomics. TOS 7. Microeconomics occupies a vital place in economics and it has both theoretical and practical importance. Disclaimer 9. 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. The imposition of a tax on a commodity (i.e., indirect tax) will lead to the loss of social welfare by causing deviation from the optimum allocation of resources, the imposition of a direct tax (for example, income tax) will not disturb the optimum resource allocation and, therefore, will not result in loss of social welfare. 9] Social welfare Image Guidelines 5. 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). Further, microeconomic analysis is applied to show the damage done to the social welfare or economic efficiency by the imposition of a tax. If it is assumed that resources are optimally allocated or maximum social welfare prevails before the imposition of a tax, then it can be demonstrated by micro-economic analysis that what amount of the damage will be caused to the social welfare. It explains economising of scarce resources to achieve maximum welfare. Furthermore, the determination of the foreign exchange rate of a currency, if it is free to vary, depends upon the demand and supply of that currency. 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. These simple models remove the complexities in economic analysis. It also studies how taxes affect social welfare. 12] Basis of macro economics 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. 4] Price determination 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. Micro economics is useful in making predictions based on demand forecasting depends on the micro economic principles of demand. 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. Departure from perfect competition leads to a lower level of welfare, that is, involves loss of economic efficiency. In spite […] 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. Microeconomic analysis is also useful applied to the various applied branches of economics such as Public Finance, International Economics. Microeconomic theory reveals than when the externalities exist, free working of the price mechanism fails to achieve economic efficiency, since it does not take into account the benefits or harms made to those external to the individual producers and the consumers. Similarly, microeconomics brings out the welfare implications of oligopoly (or oligopoly) whose main characteristic is that individual sellers (or buyers) have to take into account, while deciding upon their course of action, how their rivals react to their moves regarding changes in price, product and advertisement policy. Report a Violation, Interdependence between Micro and Macro Economics, Microeconomics: Useful notes on Microeconomics (With Diagram). The greatest of these is depth in understanding of how a free private enterprise economy operates. MIcroeconomics has great uses. Besides, microeconomics finds application in the various problems of international economics. It also makes important and useful policy recommendations to regulate monopoly so as to attain economic efficiency or maximum welfare.