BBS First Year Microeconomics Note

Unit 1: Introduction to Microeconomics

Meaning of Microeconomics

Generally, the subject matter of economics is divided into two main branches. They are microeconomics and macroeconomics. The terms ‘micro’ and ‘macro’ were first used in economics by Norwegian economist Ragnar Frisch in 1933. These terms were derived from Greek words ‘MIKROS’ and ‘MAKROS’ respectively which refers to the small individual unit and large.

Microeconomic theory is a traditional concept. The foundation of microeconomics was ‘Wealth of Nation’ which was published by Adam Smith in 1776.  All the economic theories of classical economists were mainly microeconomic in nature. The famous economists of this period were Adam Smith and his followers J.B. Say, A.C. Pigue, J.S. Mill, David Ricardo as well as Alfred Marshall, etc. These economists are the pillar of classicism.

The term ‘micro’ is derived from the Greek word ‘mikros’ which refers to ‘small’. Thus, microeconomics deals with the analysis of small individual units of the economy, such as individual consumers, individual firms, and small groups of individual units like various industries and markets.

Microeconomics is the study of a particular unit rather than all the units combined. Thus, microeconomics consists of looking at the economy through a microscope, to see how the millions of cells in the economy play their part in the working of the whole economic organization.

“Microeconomic analysis offers a detailed treatment of individual decisions about particular commodities.” (David Ricardo)

“Microeconomics is concerned not with total output, total employment or total spending, but with the output of particular goods and services by single firm or an industry and with the spending on particular goods and services by single household or by household in single market.” (Edward Shapiro)

“Microeconomics is the study of how households and firms make decisions and how they interact in the market.” (N. Gregory Mankiw)

Microeconomics studies the pricing of goods and services and that of factors of production so it is also known as price theory. The basic elements of microeconomics are goods and services, prices, markets, economic agents like consumers, firms, and government. Some of the basic assumptions of microeconomics are the full employment equilibrium and ceteris Paribus (other things remaining constant). Due to the assumption of ceteris Paribus, microeconomics is a partial equilibrium analysis.

Characteristics of Microeconomics

Following are the basic features of microeconomics:

  • Microeconomics is concerned with the small parts of the economy.
  • It studies individual firms and consumers.
  • It studies the economy in a disaggregated manner.
  • Microeconomics assumes the existence of full employment in the total economy.
  • Its objectives are to analyze the process by which scarce resources are allocated among alternative uses.
  • Microeconomics analyses economic phenomena under the ceteris paribus assumption. Therefore, microeconomics is a method of partial equilibrium analysis.
  • Its important variables are individual prices, demand, supply, income, etc.
  • It is applicable in a capitalist economy where price mechanism plays an important role.

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