- Prices of individual commodities are determined by market forces of demand and supply. So micro economics makes demand analysis (individual consumer behavior) and supply analysis (individual producer behavior).
- Factor Pricing Land, labor, capital and entrepreneur, all factors contribute in production process. So they get rewards in the form of rent, wages, interest and profit respectively. Micro economics deals with determination of such rewards I. E. Factor prices. So micro economics is also called as 'Price Theory' or 'Value Theory'.
- Welfare Theory Micro economics deals with optimum allocation of available resources and reduce? , 'How to produce? ' and 'For whom it is to be produced? '. In short, Micro economics guides for utilizing scarce resources of economy to maximize public welfare. Characteristics / Features of Microeconomics Classical economists always insisted on micro economics because they believed that it is better to understand concept at individual level and then go for general (or macro) level.
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E. G. First understanding individual consumer behavior and then analyzing the behavior of entire market.
- Nature of Analysis In micro economics, the behavior of individual consumers and producers in detail is analyses.
It is study of subject matter from particular to general.
- Method Micro economics divides the economy into various small units and every unit is analyses in detail. It is a slicing method.
- Scope Micro economic analysis involves product pricing, factor pricing and theory of
- Application Both theoretically and practically, micro economics is useful in formulating various policies, resource allocation, public finance, international trade, etc.
- Nature of Assumptions Assumption of Sisters Paramus is always made in every micro economic theory. It means theory is applicable only when 'other things being same'.
Uses / Importance / Advantages of Microeconomics
- Individual Behavior Analysis Micro economics studies behavior of individual consumer or producer in a particular situation.
- Resource Allocation allocation and utilization of resources to produce various types of goods and services.
- Price Mechanization Micro economics decides prices of various goods and services on the basis of 'Demand-supply Analysis'.
- Economic Policy Micro economics helps in formulating various economic policies and economic plans to promote all round economic development.
- Free Enterprise Economy Micro economics explain operating of a free enterprise economy where individual has freedom to take his own economic decisions.
- Public Finance It helps the government in fixing the tax rate and the type of tax as well as the amount of tax to be charged to the buyer and the seller.
- Foreign Trade It helps in explaining and fixing international trade and tariff rules, causes of disequilibrium in BOP, effects of factors deciding exchange rate, etc.
- Social Welfare It not only analyses economic conditions but also studies the social needs under different market conditions like monopoly, oligopoly, etc.
Disadvantages / Limitations of Microeconomics
- Unrealistic Assumptions Micro economics is based on unrealistic assumptions, especially in case of full employment assumption which does not exist practically. Even behavior of one individual can not be generalized as the behavior of all.
- Inadequate Data Micro economics is based on the information dealing with individual behavior, individual customers. Hence, it is difficult to get correct information. So because of
- Sisters Paramus It assumes that all other things being equal (same) but actually it is not so. Glance on Notes of Microeconomics .
Micro economics is that branch of economics which studies individualistic behavior. It concentrates on individual consumer, producer, price of a particular commodity, household, etc.
- The word micro has been derived from a Greek word 'Micros' I. E. Small.
- The concept of 'Micro Economics' was introduced by Proof. Raglan Frisks and was developed by Dry. Alfred Marshall
- Micro economics mainly concentrates on commodity pricing, factor pricing and economic welfare.
- It is the 'Slicing Method' which divides the economy into various small units and every unit is analyses in detail.
- It indicates the partial equilibrium analysis.
- It is based on 'Sisters Paramus' assumption.
Production-possibility frontier In economics, a production-possibility frontier (APP), sometimes called a production- possibility curve, production-possibility boundary or product transformation curve, is a graph that shows the various combinations of amounts of two commodities that could be produced using the same fixed total amount of each of the factors of production. Graphically bounding the production set for fixed input quantities, the APP curve shows the maximum possible production level of one commodity for any even production level of the other, given the existing state of technology.
By doing so, it defines productive efficiency in the context of that production set: a point on the frontier indicates efficient use of the available inputs, while a point beneath the curve indicates inefficiency. A period of time is specified as well as the production technologies and amounts of inputs available. The commodities compared can either be goods or services. Fps are normally drawn as bulging upwards ("concave") from the origin but can also be represented as bulging downward or linear (straight), depending on a number of factors.
A APP can be used to illustrate a number of economic concepts, such as scarcity of resources (I. E. , the fundamental economic problem all societies face), opportunity cost (or marginal rate of transformation), productive efficiency, allocation efficiency, and economies of scale. In addition, an outward shift of the APP results from growth of the availability of inputs such as physical capital or labor, or technological progress in our knowledge of how to transform inputs into outputs.
Such a shift allows economic growth of an economy already operating at its full productivity (on the APP), which means that more of both outputs can be produced during the specified period of time without sacrificing the output of either good. Conversely, the APP will shift inward if the labor force shrinks, the supply of raw materials is depleted, or a natural disaster decreases the stock of physical capital. However, most economic contractions reflect not that less can be produced, but that the economy has started operating below the frontier?typically both labor and physical capital are underemployed.
The combination represented by the point on the APP where an economy operates shows the priorities or choices of consumer goods or vice versa. Efficiency An example APP with illustrative points marked See also: Productive efficiency and Parent efficiency A APP shows it takes the form of the curve on the right. For an economy to increase the quantity of one good produced, production of the other good must be sacrificed. Here, butter production must be sacrificed in order to produce more guns. Fps represent how much of the latter must be sacrificed for a given increase in production of the former. L] Such a two-good world is a theoretical simplification, due to the difficulty of graphical analysis of multiple goods. If we are interested in one DOD, a composite score of the other goods can be generated using different techniques. Furthermore, the production model can be generalized using higher-dimensional techniques such as Principal Component Analysis (PICA) and others. For example, assume that the supply of the economy's factors of production does not change over time, in order to produce more butter, producing "guns" needs to be sacrificed.
If production is efficient, the economy can choose between combinations (I. E. Points) on the APP: B if guns are of interest, C if more butter is needed, D if an equal mix of butter and guns is required. L] In the APP, all points on the curve are points of maximum productive efficiency (I. E. , no more output can be achieved from the given inputs); all points inside the frontier (such as A) can be produced but productively inefficient; all points outside the curve (such as X) cannot be produced with the given, existing resources. 5] Not all points on the curve are Parent efficient, however; only in the case where the marginal rate of transformation is equal to all consumers' marginal rate of substitution and hence equal to the ratio of prices will it be impossible to find any trade that will make no nonuser worse off.  Opportunity cost Increasing butter from A to B carries little opportunity cost, but for C to D the cost is great. Main article: Opportunity cost If there is no increase in productive resources, increasing production of a first good entails decreasing production of a second, because resources must be transferred to the first and away from the second.
Points along the curve describe the trade-off between the goods. The sacrifice in the production of the second good is called the opportunity cost (because increasing production of the first good entails losing the opportunity to produce some amount of the second). Opportunity cost is measured in the number of units of the second good forgone for one or more units of the first good. [l] In the context of a APP, opportunity cost is directly related to the shape of the curve (see below).
If the shape of the APP curve is straight-line, the opportunity cost is constant as production of different goods is changing. But, opportunity cost usually will vary depending on the start and end point. In the diagram on the right, producing 10 more packets of butter, at a low level of butter production, costs the opportunity of 5 guns (as with a movement from A to B). At point C, the economy is already close to its maximum potential butter output. To produce 10 more packets of butter, 50 guns must be sacrificed (as with a movement from C to D).
The ratio of rate of transformation Marginal rate of transformation increases when the transition is made from AAA to B. The slope of the production-possibility frontier (APP) at any given point is called the marginal rate of transformation (MR.). The slope defines the rate at which production of one good can be redirected (by re-allocation of production resources) onto production of the other. It is also called the (marginal) "opportunity cost" of a commodity, that is, it is the opportunity cost of X in terms of Y at the margin.
It measures how much of good Y is given up for one more unit of good X or vice versa. The shape of a APP is commonly drawn as concave from the origin to represent increasing opportunity cost with increased output of a good. Thus, MR. increases in absolute size as one moves from the top left of the APP to the bottom right of the APP. The marginal rate of transformation can be expressed in terms of either commodity. The marginal opportunity costs of guns in terms of butter is simply the reciprocal of the marginal opportunity cost of butter in terms of guns.
If, for example, the (absolute) slope at point EBB in the diagram is equal to 2, then, in order to produce one more packet of butter, the production of 2 guns must be sacrificed. If at AAA, the marginal opportunity cost of butter in terms of guns is equal to 0. 25, then, the sacrifice of one gun could produce four packets of butter, and the opportunity cost of guns in terms of butter is 4. Therefore Opportunity cost plays a major role in society. Shape The production-possibility frontier can be constructed from the contract curve in an Edgerton production box diagram of factor intensity.
The example used above (which demonstrates increasing opportunity costs, with a curve concave from the origin) is the most common form of APP.
It represents a disparity in the factor intensities and technologies of the two production sectors. That is, as an economy specializes more and more into one product (e. G. , moving from point B to point D), the opportunity cost of producing that product increases, because we are using more ND more resources that are less efficient in producing it. With increasing production of butter, workers from the gun industry will move to it.
At first, the least qualified (or most general) gun workers will be transferred into making more butter, and moving these workers has little impact on the opportunity cost of increasing butter production: the loss in gun production will be small. But the cost of producing successive units of butter will increase as resources that are more and more specialized in gun production are moved into the butter industry.
If opportunity sots are constant, a straight-line (linear) APP is produced.  This case reflects a situation where resources are not specialized and can be substituted for each other with no added cost. 10] Products requiring similar resources (bread and pastry, for instance) will have an almost straight APP, hence almost constant opportunity costs.  More specifically, with constant returns to scale, there are two opportunities for a linear APP: firstly, if there was only one factor of production to consider, or secondly, if the factor intensity ratios in the two sectors were constant at all points on the reduction-possibilities curve. With varying returns to scale, however, it may not be entirely linear in either case.  With economies of scale, the APP would appear product.
Specialization in producing successive units of a good determines its opportunity cost (say from mass production methods or specialization of A common APP: increasing opportunity cost I I A straight line APP: constant opportunity cost I I An inverted APP: decreasing opportunity cost I Position An unbiased expansion in a APP The two main determinants of the position of the APP at any given time are the state f technology and management expertise (which are reflected in the available production functions) and the available quantities and productivity of factors of production.
Only points on or within a APP are actually possible to achieve in the short run. In the long run, if technology improves or if the productivity or supply of factors of production increases, the economy's capacity to produce both goods increases, I. E. , economic growth occurs. This increase is shown by a shift of the production-possibility frontier to the right. Conversely, a natural, military or ecological assister might move the APP to the left, in response to a reduction in an economy's productivity. L] Thus all points on or within the curve are part of the production set, I. E. , combinations of goods that the economy could potentially produce. If the two production goods depicted are capital investment (to increase future production possibilities) or current consumption goods, the APP can represent, how the higher investment this year, the more the APP would shift out in following years. 14] It can also represent how a technological progress that more favors production possibilities f one good, say Guns, shifts the APP outwards more along the Gun axis, "biasing" production possibilities in that direction. Similarly, if one good makes more use of say capital and if capital grows faster than other factors, growth possibilities might be biased in favor of the capital-intensive good. [1 Other applications In microeconomics, the APP shows the options open to an individual, household, or firm in a two-good world.Read also what do think classical economists
By definition, each point on the curve is productively efficient, but, given the nature of market demand, some points will be more profitable Han others. Equilibrium for a firm will be the combination of outputs on the APP that is most profitable.  From a macroeconomic perspective, the APP illustrates the production possibilities available to a nation or economy during a given period of time for broad categories of output. However, an economy may achieve productive efficiency without necessarily being lucratively efficient.
Market failure (such as imperfect competition or externalities) and some institutions of social decision- making (such as government and tradition) may lead to the wrong combination of odds being produced (hence the wrong mix of resources being allocated between producing the two goods) compared to what consumers would prefer, given what is feasible on the APP demand analysis Definition Study of sales generated by a good or service to determine the reasons for its success or failure, and how its sales performance can be improved. Awe of demand Observation that, as a general rule, the demand for a product varies inversely with its price lower prices stimulate demand and higher prices dampen it. Law of demand holds in most instances, except in case of Gifted good
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