Microeconomics: Meaning, Scope, Nature and Importance

Microeconomics: Meaning, Scope, Nature and Importance

What is Economics?

Economics is defined as the study of production, distribution, and consumption of various goods and services. It studies the decisions made by nations, governments, businesses, and individuals in the allocation of resources to achieve the best return on investment.

Importance of Economics

  • It helps in coming up with a proper mechanism to counter the exhaustion of raw in times of shortage.
  • Economists have a divided option on the governments level of intervention in an economy. While some economists believe that government intervention can improve access to public goods, free-market economists wish to have limited government for the same.
  • One of the main duties of economists is to analyse and understand the reasons for any slump in economic growth, political issues, unemployment and poverty. This can help individuals make a better decision.

Based on the level of focus, economics can be classified into two categories: Macro-Economics and Micro-Economics

Macroeconomics: The study focuses on the behavior of an overall economy.

Microeconomics: The study concentrates on individual-level business behavior.


  • The science of macroeconomics is the study of an aggregate economy where its focus can range from the entire world, a continent, a nation, to even a particular region in a country.
  • The study includes various topics such as the unemployment levels, prevailing interest rates, inflation levels, monetary policies, government regulations and Gross Domestic Product (GDP) performances, among others.


  • The study of microeconomics concentrates on individual consumers and businesses behavior of taking decisions. The research focuses on distinct entities such as a government agency, a business firm, a household or a person.
  • Microeconomics allows us to understand the reason for the change in price and demand of a particular product at a specific time. This is done primarily by tracking behavior at the individual level, where certain aspects of human behavior are analyzed.

  • The study also includes various topics such as the efficiency and cost involved in the production of a particular good, supply and demand, allocation of labour, risk involved, uncertainty, and strategic approach at the individual consumer and business level.
The scope of micro-economics can be explained with the following points:

1. Theory of Product Pricing
The price of an individual commodity is determined by the market forces of demand and supply. Micro-economics is concerned with demand analysis i.e. individual consumer behaviour and supply analysis i.e. individual producer behaviour. The theory of product pricing explains how the price of a commodity is determined.

2. Theory of Factor Pricing

Land, labour, capital and entrepreneur are all factors of production and contribute to the process of production. For this contribution, they get rewards in the form of rent, wages, interest and profits respectively. The theory of factor pricing explains how the factor prices (or rewards) are determined.

3. Theory of Economic Welfare

Theory of Economic Welfare basically deals with the efficiency in allocation of resources. Efficiency in the allocation of resources is attained when it results in maximization of satisfaction of people. Economic efficiency involves three efficiencies:
  • Efficiency in production: Efficiency in production means producing maximum possible amount of goods and services from the given amount of resources.
  • Efficiency in consumption: Efficiency in consumption means distribution of produced goods and services among the people for consumption in such a way as to maximize total satisfaction of the society.
  • Overall economic efficiency: Overall efficiency means the production of those goods which are most desired by people. Micro-economic theories show under what conditions these efficiencies are achieved. Thus, we can conclude that the scope of Micro-economics is limited to price theory (factor pricing and product pricing) and allocation of resources. It does not study the aggregates relating to the whole economy.

Microeconomic Variables

Microeconomic variables are those patterns or elements that can be used to describe the behavior of a person or an individual economic unit, like a business 

Examples of microeconomic variables:

Price: the price of a good or service is the amount of money required or given in payment for something.

Individual expenditure: it’s the amount of money spent. Microeconomics can analyze the expenditure of a family, the expenditure of a business or the expenditure in a single product.

Quantity demanded: it’s the total amount of good or services that people or businesses are willing to buy at a given time.

Consumption: it’s the amount of money spent on good or services.

Quantity produced: it’s the quantity of goods produced by firms in a given period of time.

Wages: a payment for labor in a given period of time.

Cost of Inputs: the expenditure incurred to produce a good or service.

Individual investment: the expenditure that will give benefits in the not immediate future.

Market share of a business: the percentage of sales by a particular company, with respect to market’s total sales.

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