Section A

Prof. Kenneth Boulding

Teaching Objectives
To enable the students to understand meaning, nature, scope &
subject matter of Micro Economics.
Micro-economics is the study of particular firms, particular
households, individual prices, wages, incomes, individual
industries, particular commodities.
Teaching Points
1.1 Introduction
1.2 Historical review of Micro Economics
1.3 Meaning & definitions of Micro Economics
1.4 Scope and subject matter of Micro Economics
1.5 Features of Micro Economics
*
1.6 Importance and usefulness of Micro Economics
Adam Smith
The Father of Economics.
The real tragedy of poor is the poverty of their aspiration Adam Smith
1.1 Introduction:
The study of Economics is divided into two parts viz Micro
Economics and Macro Economics. The terms Micro Economics and
Macro Economics were first coined and used by Ragnar Frisch of
Oslo University in 1933 and since then they have been adopted
by the economist all over the world.
The term Micro Economics is derived from the Greek word
mikros which means a small-a millionth part. Thus in Micro
Economics we analyse the economic behavior of small individual
economic units such as individual consumer, individual
producers etc.
The term Macro Economics is derived from the Greek word
makros which means large. Thus in Macro Economics we analyse
the behaviour of the economy as a whole and we study the large
aggregates of the economy, such as total national income,
total national output, total consumption, aggregate investment
etc. In other words, Micro Economic analysis is
individualistic while Macro Economic analysis is aggregative.
Knowledge of both the approaches is essential for complete
understanding of the working of the economic system. But in
the beginning, it is necessary to know the precise meaning,
scope & subject matter of these two branches. In this chapter,
we will discuss important aspects of Micro Economics. While
Macro Economics will be explained in chapter VII of this text
book.
1.2 Historical Review of Micro Economics:
From the historical point of view Micro Economic analysis
was developed first. Micro approach is relatively traditional
approach. Origin of this approach can be traced back to era of
classical economist.
Adam Smith The Father of Economics is considered as
founder of Micro Economics. In his book Wealth of Nations
published in 1776, he discussed how prices of individual

commodities and the factors of production are determined.

Micro Economic approach is also seen in the writings of David
Ricardo and J. S. Mill.
But Micro Economic analysis in fact was developed &
popularised by Dr. Alfred Marshall, the neo-classical
economist. lie is considered as a
real architect of Micro Economics. Dr. Marshalls Principles
of Economics was published in 1890 and considered as leading
work on economics. Most of his analysis in this book is based
on Micro Economic approach. Marginalism principle used by
Marshall became an important & indespensible tool of
microanalysis. Prof Pigou, J.R. Hicks, Prof. Samuelson, Mrs.
loan Robinson, Chamberlin are the other economist who have
participated in the development of Micro Economics.
1.3 Meaning and Definitions of Micro Economics.
Micro means a small part of a thing. Micro Economics thus
deals with a small part of the national economy. It studies
the economic actions and behavior of individual units such as
individual consumer, individual producer or firm, the price of
a particular commodity or factor etc.
Let us discuss some important definitions of Micro Economics
to understand its meaning, nature & subject matter.
(1) According to Kenneth Boulding Micro Economics is the study
of particular firms, particular households, individual
prices, wages, incomes, individual industries, particular
commodities.
It means Micro Economics is a study of economic activity of
households as a consumption unit, individual firms &
industries as production unit and individual prices, wages,
incomes and their determination.
(2) In the words of Maurice Dobb, Micro Economics is in fact a
microscopic study of the economy.
It means in Micro Economic analysis each individual unit is
examined separately in detail.
1.4 Scope and subject matter of Micro Economics
Micro Economics basically deals with
i)
Theory: of product pricing
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ii)
Theory, of factor pricing (Microtheory of distribution)
iii) Theory of economic welfare
1
1. Product Pricing
'
The theory of product pricing explains how the relative
prices of cotton cloth, rice, car and thousands of other
commodities are determined.
Price of a commodity depends upon the forces of demand and
supply. Therefore, analysis of demand and supply side is
necessary in order to explain the process of determination of
price.
Study of demand side covers the analysis of consumers
behavior and study of supply side, covers the analysis of
conditions of production, cost and behaviour of firm &

industry.
So, theory of product pricing is subdivided into theory of
demand & theory of production & cost.
2. Factor Pricing
Theory of factor pricing i.e. Theory of distribution
explains how wages (price for the use of labour) rent (payment
for the use of land), interest (Price for the use of capital),
profits (the reward for the entrepreneur are determined.
3. Theory of welfare
Theory of welfare basically deals with efficiency in the
allocaton of resources. Efficiency in the allocation of
resources is attained when it results in maximization of
satisfaction of people. Economic efficiency involves three
efficiencies:
i) Efficiency in production - Efficiency in production means
producing maximum possible amount of goods from the given
amount of resources.
ii)
Efficiency in consumption - Efficiency in consumption
means distribution of produced goods & services among the
people for consumption, in such a way as to maximize total
satisfaction of society.
iii)
Efficiency in the direction of production
i.e. overall economic efficiency - Efficiency in the direction
of production means production of those goods which are most
desired by the people.
Micro economic theory shows under what conditions these
efficiencies are achieved.
We may conclude that Micro Economics is mainly concerned
with price theory and allocation of resources. It seeks to
examine the following basic economic questions:
a) What goods are produced with and in what quantities?
b) Who will produce them & how ?
c) To whom & how the wealth so produced shall be distributed?
d) How shall resources be allocated to production & consumption
in efficient manner?
All these questions are in the domain of Micro Economics.
Above discussion on subject matter of Micro Economics explains
the scope of it.
The study of Micro Economics is mainly confined to price
theory and resource allocation. It does not study the
aggregates relating to whole economy. This approach does not
study national
The subject matter of Micro Economics can be presented as
follows:Micro Economic Theory
v/

Theory
of

Theory
of

demand
(analysi
s of

supply r
(product
ion &

consumer

cost)
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behaviou
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Rent

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Theory of
product
pricing

Theory of
factor
5 hi\i' pricing

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Theory of
economic
welfare

Efficiency in production
Efficiency in consumption
Efficiency in direction of production
Wages
Interest
Profit
3
economic problems such as unemployment, poverty, inequality of
income etc. Theory of growth, theory of business fluctuation,
monetary and fiscal policies etc. are beyond the limit of
Micro Economics, so its scope is limited, compared to that of
Macro Economics.
1.5 Features of Micro Economics
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1. Study of individual units
Micro Economics is the study of behaviour of small
individual economic units, like particular households,
individual firms, individual prices etc.
2. Price Theory
Micro Economics is called price theory because it is
primarily concerned with determination of prices of goods and
factors of production.
3. Slicing method
Micro Economics splits the economy into small individual
unit and then studies each unit separately in detail. Thus it
is said that Micro Economics uses Slicing method.
4. Partial equilibrium
Micro Economic analysis is a partial equilibrium analysis.
Partial equilibrium analyses equilibrium position of
individual consumer individual firm, individual industry etc.
Partial equilibrium analysis isolates an individual unit from
other forces and proceeds with the assumption. Other things
remaining the same (Ceteris paribus). This approach neglects
the interdependence between economic variables.

5. Microscopic approach
Micro Economics is the microscopic study of the economy. In
the words of Prof. A.P. Lemer, It is looking at the economy
through microscope, as it were to see how the millions of
cells in the body of economic - the individuals or households
as consumers, and individuals or firms as producers play their
part in the working of whole economic organism.
In Micro Economic theory, we discuss how the various cells
of economic organism, such as thousands of consumers,
thousands of producers or firms, thousands of workers and
resource suppliers in the economy, do their economic
activities and reach their equilibrium state. In other words
in Micro Economics, we attempt only a microscopic study of the
national economy. We do not study the national economy in its
totality.
6. Analysis of resource allocation and economic efficiency
Micro Economics deals with the allocation of resources among
competing groups. Micro Economics explains how relative prices
of commodities and factors of production determine the
allocation of resources in turn determines (a) What goods will
be produced & in what quantities ? (b) How they will be
distributed ?
It means Micro Economics also deals with the problem of
income distribution.
Micro Economics also examines whether the given allocation
of resources is efficient i.e. whether it results in economic
welfare of society.
7. Use of marginalism principle
Micro Economics uses marginalism principle as a tool of
analysis. Marginal means change brought about in total by an
additional unit i.e. marginal unit. All important micro
economic decisions are taken at the margin. So this concept is
of crucial importance in all areas of Micro Economics.
Micro Economics assumes laissez fair policy, pure
capitalism, full employment, perfect competition etc. Which do
not exist in reality. Also most of the theories are based on
the ceteris paribus assumption i.e. Other things being
constant. The assumption makes the analysis simple, but at the
same time, it neglects the interdependence between economic
variables. The assumption makes the theories static and
neglects changing economic world.
8. Based on certain assumptions
4
9. Limited Scope
Micro Economics studies individual economic units & not the
whole economy. It does not deal with the nation-wide problems
like unemployment, inflation, deflation, poverty, balance of
payment situation, economic growth etc. So its scope is
limited.
10. Analysis of market structures
Micro Economics analyses different market structures i.e.

perfect competition, monopoly oligopoly, monopolistic

competition etc and describes how prices & quantities are
determined in different markets.
1.6
Importance and usefulness of Micro Economics:
1. To understand the working of free market economy
Micro economic theory helps in understanding the working of
free market economy.
2. Explains price determination & allocation of resources
It explains how the relative prices of various products &
factors are determined and further explains why prices of
these various products & factors are found different.
Also it explains the process of allocation of resources for
the production of various goods & allocation of total
production among the various consumers.
3. It helps businessman in decision making
The knowledge of price theory is useful to businessman in
deciding policies regarding the
prices, cost of production, investment, attainment of maximum
productivity etc. Also, with the help of Micro Economics the
businessman can estimate demand for his product.
4. Useful to government
It is useful to government in framing economic policies,
Micro Economic analysis is useful in determining tax policy,
public expenditure policy, price policy, efficient allocation
of resources
etc.
5. Helpful in international trade & public finance
Many aspects of international trade like effects of tariff
determination of exchange rate, gains from international trade
etc. can be explained with the help of micro economic
analysis. It is useful in public finance to analyse incidence
and effect of particular tax.
6. Model Building
Micro Economics builds simple model which helps us in
understanding complex economic situations. Development of
various terms, concepts, terminologies, tools of economic
analysis is valuable contribution of Micro Economics to the
science of economics.
7. Basis of welfare economics
Micro Economics examines the conditions of economic welfare.
It explains how best results can be obtained through avoidance
of wastage of resources.
Thus micro economic analysis has great theoretical and
practical importance.
Exercise
- * $ 01
Q.l) (A) Fill in the blanks with appropriate alternative given
in the brackets.
1) The terms Micro & Macro Economics were first used by
(Adam Smith / Robbins / Ragner Frisch / Marshall) Q.2)
2)
Micro Economics is a study of

(Whole economy / general price level / National Output /

Individual economic unit)
3)
Micro Economics is also called as
............(Income theory / Price theory /
Growth theory / Employment theory)
4)
Micro Economic analysis adopts
Method (lumping / aggregative / Slicing / inclusive)
5)
Micro Economics is a .... .
equilibrium approach, (partial / general / total / multivariable)
(B)
Match the following
Group A
Group B
1) Adam Smith A) Aggregates
2) Micro Economics B) Prof. Boulding
3) Macro Economics C) Father of
Economics
4) Dr. Marshall
D) Individual units
E) Economic efficiency
F) Principles of Economics
(C)
State whether the following statements are TRUE or
FALSE
1) Dr. Marshall is known as the Father of Economics.
2)
Micro Economics studies theory of firm.
3) Micro Economics deals with allocation of resources.
4) Micro Economic theory assumes full employment.
5) Micro Economics theory suggest policies to solve problem of
inflation.
(A) Define or Explain the following
concepts.
1) Micro Economics
2) Partial equilibrium
3) Economic efficiency
4) Individual economic unit
5) Resource allocation
B) Give reasons or explain the following statements
1) Micro Economics is also known as price theory.
2) Micro Economics studies individual economic unit.
3) Micro Economics analyses partial equilibrium.
4) Micro Economic theories are based on certain assumptions.
5) Marginalism principle is used as a tool of analysis in micro
economics.
Write short notes on :
i) Features of Micro Economics
ii) Subject matter of Micro Economics
iii) Historical review of Micro Economics
iv) Importance of Micro Economics
Answer the following questions
i) Explain the meaning of Micro Economics with the help of few
important definitions.
ii) What is the scope & subject matter of Micro Economics?

iii)
What is the importance of Micro Economics?
iv)
What are the features of Micro Economics?
v) What are the basic economic questions dealt with by Micro
Economics?
Q.5 Do you agree with the following statements?
Give reasons.
i) Micro Economics studies behaviour of individual economic
unit.
ii)
Micro Economics is known as income theory.
Q.6 Answer in details
1) Explain the features of Micro Economics.
2) Explain the scope and subject matter of Micro Economics.
Project:
1) Visit vegetable market in your nearby area & collect the
data regarding the changes in demand & supply of selected
vegetable and study price fluctuation in them, over a period
of month.
2) Visit a farmer & collect information about his agricultural
product on the basis of cost, investment, price & profit.
Analyse the problems faced by him.
$ $
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