ROLE OF MICRO ECONOMICS IN MANAGEMENT

Micro economics and its theory have a vital role to play in the field of management. Its
role can be concentrated as follows.

1. Operational issues

Operational issues are of internal nature. Internal issues include all those problems which
arise within the business organisation and fall within the preview and control of
management. Some of the basic internal issues are (1) choice of business and nature of
the product ie. What to produce (2) choice of size of the firm ie. how to produce (3)
choice of technology ie. Choosing the factor combination (4) choice of price ie. How to
price the commodity (5)how to provide sales (6) how to face price competition (7) how to
manage profit and capital (8) how to manage an inventory ie. Stock of finished goods and
raw materials.

2. Micro economics explains the economic behavior of individual decision makers,

individual consumers, firms, industries and factory owners and bring out the nature of
relationship between the dependent and independent variable.

The process of decision making comprises 4 main phases

1. determining and defining objectives

2. collection of information regarding economics social, political and technological
environment and foreseeing the necessity and occasion for decision
3. inventing, developing and analyzing possible course of action
4. selecting the particular course of action from the available alternatives.

So the process of decision making is complete only when the economic theories and tools
of economic analysis is utilized.
3. Micro economic also helps in the field of production to provide data based on certain
analysis. The data usually required are

• cost of production associated with different production technology

• supply position of inputs required to produce the planned commodity
• cost structure of competitive products

4. Micro economics is also effectively used in sales proceedings. The data it can be
produced are

• general market sense

• prices of competing products
• market structure and degree of competition
• supply position of complementary goods.

5. Micro economic theories establish cause and effect relationship between two or more
economic events and thereby provide basis for predicting the future course of economic
events. Economic predictions are of great importance in planning future course of
economic activities by individuals, business firms and the government.

They contribute a great deal in formulating economic policies and in examining the
approaches and effectiveness of economic policies. Policy makers may apply relevant
micro economic theories explain the problem at hand and analyst the implications of
alternatives policies and select one which seems to be the most appropriate.

6. Micro economic theories, particularly price theory can be and in fact profitably used I
business decision making. All the economic theories may not offer a practical solution to
a problem of the real business world, they do help business decision makers in building
analytical models, which help in specifying the nature of managerial problems and in
determining appropriate policy actions.
7. One of the most important uses of micro economic theories is to provide is to provide
the basis for formulating propositions that maximizes social welfare. Micro economics
examine how imperfect market conditions distort the allocation of resources ( money,
men, machine and material) create inefficiency and reduction in production, competition
and social welfare.