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Term Paper on Micro Economics
Term Paper Contents:
- Term Paper on the Meaning and Definitions of Micro Economic Analysis
- Term Paper on the Types of Micro Economic Analysis
- Term Paper on the Role of Micro Economics in Formulation of Business Policies
- Term Paper on the Dependence of Micro Economic Analysis on Macro Economic Analysis
- Term Paper on the Limitations of Micro Economic Analysis
Term Paper # 1. Meaning and Definitions of Micro Economics:
Micro economics is that part of economic analysis which studies the individual economic variables. For example, specific firm, industry, consumer, producer, commodity price, input price, etc.
This can be seen from the following chart:
As we have depicted in Chart I, the micro economics is concerned with only those economic variables which are of individual nature. Consumer households are resource owners and business firms are owners of goods and services in the economy.
How an individual household allocates his resources on various wants to maximise his satisfaction and similarly an individual firm also allocates its given resources that profit is maximised either by the maximisation of output or minimisation of cost of production. Micro economics is also called price theory, theory of value, price system and resource allocation. Different economists have given different definitions of micro economics.
Some of the definitions are given below:
(1) According to Prof. Handerson and Prof. Quant, “Micro economics is the study of economic actions of individuals and well defined groups of individuals.”
(2) Professor Leftwitch has defined, “Micro economics is concerned with the economic activities of economic units as consumers, resource owners and business firms.”
(3) According to Prof. E.F. Boulding, “Micro economics is the study of particular firms, particularly household individual prices, wages, incomes, individual industries and particular commodities.”
(4) Prof. Chamerlin has defined, “The micro model is built solely on the individuals and deals with interpersonal relations only.”
(5) According to Prof. J.M. Joshi, “Micro economic analysis is concerned with the study of the individual decision units.”
(6) Edwin Manfield has defined, “Micro economics deals with the economic behaviour of individual units like consumers, firms and resource owners.”
(7) According of Prof. A. Kout Soyiannis, “Economic theory aims at the construction of models which describe the economic behaviour of individual units (consumers, firms, government agencies) and their interactions which create the economic system of a region, a country or the world as a whole.”
On the basis of above definitions we can say that micro economics is that part of economic analysis which deals with individual economic variables like individual consumer, individual producer, individual firm, individual industry, price of an individual commodity, price of an individual input, etc.
Term Paper # 2. Types of Micro Economic Analysis:
Micro economic analysis deals with individual economic variables and there are three types of such analysis as given below:
(1) Micro Static Analysis:
It is that part of micro economic analysis in which an equilibrium point of micro economic variables is attained at a given point of time as shown in the following diagram:
The diagram clearly indicates that at point E there is micro static point where EQ is the price and OQ is the quantity demanded and supplied.
(2) Micro Comparative Static Analysis:
It deals with a comparison of two micro static points of two different points of time. The following diagram shows the micro comparative static analysis where E and E1 points are comparative points under the micro static analysis showing EQ and E1Q1 prices and OQ and OQ1 quantity demanded and supplied with supply curve (SS) and original demand curve (DD) with the change in demand curve (D1D1).
(3) Micro Dynamic Analysis:
This type of micro economic analysis explains the process of change between initial or original equilibrium and new equilibrium. It also discusses the forces which have been operative during such process of change as given in the following diagram:
The diagram shows that the initial or original equilibrium was at point E where EQ was the price and OQ was the quantity demanded and supplied. The new equilibrium is at point E1 where new demand curve is D1D1 and the price is E1Q1 while the demand and supply is OQ1. The change in the equilibrium from E to E1 is not a sudden change but the process of change has been caused by several variables.
Term Paper # 3. Role of Micro Economics in Formulation of Business Policies:
Micro economic analysis is also called the theory of firm. Firms are faced with the problem of formulation of policy and alternative courses of action. Varieties of concepts and analytical tools are made available by micro economic analysis which are used in the formulation of business policies.
Prof. Edwin Manfield has pointed out, “Economics is concerned with application of economic concepts and economic analysis to the problem of formulating rational managerial decisions. Micro economics is by and large economics of the firm.”
The role of micro economic analysis in formulation of business policies may be studied under the following headings:
(1) Understanding of the Working of Economic System:
Micro economics helps in understanding the working of an economic system. In a free economy there is no institution for planning and coordinating the economy. Which goods are to be produced, how much production, where the production should be carried on and how the goods should be distributed are some of the decisions which are taken by producers and consumers with any external force.
Micro economics helps in understanding the mechanism of a free economy and reveals that in a centrally planned economy efficient operation of various economic activities is not possible. Professor Lerner has rightly pointed out that micro economics teaches us that in a centrally planned economy all the information cannot be furnished and necessary directions cannot be given for its efficient operation.
Thus, micro economics helps the business firms in understanding the mechanism of various types of economic systems and on the basis of such understanding the firms can formulate and amend their business policies.
(2) Government Policies and Business Decision Making:
Business economics with its micro economic analysis helps business firms to understand the effects of various government policies. Such policies are evaluated and they can be amended. We can study the specific government policies and their effects on general price level, wages, rate of interest, etc.
If government policies are adversely affecting business firms then the business firms should get these policies changed through their organisations or associations. Thus business firms can take business decisions according to changed government policies.
(3) Study of Internal Operational Problems:
Micro economic analysis helps business firms in solving internal operational problems like the choice of commodity, choice of scale of operation, quantum of output, choice of technology, choice of price, sales promotion, type of competition, expansion of investment and management of inventory. All these problems are related with the internal operation of business firms which can be solved with the knowledge of micro economics.
(4) Helpful in Price Determination:
Micro economic analysis plays an important role in the determination of prices of commodities and factors of production. It is the basis for the maximisation of output or minimisation of cost of production.
(5) Demand and Forecasting:
Business firms take help from micro economic analysis to forecast its demand and take decision accordingly about the volume of production. If their demand forecasting is nearer to realities, they will be successful in attaining their objectives. Firms will successfully earn reasonable or optimum rate of return.
(6) Effects of Taxation:
Government imposes various types of taxes on production and income of firms. Business firms have to take into consideration the impact and incidence of excise duty and sales tax. A business firm studies the effects of such taxes on production and sales and makes necessary changes in its policy so that the least effect is borne by it.
(7) Study of Economic Welfare:
Micro economic analysis also studies the conditions of economic welfare. It tells us that optimum or favourable economic welfare will be attained only when the perfect competition is in existence in commodity and factor markets. But in practice we have monopoly, oligopoly and monopolistic competition.
Under such market structure the resources are less optimum and the output is also less than optimum. There is wastage of resources. Micro economic analysis helps business firms to avoid wastage of resources so that maximum social welfare is attained. Pareto’s optimum conditions help in maximising the welfare of the society.
(8) Tools of Decision Making:
Business managers have to attain the predetermined objectives of business. Micro economic analysis provides such tools through which these objectives are achieved. Minimisation of cost and maximisation of profit, optimum sales and long run survival in the business are some of the objectives. Micro economics provides the necessary tools to attain these objectives.
(9) Production and Cost Analysis:
Production and cost analysis is important sphere in which micro economic analysis provides the necessary guidance. On the basis of such analysis business firms may make necessary changes in cost of production and volume of production.
Cost of production can be reduced and it can be controlled. On the basis of production analysis cheaper inputs are used in place of dearer inputs and less productive inputs can be substituted by more productive inputs. This can only be possible with the use of micro economic analysis.
(10) Profit Planning and Control:
Business has several objectives. Maximisation of profit is one of these objectives. Profit is the yardstick of the success of a business firm. Micro economic analysis helps business firms in attaining these objectives. Profit planning and its control is based on such analysis.
(11) Basis of Predictions:
Professor Richard Bilas has rightly pointed out that micro economics provides the basis of predictions. Various specialists are appointed in different departments and they predict about their requirements.
For example, if the demand for a product is more than its quantity supplied, the price will increase and micro economic analysis suggests that it will encourage producers to produce more and consequently in future the supply will increase and the price for the product will fall. Thus, the government policies can be analysed and studied and their future effects on business firms can be predicted.
(12) Construction and Use of Models:
Micro economic analysis helps us in the construction and use of models for real economic events. There are independent and dependent variables. On the basis of such economic variables suitable data are collected and they are used in business decision-making and policy formulations. There is a large number of facts which are not systematic and cannot give the results for the real economic events. Micro economics uses such facts through these models which can be used for policy formulation and conclusions.
(13) Basis of Managerial Efficiency:
A business firm attains several objectives. But the major achievement of a business firm is to attain managerial efficiency. Micro economic analysis helps in measuring the managerial efficiency of a firm keeping in view the objectives and the performance within a given period. If there is inefficiency in any part of business concern necessary action can be taken to improve it.
The various uses and roles of micro economic analysis through which business firms can formulate policies and apply them in practice and necessary business decisions are taken to attain the objectives.
Term Paper # 4. Dependence of Micro Economic Analysis on Macro Economic Analysis:
The following are the areas in which micro economic analysis is dependent on macroeconomic analysis:
(1) Factor Pricing:
The prices of various factors of production are based on the total demand for the factors in the overall economy. The individual factor price is based on the price prevailed in the economy. For example, wage rate in an individual firm is based on the wage rate policy in the economy.
(2) Commodity Pricing:
The price of a commodity is not dependent on the demand for and supply of individual firm but also the prices of other commodities, namely, substitutes and complementary.
(3) Volume of Sales and Output:
The quantum of output and volume of sales of an individual firm will not only depend upon its demand but also on the purchasing power of the people in the country.
(4) Increase in the Demand or Decrease in Demand:
For any commodity may not be on account of the change in the price and cost of production of the commodity but it may also be due to change in the total income and employment in the country.
(5) Micro Decisions:
Micro decisions are also affected by the aggregative economic variables and such decisions cannot be taken in isolation. For example, decision to invest in an individual business firm is affected by the planning commission, level of income, level of employment and the effective demand in the society.
Term Paper # 5. Limitations of Micro Economic Analysis:
Micro economic analysis is not a perfect part of economic analysis. It has its own weaknesses or limitations.
Some of these limitations are given below:
(1) Limited to the Study of Micro Activities:
Micro economic analysis studies the individual units only. We do not know about the whole economy. It fails in analysing the paradoxes. For example, saving is a virtue for an individual but it is an evil for the economy as a whole. Hence, those things which are correct for individuals may not be correct for the group as a whole. In such a situation the analysis does not explain such paradoxes.
(2) Unrealistic Assumptions:
Micro economic analysis is based on unrealistic assumptions.
These, unrealistic assumptions are:
(i) Other things remaining the same or ceteris paribus.
(ii) Existence of full employment.
(iii) Supply creates its own demand.
If the analysis is based on such unrealistic assumptions the conclusions drawn will also not be reliable and useful for policy formulations and decision-making.
(3) Fails to Study the Whole Economy:
Micro economic analysis does not pay attention on the economy as a whole but its scope is limited to the study of the micro economic variables only. In such a situation policy formulation and decision-making on the basis of micro economic analysis cannot be useful for the economy as a whole.
(4) No Use for National Level Economic Problems:
The study and analysis of micro economics have no utility for national level economic problems as it is concerned with micro level economic problems only. For example, monetary policy, fiscal policy, foreign exchange, banking and finance, national income and employment, planning, international trades are some of the problems which are beyond the scope of micro economic analysis.