There are three types of micro economic analysis –
(a)Simple Micro-statics- Simple micro-economic analysis studies a set o relation when they are in equilibrium at a given point of time. It does not explain how the equilibrium has been brought about. It does handle the problem of change through time. It implies that the equilibrium is constant through time.
Simple Micro-static can be explained by taking the example of equilibrium prices of any commodity. The forces of demand and supply establish equilibrium at a point E. So long as the demand function DD and the supply function SS in the fig. remain unchanged the price of the commodity shall remain fixed at OP because at this price the total amount demanded is equal to the total amount supplied. Consequently, is in a static equilibrium.
(b) Comparative Micro-Statics- It is the second way of analyzing micro-economics problems. Here we see what happens when some variables change, what happens to price, quantity and equilibrium when some variables change. For example, in fig. the new equilibrium is established at E1. The quantity demanded and supplied increase to OM1 and price OP1. Comparing micro- statics compares the two equilibria, E and E1.
Micro-Dynamics- It throws full light on the happenings in the transition from one equilibrium to another. It involves the fullest study of the forces which come into equilibrium and the establishment of another.
In brief the method of micro-economics fully reflects all the disequilibria which occur between the disturbances of one equilibrium to another. Thus this method involves a full length movie film of the entire sequence.
SL is the long period supply curve when the demand curves DD shifts upward the equilibrium is disturbed. Price is pushed up from ME (OP) to MC since the supply is perfectly inelastic at a point of time. The sellers are motivated to increase output because they enjoy pure surplus of CE per unit of commodity. This shifts supply curve after some time interval to the position of S2. Price now falls by FG, which is however more than M1E1 (OP1) at which normal profits are available. The sellers have still inducement to curve shifts to the right to S3 after some time. Price falls by HE1. This process of output expansion finally results in long period equilibrium price OP1 in the market.
Thus, micro-dynamics is concerned with the study of market in a state if disequilibrium. It traces the path of the movement from one equilibrium to another. It studies the process of change the movement from one equilibrium to another until the piece finally settles at OP1 fig. shows the movement of the path of equilibrium between E and E1 with the help of dotted stair case line ECFGHE1.
Micro economics occupies a vital place in economics and has both theoretical and practical importance. Keynes regarded it as a necessary part of one’s apparatues of thought.
1. To understand the working of the economy: micro-economics reveals how a decentralised syustem of a free private enterprise functions without any central control. Professor Lerner states, “micro-economics teaches is that completely direct running of the economy is impossible that a modern economy is so complex that no central planning body can obtain all the information and give out all the directives necessary for its efficient operation.” Thus, micro-economics helps in understanding how decisions regarding how, what and for whom to produce, how to distribute and what to consume, are taken by producers and consumers without any external interference.
2. To provide tools for economic policies: micro-economics is an important tool of economic policy. Economic policies of the government are studied in the light of their effect on the working of individual pr particular unit. For instance, micro-economics will state whether the rationing is justified or not in the interest of citizens of a country.
3. Useful in optimum utilization of resources: with the help of micro-economics we can easily find the situation of optimum utilization of resources for a producer and for a consumer. A producer will get maximum profits when the ratio of a marginal product of factor of production equals the ratio of their prices. This situation would be the situation of maximum welfare on micro-level. Likewise micro economics provides the law of substitution by which a consumker will maximise his satisfaction when the ratio of marginal utilities equals the ratio of various commodities. Mathematically, a producer maximizes profits or maximizes his costs when commodities. Mathematically, a producer maximizes his costs when
MP1/P1 = MP2/P2 = ….. = MPn/Pn
Also a consumer maximises satisfaction when,
MU1/P1 = MU2/P2 = ….. = MUn/Pn
Where MU is marginal utility and P is the price. The subscripts 1, 2 …..n indicate the respective commodities.
4. Helpful to business executives: the analytical tools of micro-economic theory are quite helpful to business executives in taking decisions about demand, cost price, etc. the linear programming technique which emerged during the post-war period is a major innovation in the micro-economic theory with which a producer takes a number of important decisopns. Linear programming investigates the best possible production process among the alternative production processes to attain maximum profit. Likewise, operations research (OR) draws heavily upon the micro-economics for tackling economic problems.
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