Microeconomics: Notes on Meaning of Microeconomics!

Microeconomics is that part of economic theory which deals with the behaviour of individual units of an economy such as a household, a firm, etc.

It is the analysis of economy’s constituent elements—households, firms and industries. Micro is a Greek word meaning ‘small’. Thus, microeconomics means economics of small.

As the name suggests, microeconomics takes microscopic view of the economy. It is like dealing with individual trees in the economic forest. According to Prof. Boulding, “Microeconomics is the study of particular firm, particular household, individual price, wage, income, industry and particular commodity.” It is primarily concerned with the determination of prices of Individual commodities and factors. It explains how prices of wheat, cloth, shoes, pens and thousands of other goods are determined.


Similarly, how prices (remuneration) of factors of production (i.e., rent, wages, interest, etc.) are determined. Thus, the theory of product pricing and theory of factor pricing fall within the domain of microeconomics .Since prices of products and factors occupy the central place, microeconomics is, therefore, also called ‘Price Theory’. Examples of microeconomics are: individual income, individual saving, consumer equilibrium, price determination of a good, demand of a commodity, etc.

In microeconomics, problems of individual economic units are studied such as equilibrium of a consumer (i.e., state of maximum satisfaction), equilibrium of a firm (i.e., state of maximum profit) and an industry. It explains how a consumer, a producer and an industry attain equilibrium. An individual household (or consumer) is said to be in equilibrium if it gets maximum satisfaction from allocation of its expenditure on various goods and services.

On the other hand, a firm is said to be in equilibrium if it is getting maximum profit determined by its Marginal Cost and Marginal Revenue. An industry is assumed to be in equilibrium if there is no tendency among its constituent firms to either leave the industry or for outside firms to enter it. (Remember, an industry is a whole group of firms producing the same product.)

In short, the subject matter of microeconomics deals with:


(a) Determination of prices of individual products and factors; and

(b) Allocation of resources to their most valuable uses so as to maximise total output of the economy (i.e., deals with central problems of ‘what, how and for whom to produce’).