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Karnataka Class 12 Commerce Economics Uses of Microeconomics Notes

Karnataka Class 12 Commerce Economics Uses of Microeconomics Notes

Karnataka Class 12 Commerce Economics Uses of Microeconomics : Karnataka State Open University is located in Manasagangotri, Mysore. It is recognized as one of the best Open Universities in India imparting Distance Education. The University was established during 1996 and the library started functioning in the same year. It has a glorious record of worthy service with a multi disciplinary resource collection of more than one lakh volumes. At the inception of Library, the collection of books was around 50,000, which was housed in the main building of KSOU but later the Library was shifted to its own new building in the KSOU campus in 2006. It was inaugurated by Former Hon’ble Governor of Karnataka Sri T.N. Chethurvediji. The Library is housed in spacious, beautiful and attractive building situated in 1750 Sq.mts area. It follows the Dewey Decimal Classification system for organizing documents for its collection and identified as a best knowledge bank.

Karnataka Class 12 Commerce Economics Uses of Microeconomics Notes

Karnataka Class 12 Commerce Economics Uses of Microeconomics : Karnataka Class 12 Commerce Economics Uses of Microeconomics  is one of the Karnataka Class 12 Commerce Economics chapter 1 Introduction sub topic. Here we collected some PDF FormatKarnataka Class 12 Commerce Economics Uses of Microeconomics . Download and read well.

Karnataka Class 12 Commerce Economics Uses of Microeconomics Notes

Karnataka Class 12 Commerce Economics Uses of Microeconomics : Economics is a discipline that can help us answer these questions. Economics can actually be defined a few different ways: it’s the study of scarcity, the study of how people use resources, or the study of decision-making. Economics often involves topics like wealth, finance, recessions, and banking, leading to the misconception that economics is all about money and the stock market. Actually, it’s a much broader discipline that helps us understand historical trends, interpret today’s headlines, and make predictions for coming decades.

Karnataka Class 12 Commerce Economics Uses of Microeconomics Notes

Karnataka Class 12 Commerce Economics Uses of Microeconomics :   The term ‘Micro’ has been derived from the Greek word ‘mikros’ which means   ‘small’. Micro economics deals with the study of economic behaviour of small individual economic units such as individual consumer, firm, producer etc. In other words, its approach is individualistic in nature. It splits / divides the whole economy into small individual units and then studies each unit separately in detail. Micro economics is, thus, a microscopic study of the economy. It is also known as price theory

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Definitions of Micro Economics:

According to Kenneth Boulding, “Micro economics is the study of particular firms, particular households, individual prices, wages, incomes, individual industries and particular commodities.”      The above definition intends to explain that micro economics is a study of economic activity of  households  as  a  consumption  unit,  individual firms  and  industries  as  a  production  unit  and individual prices, wages, incomes and their determination. According to Maurice Dobb, “Micro economics is in fact a microscopic study of the economy.” The  above  definition  intends  to  explain  that  in  micro  economics,  each  individual  unit  is  separately examined and analyzed in detail.

Historical Review of Micro Economics

  • Micro economics is a traditional approach and its origin can be traced back to the era of classical economist.
  • It was founded by Adam Smith, also known as “The father of Economics”. In his book “Wealth of Nations” published in 1776, he discussed how prices of individual commodities and the factors of production are determined. He said that if the government doesn’t tamper with the economy, a nation’s resources can be used efficiently.
  • Micro economic analysis was developed and popularized by the neo classical economist   Dr. Alfred Marshall.
  • He is regarded as the real architect of Micro economics. His book “Principles of Economics”, published in 1890 is based on Micro economic approach.
  • Marshall proposed an idea of study of specific, individual markets and firms, as a means of understanding the dynamics of economics.
  •  The marginalism principle used by him became an important and indispensible tool of micro analysis.
  •   Micro economics approach can also be found in the writings of David Ricardo and J.S. Mill.
  • Some other economists who participated in the development of Micro Economics are J. R. Hicks, Prof. Samuelson, Prof. Pigou, Chamberlin, Mrs. Joan Robinson etc.

Scope and Subject Matter of Micro Economics :

According to Kenneth Boulding, “Micro economics is the study of particular firms, particular households, individual prices, wages, incomes, individual industries and particular commodities.”

Scope of Micro economics:

  • Micro Economic analysis is individualistic in nature.
  • It considers individual constituents such as consumer, firm, producer, individual income, price etc.
  • Its study is mainly confined to price theory and resource allocation.
  • It does not take into account aggregates of economy or national problems such as poverty, unemployment, inequalities of income etc.
  • Some theories such as fiscal and monetary policies are also beyond the limit of micro economics. We can thus conclude that, the scope of Micro economics is limited.

Subject Matter of Micro Economics:

  i.    Theory of Product Pricing:

  • This theory 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, in order to explain the process of determination of price, analysis of demand and supply is necessary.
  •  Study of Demand side covers the analysis of consumer’s behaviour whereas its supply side covers the analysis of conditions of production, cost and behavior of firm and industry. Thus, the theory of product pricing is divided into two parts viz. ‘Theory of Demand’ and ‘Theory of Production and Cost’.

ii.    Theory of Factor Pricing or Micro Theory of Distribution:

  •   The theory of the price determination of various factors of production, such as rent for land, wages for labour, interest for capital and profits for entrepreneur is called theory of factor pricing or micro theory of distribution.
  • Accordingly, the theory of factor pricing discusses how the reward or return for the various factors of production (land, labour, capital and entrepreneur) should be repaid, when they are contributing to the production activities.

iii.    Theory of Economic WELFARE:

  • This theory deals with the efficiency in the allocation of resources.
  • Efficiency in the allocation of resources is attained when it results in maximization of satisfaction of people.        Economic Efficiency implies maximum satisfaction with the help of minimum use of resources. It involves three efficiencies:
  • Efficiency in production: It means producing maximum possible amount of goods from the given resources.
  • Efficiency in consumption: It means distribution of goods and services among the people for consumption, in such a way that it gives maximum satisfaction to consumers.
  • Efficiency in the direction of production: It means production of those goods which are most desired by the people. Thus, the subject matter of micro economics is mainly concerned with the price theory and allocation of resources. It seeks to examine the basic economic questions regarding production, distribution and consumption of goods and services

Features of Micro Economics :

  i.    Price Theory:

  • All the factors of production (such as land, labour, capital and entrepreneur) contribute towards the production process.
  • As a consideration, they receive rewards in the form of rent, wages, interest and profits respectively.
  • Micro economics deals with the determination of such rewards i.e. factor prices.
  •  Also, it deals with the determination of prices of goods and services.
  • Hence, it is correctly known as “price theory”.
  • Price theory benefits both, the consumers (by  rendering  guidance  as  to  how  to  make  optimum use of money to attain maximum satisfaction) as well as the producer (by rendering  guidance as to how to fix the price of a product / service, which would fetch maximum profit).

ii. Partial equilibrium:

  • Micro economic analysis is a partial equilibrium analysis.
  • Partial equilibrium analyses equilibrium position of an individual economic unit i.e. individual consumer, individual firm, individual industry etc.
  • It isolates an individual unit from other forces and proceeds with the assumption “Other things remaining the same” (Ceteris Paribus). Many theories of micro‐economics are based on such assumptions.
  • Partial equilibrium also neglects the interdependence between economic variables.

iii.    Microscopic approach:

  •  Micro economics analyzes and examines each individual unit separately in detail.
  •  In the words of Prof. A.P. Lerner, “It is looking at the economy through microscope, as it were to see how the millions of cells in the body of economy ‐ the individuals or households as consumers, and individuals or firms as producers, play their part in the working of whole economic organism.”
  •  Thus, micro economics is said to conduct the microscopic study of the economy.
  •  Micro economics gives us a ‘worms’ eye view of the economy. In simple words, it studies the tree and not the entire forest as a whole.

iv.    Analysis of Resource Allocation and Economic Efficiency:

  • Micro economics deals with the resource allocation among the competing groups.
  • It further explains how the relative prices of both, goods as well as factors of production would determine the allocation of resources.

v.    Use of Marginalism Principle:

  • Marginal refers to the change brought about in total by an additional unit (marginal unit).
  • Micro economics makes use of marginalism principle as its tool of analysis as all important micro economic decisions are taken at the margin.
  • The concept of marginalism is important in all the areas of micro economics.
  •  Producers and consumers also take economic decisions using this principle.

vi.    Analysis of Market Structure:

  • Micro economics analyses different market structures such as perfect competition, monopoly, monopolistic competition, oligopoly etc. and explains how prices and quantities are determined in these markets.

Importance of Micro Economics :

i. Price Determination: Micro economics helps in explaining how the prices of different commodities are determined. It also explains how the prices of various factors of production such as rent for land, wages for labour, interest for capital and profits for entrepreneur are determined in the commodity and factor market.

ii.    Working of a Free Market Economy: Free market economy is that economy where the economic decisions regarding production of goods such as ‘What to produce, How much to produce, How to produce etc.’ are taken by private individuals.These decisions are based on the preference of the consumer or demand for the product.           ‐  Micro economics theory helps in understanding the working of the free market economy.

iii.    International Trade & Public Finance: Micro economics helps to explain many international trade aspects like effects of tariff, determination of exchange rates, gains from international trade etc. It is also useful in public finance to analyze both, the incidence as well as effect of a particular tax.

iv.    Utilization of Resources: Micro economics helps in explaining how the scarce resources can be effectively and efficiently utilized by the producers in order to achieve maximum output.

v.    Model Building: Micro economics helps in understanding various complex economic situations with its simple models. It has made a valuable contribution to the science of economics by the development of various terms, concepts, terminologies, tools of economic analysis etc.

  vi.    Helps in Taking Business Decisions: Micro economic theories are helpful to businessmen for taking crucial business decisions. These decisions include the cost of production, prices, maximum output, consumer’s preferences, demand and supply of the product etc.

vii.   Useful to Government: Micro economics is that branch of economics which is concerned with the study of economic behaviour of individual economic units. It is useful in framing economic policies such as taxation policy, public expenditure policy, price policy etc. These policies help the government to attain its goal of efficient allocation of resources and promoting economic welfare of the society.

viii.   Basis of Welfare Economics: Micro economics promotes economic and social welfare by making optimum utilization of the resources, thereby avoiding wastage.

Karnataka Class 12 Commerce Economics Uses of Microeconomics Notes

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