Micro Economics

Assignment #1 (6th Nov, 2020) Roll No: _4
Please, provide detailed answers to the following questions and send them by
email before the deadline (Monday 10.00am)
The assignment should be sent to email: [email protected] before the
deadline; not accepted otherwise.
PUT: MICRO-ECONOMICS into subject.
NOTE: According to SOAU regulation, plagiarism and cheating subject to
penalties up to expelling from the Bachelor’s Programme.
1. Significant of Microeconomics in Business Decision Making

Ans. Microeconomics refers to the study of individualistic economic behavior at
the time of making economic decisions. It studies an individual consumer,
producer, manager or a firm, price of a particular commodity or a household.
Microeconomics plays a vital role in assisting the business firms and business
decision makers. Some of the major functions of microeconomics in business
decision making are listed below:
OPTIMUM UTILIZATION OF RESOURES:-The study of

microeconomics helps the decision makers to analyze and determine how the
productive resources are allocated for various goods and services. It also helps in
solving the producers’ dilemma of what to produce, how much to produce and for
whom to produce.
DEMAND ANALYSIS:-With the help of microeconomic analysis, business

firms can forecast their level of demand within the certain time interval. The
demand for a commodity fluctuates depending upon various factors affecting it.
Thus, business firms and decision makers can determine the level of demand for
the commodity.
COST ANALYSIS:-It theories explain various conditions of cost like fixed

cost, variable cost, average cost, and marginal cost. Along with this, it also
provides an analysis of the short run and long run costs that help the business
decision makers determine the cost of production and other related costs, so they
can implement policies to cut down cost and increase their level of profit.
FREE MARKET ECONOMY:-It explains the operating of a free market

economy where, an individual producer has the freedom to take economic
decisions like what to produce, how to produce, or for whom to produce.
Allocation of resources is determined by price or market mechanism i.e. interaction
between demand and supply
PRODUCTION DECISION OPTIMIZATION:-It deals with different

production techniques that help to find out the optimal production decision which
helps the decision makers to determine the factors needed in order to produce a
certain product or a range of products.
PRICING POLICY:-It analysis provides business managers with a thorough

knowledge of theories of production and pricing in order to ensure optimum profit
for the firm in the long run.
Determination of Relative Prices of Products & Factors of production
Microeconomics helps in analyzing market mechanisms i.e. determinants of

demand and supply which are responsible for the determining prices of
commodities in the market. Along with this, it provides an insight on theories
relating to prices of a factor of rent, wage, interest, and profit.
Basis of Managerial Economics
Microeconomics used for the study of a business unit, but not the economy as a
whole is known as managerial economics. The various tools used in
microeconomics like cost and price determination, at an individual level becomes
the foundation of managerial economics.
Basis of Welfare Economics
Microeconomics is not only concerned with analyzing economic condition but also
with the maximization of social welfare. It studies how given resources are utilized
to gain maximum benefit under various market conditions like monopoly,
oligopoly, etc. Analysis of production efficiency, consumption efficiency, and
overall economic efficiency are conducted on the basis of microeconomics.
Formulation of Public Economic Policies
Microeconomics tools are useful for introducing policies relating to tax, tariff,
debt, subsidy, etc. it helps the governmental bodies to fixate on the tax rate, types
of tax, and the amount of tax to be charged to buyers and sellers.
Helpful in Foreign Trade
Microeconomics is useful in explaining and determining the rate of foreign

exchange between currencies, fixing international trade and tariff rules, defining
the cause of disequilibrium in the balance of payment (BOP), and formulating
policies to minimize it.
Study of microeconomics helps in the decision making of business organization.

Microeconomics variables such as demand and supply help business firm to
analyze the quantity demanded in the market and quantity that has to be supplied in
the market. With the help of microeconomics and the study of demand and supply
forces, firms are able to decide the prices of goods and services. Microeconomics
also solves the producer's dilemma that includes, what to produce, how to produce
and in what quantity it should be produced. Scarcity is also a factor of
microeconomics; understanding the problem of scarcity will help the business
organization to use the resources carefully and optimally.
It also helps a business firm to understand the behavior of people and their
purchasing pattern. After understanding the income and purchasing pattern of the
people, the business firm is able to take important decisions regarding the
production of the products and its prices
2. Define and differentiate between Microeconomics and Macroeconomics
give examples of each?
Ans. The main differences between micro and macro economics:
Microeconomics is the study of particular markets, segments of the economy. It

looks at issues such as consumers behavior, individual labour market, and the
theory of firms.
Macroeconomics is a study of the whole economy. It looks aggregates

variables, such as aggregates demand, national output and inflation.
Microeconomics works on the principle that markets soon create equilibrium. In

macro economics, the economy may be in a state of disequilibrium (boom or
recession) for a longer period.
Macro economics places greater emphasis on empirical data and trying to

explain it. Micro economics tends to work from theory first – though this is not
always the case.
Differences between microeconomics and macroeconomics
The main difference is that micro looks at small segments and macro looks at
the whole economy. But, there are other differences.
Equilibrium – Disequilibrium
Classical economic analysis assumes that markets return to equilibrium (S=D). If

demand increases faster than supply, this causes price to rise, and firms respond by
increasing supply. For a long time, it was assumed that the macro economy
behaved in the same way as micro economic analysis. Before, the 1930s, there
wasn’t really a separate branch of economics called macroeconomics.
Micro-economics involves:-
Supply and demand in individual markets.
Individual consumer behavior. e.g. Consumer choice theory
Individual labour markets-e.g. demand for labour, wage determination
Externalities arising from production and consumption-e.g.
Externalities
Macro-economics involves:-
Monetary/fiscal policy. e.g. what effects does interest rates have on the
whole economy
Reason for inflation and unemployment
Economic growth
International trade and globalization
Government borrowing
Reason for difference in living standards and economic growth
between countries
MICROECONOMICS
MACROECONOMICS
Individual markets Whole economy(GDP)
Effects on price of good Inflation
Individual labour market employment/unemploy.
Individual consumer behavior aggregate demand
Supply of good Prod. capacity of eco.
KEY TAKEAWAYS:- Microeconomics studies individuals and
business decisions, while macroeconomics analyzes the decisions made
by countries and governments.
Microeconomics focuses on supply and demand, and other forces that
determine price levels, making it a bottom-up approach.
Macroeconomics takes a top-down approach and looks at the economy
as a whole, trying to determine its course and nature.
Investors can use microeconomics in their investment decisions, while
macroeconomics is an analytical tool mainly used to craft economic and
fiscal policy.

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Assignment #1 (6th Nov, 2020) Roll No: _4

email before the deadline (Monday 10.00am)

The assignment should be sent to email: [email protected] before the

deadline; not accepted otherwise.

PUT: MICRO-ECONOMICS into subject.

NOTE: According to SOAU regulation, plagiarism and cheating subject to

penalties up to expelling from the Bachelor’s Programme.

1. Significant of Microeconomics in Business Decision Making

OPTIMUM UTILIZATION OF RESOURES:-The study of

DEMAND ANALYSIS:-With the help of microeconomic analysis, business

COST ANALYSIS:-It theories explain various conditions of cost like fixed

FREE MARKET ECONOMY:-It explains the operating of a free market

PRODUCTION DECISION OPTIMIZATION:-It deals with different

PRICING POLICY:-It analysis provides business managers with a thorough

Determination of Relative Prices of Products & Factors of production

Microeconomics helps in analyzing market mechanisms i.e. determinants of

Basis of Managerial Economics

Basis of Welfare Economics

Formulation of Public Economic Policies

Helpful in Foreign Trade

Microeconomics is useful in explaining and determining the rate of foreign

Study of microeconomics helps in the decision making of business organization.

Microeconomics is the study of particular markets, segments of the economy. It

Macroeconomics is a study of the whole economy. It looks aggregates

Microeconomics works on the principle that markets soon create equilibrium. In

Macro economics places greater emphasis on empirical data and trying to

Differences between microeconomics and macroeconomics

Classical economic analysis assumes that markets return to equilibrium (S=D). If

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