Note on Types of Microeconomics

  • Note
  • Things to remember

Types of Microeconomics

1. Simple Micro-statics 

It is the economic model which studies different microeconomic variables and their relationships at a given point of time under the condition of equilibrium, other things being equal. In the micro-static models of price determination, the relationship between two market forces demand and supply determine price in the market at a point in time which is also constant through time.

fig. Simple Micro statics
          Fig. Simple Micro statics

In the figure, quantity and price are measured on X-axis and Y-axis respectively. The figure shows DD and SS the demand and supply curves respectively. The equilibrium price of a commodity is established at a point E where quantities of demand and supplied equals to OQ at price OP. This is a static analysis of price determination, for all variables such as quantity supplied, quantity demanded and price refer to the same point or period of time.

2. Comparative Micro-statics

A Comparative Micro-Static analysis compares one equilibrium position with another when data have changed and system has finally reached another equilibrium position. It does not show how the system has reached the final equilibrium position with a change in data. It merely explains and compares the initial equilibrium position with the final one reached after the system has adjusted to a change in data.

Comparative Micro statics
Fig. Comparative Micro statics

In the figure, quantity and price are measured on X-axis and Y-axis respectively. The initial equilibrium point between DD the demand curve and SS the supply curve is at E. When demand function shift upward to D1Ddue to change in some independent variable (such as income), the new equilibrium is at E1where quantities of demand and supplied equals to OQat the price OP1. In a comparative static analysis, we are concerned only with explaining the new equilibrium position at point Eand comparing it with E. We are not concerned with the whole path the system has travelled from E to E1.

3. Micro dynamics 

It explains lagged relationship between the macroeconomic variables. It throws full light on what is happening in the market during the period of transition from one static equilibrium point to another. More specifically, it studies the process through which the new equilibrium in the market is established after breaking initial equilibrium. It explains all types of changes occurred between two equilibrium. It provides answers to the following questions: What is the cause for breaking initial equilibrium or establishing new equilibrium? What types of other changes occur between two equilibriums? But it does not provide answers to the following questions: What shows initial equilibrium or new equilibrium? What is the comparative difference between them with respect to economic variables?

So, micro dynamics is the study of the process which shows how the initial equilibrium breaks and attains new equilibrium. 

Micro dynamics

In the figure, the initial price of a commodity is fixed at OP1 where the quantity demanded as well as supplied is OQ1. Now due to a change in some independent variable, the demand curve DD1 shift upward to DD2. As a result, disequilibrium occurs in the market. This is followed by a series of disequilibrium before the final equilibrium until and new equilibrium price takes place. Even though demand increases, supply cannot be increased at the same movement. Therefore, the immediate effect of the upward shift in the demand curves is that the suppliers enjoy higher price P5. It is due to the fact that the supply is perfectly inelastic at a given point of time. This sharp increase in price in the market period will attract the suppliers to increase their supply in the short run. This leads to increase in the supply at the level of OQ4. It will result in a decrease in price by P5 to P2. This process is continuing until the new equilibrium is established at point E2.

 

Limitations of microeconomics

  1. The study of microeconomics is unable to focus the collective activity of the national economy.
  2. The economy policy such as taxation policy, expenditure policy of the government, monetary policy, fiscal policy etc. is assumed to be of greater importance. These policies affect the entire economy. These policies do not come within the eye of microeconomics.
  3. Microeconomics assumes other things being equal and has based its results on the assumption of full employment in the society. These assumptions do not have a hold in real life.
  4. Microeconomic theories assume the existence of a free existence of a free enterprise system in which the ‘invisible hands’ or market forces are assumed to play their roles freely. It assumes also the absence of any government intervention in the economic activities of the society.
  5. Microeconomics is concerned with the behavior of individual elements of the economic organism and not with the organism as a whole. It provides only a partial analysis of the economic phenomenon.

 

Difference between microeconomics and macroeconomics

On the basis

Microeconomics

Macroeconomics

Nature

It studies the individual or small economic variables of the economy such as individual consumption, saving, investment and income

It deals with aggregates like national income, full employment and price level.

Objectives

It studies principles, problems, and policies relating the optimum resources allocation.

It deals with the principles, policies, problems, relating to full employment and growth of resources.

Subject matter

It deals with the determination of price, consumer’s equilibrium, distribution, and welfare, etc.

It studies full employment, price level, national income, trade cycles, etc.

Methodology

Law of microeconomics is formulated on assumptions such as constant production, income, and full employment, other things being equal.

Macroeconomics assumes how the factors of production are or will be distributed. It explains how full employment can be achieved on the basis of the assumptions of the factors distribution.

Equilibrium

 

It studies the equilibrium between the forces of market demand and supply. The basic of microeconomics is the price mechanism.

It deals with the national income, output, employment, etc. and at the point of equilibrium established between the forces of the whole economy, such economic variables are determined at the point of equilibrium.

Analysis

It studies the equilibrium at a particular point in time. It does not explain the time factor. It is regarded as the static analysis.

It is based on the time lag, a rate of change, the past and expected value of variables. It is regarded as the dynamic analysis.

Application

The study of microeconomics is not of much help to solve the important current issues and problems such as a decline in national income, hyperinflation, and widespread unemployment and so on.

It studies the causes, effects and possible measures for the solution of these issues and problems. Macroeconomics helps to solve these problems.

 

 

 

Reference

Koutosoyianis, A (1979), Modern Microeconomics, London Macmillan

 

 

  • Simple micro-statics is the economic model which studies different microeconomic variables and their relationships at a given point of time under the condition of equilibrium, other things are being equal.
  • A Comparative Micro-Static analysis compares one equilibrium position with another when data have changed and a system has finally reached another equilibrium position.
  • Micro-dynamics explains lagged relationship between the macroeconomic variables. It is the study of the process which shows how the initial equilibrium breaks and attains new equilibrium. 
  • The economy policies such as taxation policy, expenditure policy of the government, monetary policy, fiscal policy etc. are not addressed by microeconomics.
  • Microeconomics assumes other things being equal and has based its results on the assumption of full employment in the society. These assumptions do not have a hold in real life.
.

Very Short Questions

0%

DISCUSSIONS ABOUT THIS NOTE

No discussion on this note yet. Be first to comment on this note