Micro economics deals with the study of economic behaviour of small individual economic units such as individual consumer, firm, producer etc.
The various features of Micro economics are as follows:
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 guidances 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.
This in turn, can help to answer the following questions:
a. Who will produce the goods?
b. What goods will be produced?
c. In what quantities the goods will be produced?
d. How to price the produced goods?
e. How will they be distributed? etc.
Moreover, it examines whether the given allocation of resources is efficient or not i.e. whether it results in the economic welfare of society.
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.
vii. Based on Certain Assumptions:
Many economists have used micro economic analysis to develop different theories which are based on the assumption of Ceteris Paribus which means “Other things remaining the same”.
The theories follow the partial equilibrium analysis in order to study a particular individual unit of an economy. They are based on certain assumptions such as perfect competition, laissez fair policy, pure capitalism, full employment, ceteris paribus etc, which do not exist in reality. These assumptions make the analysis simple and the theories static, but at the same time neglect the interdependence between economic variables and the changing economic world.
viii. Limited Scope:
The scope of micro economics is limited since it doesn’t deal with the nationwide economic problems such as inflation, deflation, balance of payment situation, poverty, unemployment, population, economic growth etc.
IX. Study of individual units:
Individual economic unit refers to the smallest part of an economy viz. individual household, individual firm, individual income, etc. Micro economics studies the economic behaviour of such individual economic units. In other words, micro economics splits the economy into small individual units and further studies each unit separately.
X. Slicing Method:
Micro economics uses slicing method since it splits or divides the whole economy into small individual units and then studies each unit separately in detail.