Subject Matter of Micro Economics:
The subject matter of Micro economics basically deals with the following theories:
- 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’.
2. 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.
3. 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.
I. 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.
II. 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.
III. 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.