The importance of Micro Economics is as given below:
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.