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Nov 28

It explains how maximum social welfare can be achieved under perfect competition. Prohibited Content 3. Importance / Uses / Significance / Advantages of Micro economics. It is microeconomics that tells us how a free- market economy with its millions of consumers and producers work to decide about the allocation of productive resources among the thousands of goods and services. It also studies how taxes affect social welfare. Copyright 10. It is the microeconomic analysis which is used to explain the factors which determine the distribution of the incidence or burden of a commodity tax between producers or sellers on the one hand and the consumers on the others. Microeconomic theory shows that welfare optimum of economic efficiency is achieved when there prevails perfect competition in the product and factor markets. Microeconomic theory reveals than when the externalities exist, free working of the price mechanism fails to achieve economic efficiency, since it does not take into account the benefits or harms made to those external to the individual producers and the consumers. Micro economics is useful in explaining how market mechanism determines price in a free market economy. As Professor Watson says, “microeconomic theory explains the composition or allocation of total production, why more of some things are produced than of others.” He further remarks that microeconomic theory has many uses. Thus, not only does microeconomic theory describe the actual operation of the economy, it has also a normative role in that it suggests policies to eradicate “inefficiency” from the economic system so as to maximize the satisfaction or welfare of the people. We, thus, seen that microeconomic analysis is very useful and important branch of modern economic theory. MIcroeconomics has great uses. 5] Economic policy 3] Business planning 4] Price determination In spite […] These externalities may be in the form of either external economies or external diseconomies. These simple models remove the complexities in economic analysis. Further, it tells us how the goods and services produced are distributed among the various people for consumption, through price or market mechanism. 11] Predictions Micro economics helps business planning ie helps the business community to plan their costs, production etc in anticipation of demand in order to maximize profits. If it is assumed that resources are optimally allocated or maximum social welfare prevails before the imposition of a tax, then it can be demonstrated by micro-economic analysis that what amount of the damage will be caused to the social welfare. 8] Foreign trade Micro economics is useful in making predictions based on conditions.eg demand forecasting depends on the micro economic principles of demand. This vast task can be achieve and in the past has been achieved, only by the development of a decentralized system whereby the millions of products and consumers and induced to act in the general interest without the intervention of anybody at the centre with instructions as to what one should make and how and what one should consume.”. The power of giant firms or a combination of firms over the output and price of a product constitutes the problem of monopoly. It also makes important and useful policy recommendations to regulate monopoly so as to attain economic efficiency or maximum welfare. ADVERTISEMENTS: Importance and Uses of Microeconomics! Another class of departure from welfare optimum is the problem of externalities. 1] Individual behavior analysis Resources are already scarce ie less in quantity. Micro economics explains the operating of a free enterprise economy where the individual has the freedom to take his own economic decisions.All economic decisions such as what, how, how much, where, when. TOS 7. Privacy Policy 8. Like monopoly, monopoly (that is, when a large buyer or a combination of buyers exercises control over the price) also leads to the loss of welfare and, therefore, needs to be controlled.

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