Basic problems of microeconomics
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Economics is the social science that analyzes the production, distribution, and consumption of goods and services. Different economists has given different definations of economics. The philosopher Adam Smith (1776) defines the subject as “an inquiry into the nature and causes of the wealth of nations. According to Alfred Marshall Economics is a study of man in the ordinary business of life. It enquires how he gets his income and how he uses it. Thus, it is on the one side, the study of wealth and on the other and more important side, a part of the study of man. According to Lionel Robbins Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses According to George Bernard economics is the art of making the most out of life, divided into two branches that is micro and macroeconomics
Micro means ‘Small’ so it indicates study of small economic units. The word micro is derived from a Greek word Mikroos. Microeconomics is the study of the economic system from the perspective of households and business firms; it focuses on the nature of individual consumption and production units within a particular market or economic system. Also Microeconomics is the study of decisions that people and organizations make with regard to the allocation of resources and prices of goods and services. Microeconomics also takes into account various policies like tax policies and government regulation at the individual level and at the firm level. Thus it encompasses supply and demand, and other forces that determine price. It helps to analyze the reasons for variations in price due to increase or decrease in supply, and the factors influencing the demand and supply. For example, the microeconomic concept analyzes why an increase in the number of pizza joints in one particular area would cause lower pizza prices in that area.
The major economic problem is that Human Wants are more than the resources. The basic problems of micro economics are what, how and for whom to produce which are given below: 1) What to produce:
This problem identifies what an economy should produce to satisfy the needs and wants of the consumer as much as possible using the limited available resources. If the country produces goods in such a way that maximizes the satisfaction of the consumer, then the economy is allocating efficiently. 2) How to produce:
This problem identifies ways in which the production inputs are combined for the production of goods as decided in problem 1 to obtain maximum efficiency. An economy achieves efficiency if it uses minimum resources to produce the desired goods.
3) For whom to produce:
Who is being targeted by the economy for the production of goods. It is those with high incomes or those with lower ones. Which Demographic group is being targeted by the economy for the production of goods? If the economy directs this problem then it is considered as OPTIMAL OR EFFICIENT. When all the 3 problems are addressed at a single time then the economy is considered to b EFFICIENTLY STATIC. And if the economy has achieved this static efficiency over a period of time then it is called DYNAMICALLY EFFICIENT. All these problems are based on the fact of unlimited wants and limited resources. Factors of production (land, labour, capital, entrepreneur) are the resources which are used in production to produce the goods that satisfy the wants. There are few other problems as well like problem of efficient use of resources, Problem of Growth, problem of fuller employment of resources Solution or suggestion to these problems:
According to the situation, we always have limited resources which can be used for satisfying alternative objectives. When we have to adopt only one course of action then we try to save money by reducing the amount that we are spending i.e we use our scarce resources with utmost care keeping wastage to the minimum. We need to:
1.Put our wants in order of preference
2.Select the most important thing for satisfaction.
3. Postpone some of the needs in the hope of finding resources for them in the future
4. Discards the remaining wants
Consider we have a wooden block, and we have two options i.e.
1. make a chair out of it
2.make enough match sticks to last for the whole season
Then according to our ultimate need due to cold weather , if we make a chair from the wooden panel then we will suffer cold as it can not play any role in reducing cold ,therefore our preference is to fight against cold . Hence we opt to make match sticks instead of chair that will last for the whole season.