R0LE 0F MICR0EC0N0MICS
Micr0ec0n0mics (fr0m Greek
prefix mikr0- meaning “small”) is a branch 0f ec0n0mics that studies the behavi0r 0f individuals and firms in making decisi0ns regarding
the all0cati0n 0f scarce res0urces and the interacti0ns am0ng these
individuals and firms.123
0ne g0al 0f micr0ec0n0mics is t0
analyze the market mechanisms that establish relative prices am0ng g00ds and services and all0cate limited res0urces am0ng
alternative uses. Micr0ec0n0mics sh0ws c0nditi0ns under which free markets lead
t0 desirable all0cati0ns. It als0 analyzes market failure, where markets fail t0 pr0duce efficient results.
Micr0ec0n0mics stands in c0ntrast t0 macr0ec0n0mics, which inv0lves “the sum t0tal 0f ec0n0mic activity, dealing with the
issues 0f gr0wth, inflati0n, and unempl0yment and with nati0nal p0licies
relating t0 these issues”.2 Micr0ec0n0mics als0 deals with the effects 0f ec0n0mic p0licies (such
as changing taxati0n levels) 0n the af0rementi0ned
aspects 0f the ec0n0my.4 Particularly in the wake 0f the Lucas critique, much 0f m0dern macr0ec0n0mic the0ry has been built up0n ‘micr0 f0undati0ns’—i.e.
based up0n basic assumpti0ns ab0ut micr0-level behavi0r.
chapter, y0u will learn ab0ut:
Participati0n and C0sts 0f Electi0ns
Flaws in the
Dem0cratic System 0f G0vernment
Abraham Linc0ln fam0usly said in his 1863 Gettysburg Address, dem0cratic
g0vernments are supp0sed t0 be “0f the pe0ple, by the pe0ple, and f0r the pe0ple.”
Can we rely 0n dem0cratic g0vernments t0 enact sensible ec0n0mic p0licies?
After all, they react t0 v0ters, n0t t0 analyses 0f demand and supply curves.
The main f0cus 0f an ec0n0mics c0urse is, naturally en0ugh, t0 analyze the
characteristics 0f markets and purely ec0n0mic instituti0ns. But p0litical
instituti0ns als0 play a r0le in all0cating s0ciety’s scarce res0urces, and ec0n0mists
have played an active r0le, al0ng with 0ther s0cial scientists, in analyzing h0w
such p0litical instituti0ns w0rk.
0f this b00k discuss situati0ns in which market f0rces can s0metimes lead t0
undesirable results: m0n0p0ly, imperfect c0mpetiti0n, and antitrust p0licy;
negative and p0sitive externalities; p0verty and inequality 0f inc0mes;
failures t0 pr0vide insurance; and financial markets that may g0 fr0m b00m t0
bust. Many 0f these chapters suggest that g0vernment ec0n0mic p0licies c0uld be
aimed at addressing these issues.
as markets can face issues and pr0blems that lead t0 undesirable 0utc0mes, a
dem0cratic system 0f g0vernment can als0 make mistakes, either by enacting p0licies
that d0 n0t benefit s0ciety as a wh0le 0r by failing t0 enact p0licies that w0uld
have benefited s0ciety as a wh0le. This chapter discusses s0me practical
difficulties 0f dem0cracy fr0m an ec0n0mic p0int 0f view: the act0rs in the p0litical
system are presumed t0 f0ll0w their 0wn self-interest, which is n0t necessarily
the same as the public g00d. F0r example, many 0f th0se wh0 are eligible t0 v0te
d0 n0t, which 0bvi0usly raises questi0ns ab0ut whether a dem0cratic system will
reflect every0ne’s interests. Benefits 0r c0sts 0f g0vernment acti0n are s0metimes
c0ncentrated 0n small gr0ups, which in s0me cases may 0rganize and have a dispr0p0rti0nately
large impact 0n p0litics and in 0ther cases may fail t0 0rganize and end up
neglected. A legislat0r wh0 w0rries ab0ut supp0rt fr0m v0ters in his 0r her
district may f0cus 0n spending pr0jects specific t0 the district with0ut
sufficient c0ncern f0r whether this spending is in the interest 0f the nati0n.
When m0re than
tw0 ch0ices exist, the principle that the maj0rity 0f v0ters sh0uld decide may
n0t always make l0gical sense, because situati0ns can arise where it bec0mes
literally imp0ssible t0 decide what the “maj0rity” prefers. G0vernment may als0
be sl0wer than private firms t0 c0rrect its mistakes, because g0vernment
agencies d0 n0t face c0mpetiti0n 0r the threat 0f new entry.
As the terms
imply, Micr0ec0n0mics f0cuses 0n micr0 0r small segment 0f ec0n0my
and it studies the decisi0n making pr0cess and ec0nt0mic pr0blems 0f
individuals ( h0useh0ld, firm, industry etc) in an ec0n0my with respect t0 that
h0w they use scarce means 0r res0urces at their disp0sal f0r satisfying their
unlimted ends. 0n the 0ther hand Macr0ec0n0mics l00ks at a larger
picture and is study 0f ec0n0my as a wh0le.
In 0rder t0
understand the c0ncepts (Micr0ec0n0mics and Macr0ec0n0mics) better, we can say
that Micr0ec0n0mics is the study 0f an individual human being, an individual h0useh0ld,
an individual firm 0r an individual industry etc with respect t0 h0w they
use/divide their given scarce means am0ng the p0ssible alternative uses/ends in
0rder t0 maximize their gain 0r wellbeing. Micr0ec0n0mic the0ry d0es n0t study
the ec0n0my as a wh0le and instead studies the individuals and their gain
maximizing behavi0r in any ec0n0my. Micr0ec0n0mics studies and analyzes
individual (human being, h0useh0ld, firm, industry etc.) behavi0r with respect
t0 issues like pr0ducti0n, c0nsumpti0n, distributi0n, price determinati0n etc.
0n the 0ther hand, studies the aggregate 0r 0verall ec0n0mic behavi0r 0f h0useh0lds,
firms, industries etc in any ec0n0my. It f0cuses 0n br0ader ec0n0mic issues
like business cycles, inlati0n, deflati0n, stagflati0n, issues related t0 ec0n0mic
gr0wth and devel0pment, nati0nal inc0me, empl0yment, m0ney and m0netary p0licy,
fiscal p0licy etc.