TYPES OF MICRO ECONOMICS

    The analysis of microeconomics is always affected by time period. But there are still some economists who do not believe the time value in microeconomics analysis. Based upon the equilibrium of microeconomics in the different situation and relationship between time and different economic models, the microeconomics is divided into three different types, namely Microsatics, Comparative Micro statics and Micro Dynamics.

 

a. Micro Statics:

Demand and supply are two principal variables that determine the equilibrium level for market. The quantity demanded of a good at a time is generally considered to be related to the price of that particular time. Same way supply is also related to price at particular static time. Thus microeconomics tries to find out the equality of demand and supply at a particular point of time or static time. This static analysis is the study of static relationship between two variable called demand and supply, which is known by micro statics. In other words, if the functional relationship is established between two principles variable at a same period of time, such analysis is known by micro static. This situation is also known by equilibrium situation of variables. This equilibrium determines the equilibrium price and quantity. According to Schumpter, “By static analysis, we mean, method of dealing with economic phenomena that tries to established relations between elements of the economic systems-prices and quantities of commodities all of which have the same time subscript, that is to say, refer to the same point of time.” He further said, “Static analysis tries to establish relation between elements of the economic system which refer to the same point of time.”

 

The concept of micro static is given below with the help of diagram.

 

In the diagram given above, DD shows demand curve and SS shows supply curve. Both curves intersect at point ‘E’ that gives the equilibrium price- P and quantity- Q at particular time period. This is static analysis.

 

b. Comparative microstatics:

Micro static explains about the equilibrium point that is obtained by two co- operant factors that is demand and supply, under the static or given period of time. Thus equilibrium is obtained when demand equals supply under the condition of ‘other things remaining same’ or ‘no change’. When variables change, the initial equilibrium level will be disturbed. This brings the process of disequilibria and it continues till new equilibrium is obtained. In this background it is essential to analyze the comparison between these two equilibrium levels. The comparison between these two different equilibriums is studied under comparative microstatics. It compares one equilibrium with other equilibrium but does not identify the process of disequilibria that occurs. According to Prof. Schneder; “The comparative analysis of two equilibrium positions may be defined as comparative static analysis. Since, it studies the alternation in the equilibrium position corresponding to an alternation in a single datum.”

 

For example, suppose that income of consumer changes that affects to demand of consumer and regarding supply, initial equilibrium distributes and new equilibrium is obtained. Same way due to change in the technology, production function, then cost and hence supply change and this affects the initial equilibrium. Thus in both cases- either demand changes or supply changes, two equilibrium appear- initial and later. Comparative micro statics studies those two equilibriums.

 

The diagram given explains the comparative micro statics equilibrium. In the diagram, demand curve DD and supply curve SS gives the equilibrium point ‘E’ at price- P and quantity- Q. due to changes in the demand, it shifts to D1D1 and new equilibrium point ‘E1’ is obtained with the same supply curve SS. This new equilibrium gives new price- P1 and quantity- Q1. Comparative micro statics studies the two equilibrium points ‘E’ & ‘E1’.

c. Micro dynamics

Study of microstatics shows the state of equilibrium through demand supply analysis under the assumption of constant time where no changes in variables take place. Same way study of comparative micro statics shows the comparison between two equilibriums due to partial change in factors and time period. But the world and time are neither static nor they partially change. The real world is dynamic. The change in time and other factors are dynamic and they lead to change in demand and supply hence change in equilibrium. Thus, micro dynamics refer to a position by which the system passes from one position of equilibrium to other. It is very essential to know change and process of change in equilibrium. In this analysis with the change in pace of time price of commodity also changes and that brings the change in demand and supply. Those changes bring the true picture of real world economy at different prices at different time. According to J.A. Schumpeter, “we call a relation dynamic if it connects economies quantities that differ to different points of time.” W.T. Bauomol said, “Economic dynamics to the study of economic phenomena in relation to preceding and succeeding events.” The other most important aspect of micro dynamic is that it deals with disequilibria condition also. The analysis chases process of change time by time. It can explain state of being disequilibria and how the disequilibria’s move towards equilibrium.

Limitation of Microeconomics

    Microeconomics is most important branch of economics. It is also known by foundation for whole economic analysis. It describes about the individual behavior of society and firm. According to William Flenar,” Microeconomics is related to the individual decision-making units.” It tells us how price and output level of any commodity is determined? How cost of production is determined? What we mean by market and its types? How wage rate and payment for capital is defined? How the government policy affects all such activities? etc. Beside such important aspects of microeconomics, it has some imitations as given below 

 

a) Individual analysis

Microeconomics explains only small individual units of economic activity. This is a partial and incomplete analysis. For the national economic analysis, aggregate income and output, aggregate production and expenditure show the economic level of country. All those subjects are not considered by microeconomics. So, it is regarded as the incomplete matter.

 

b) Impractical assumption

Most of theories and models of microeconomics are derived based upon some assumption for examples: other things remaining same, full employment, concept of rationality etc. In real life it’s near impossible to be fulfilled those assumptions. In our daily activities, there are many variable factors along with time. Those changes in variables bring the change in individual behavior that affects microeconomic activity. Same way, it is impossible to be full employment in economy.

 

c) Wrong concept of laissez faire economy

Microeconomics belief upon the concept of laissez faire economy, that means there should be no interfere in market economy by government. It has been explained in market life that government should interfere for its smooth activities. An event of great depression- 1930 had made failure to the concept of laissez faire.

 

d) Micro economics ignores the macro level activity

Real economic mirror of a country are employment, income, output, foreign trade, price level, impact of policy (monetary and fiscal) implementation etc. But microeconomics does not analysis all those subjects.

The Demand Schedule and the Demand Curve

            The demand schedule is generally represented by a table, which shows how the quantity demanded of a good varies with price, other things remaining constant. Table shows a hypothetical demand schedule for jackets sold per month at Mahendranagar.

Table

Price (In rupees)	Quantity demanded (In numbers)
500 450 400 350 300 250 200 150	10 lakhs 11 lakhs 12 lakhs 13 lakhs 14 lakhs 15 lakhs 16 lakhs 17 lakhs

            Table is constructed, based on the implicit assumption that the number of jackets demanded solely depends on their respective prices. Plotting the above figures in a graph, we can derive the demand curve. The graphical representation of the demand schedule is the demand curve, as shown in figure.

            The graph shows that the demand curve is downward sloping. A change in the quantity demanded is a movement along the demand curve caused by a change in the price of the good. A decrease in the price is reflected by a corresponding increase in the amount of quantity demanded. This inverse relationship between price and the quantity demanded is depicted in the shape of the demand curve. The downward slope of the demand curve reflects the law of demand, which states that other things remaining the same, if the price of any good decreases its quantity demanded increases and vice versa.

            There are however some instances where the law of demand does not hold goods. These are given below:

 

Firstly, if the concerned good is a Giffen good the rational consumer will go on decreasing his consumption of the good as the price falls. This is because a Giffen good is such that the consumer purchases less and less of the good as its price falls and vice versa. It was noticed by Giffen that when the prices of bread increases, consumers curtailed their consumption of meat and other expensive items and consumed more bread.

 

Secondly, a consumer may judge a good by its price. This behavior of the consumer is known as Veblem effect due to a change in price. Thus, when a price hike takes place for a good the consumer may be misguided to think that a quality improvement has taken place and he consumes more of the product.

 

Thirdly, it so happens that when the price of a good is on a rise the consumer it to rise further. In such a case he may purchase more and more units of a good as its price goes on increasing.

 

Fourthly, in the share market it is noted that when the price of a particular share raises its demand also increases to some people and vise versa.

 

In all the above cases it could be noted that the demand curve is upward rising instead of being downward slopping. This implies that, due to one unit increase in the price, the quantity demanded also increases by some amount, and vice versa.

The Concept of Demand and the Demand Function

Meaning of Demand

The term demand is defined as the number of units of particular goods or service that consumer are willing to purchase during a specific period and under a given set of period.

Demand is distinct from desire and generally it is confused with desire. We can desire for anything. A mere desire for a commodity will not encourage a producer to produce unless it is backed by purchasing power. A desire can be transformed into demand only when,

We have ability to pay i.e., income

Willingness to pay

It is possible to produce goods.

Time period; and

Price

            Demand for a commodity is always expressed in relation to particular price, Place and time. This is so because with the change in place, time and price demand for a commodity may be different. Therefore the demand for a commodity is the quantity to be bought by a person at a particular price place and time. According to Benham, "The demand for anything, at a given price, is the amount of it which will be bought per unit of time at that price."

            Various economists give various definitions According to port. Bridge

            "The term demand is defined as the number of units of particular goods or services that consumers are willing to purchase during a specific period and under a given set of conditions"

Demand function

            The change in other factors cause change in demand because these factors cause shift in demand curse A demand faction also expressed as like.

Q_x = P_y P_x, T,Y,P,E,A,B,........)

P_x = Price of ×commodity

T=Tastes of preferences,

Y= Income of the consumer

A= Advertisement expenditure

Q= quantity demanded of x commodity

E= Future price expectation

B= Income distribution in the economy,

P_y = Price of related goods.

            This relation gives the mathematical relationship bet the quantity demanded of a commodity and various determinant of demand.

 

The Demand Function

            The amount of a good that a customer is willing to buy and able to purchase over a period of time, at a certain price is known as the quantity demanded of that good. The quantity desires to be purchased may be different from the quantity of good actually bought by the consumer. As quantity demanded is a flow concept, the relevant time dimension has to be mentioned which will indicate the quantity demanded per unit of time. Demand is a relationship between the price and the quantity demanded, other things remaining constant. Hence the other things imply, the factors, which influence the decision of the consumer to buy.

            If X₁ denotes the quantity demanded and P₁ its price per unit of the good, then other things remaining constant the demand function will be given as

                        X₁ = f (P₁)

            The function shows that quantity demanded depends on the price. This means that any change in price will result in a corresponding change in the quantity demanded.

            The change in the other factors cause change in demand because these factor cause shift in demand curve. A demand function also expressed as

Q_x     =  F (P_X, TP, y, P_Y, E, A, B...........)      

P_X     =  price of X commodity.

TP   =  Taste and preferences

y     =  Income of the consumer

A     =  Advertisement expenditure.

E     =  Future price expectation

Q_X   =  Quantity demanded of the X commodity.

B     =  income distribution in the economy

P_Y    =  price of related goods.

            This relation gives the mathematical relationship between the quantities demanded of a commodity and various determinants of the demand

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