Introduction to Micro Economics: Meaning, Scope, Importance and Basic Concepts Questions

Question 1

Define micro economics.

Accepted Answer

Micro economics is the branch of economics that studies individual economic units like consumers, firms and markets and the determination of individual prices and output.

Question 2

Why is micro economics called price theory?

Accepted Answer

Micro economics is called price theory because it explains determination of prices of goods and factors and output in particular markets.

Question 3

Define opportunity cost.

Accepted Answer

Opportunity cost is the cost of the next best alternative foregone when a choice is made.

Question 4

What is ceteris paribus?

Accepted Answer

Ceteris paribus means other things remaining constant while studying the effect of one factor.

Question 5

State any one central problem of an economy.

Accepted Answer

What to produce and how much to produce is one central problem of an economy.

Question 6

What is PPC?

Accepted Answer

PPC (Production Possibility Curve) shows different combinations of two goods that can be produced with given resources and technology.

Question 7

Explain scope of micro economics.

Accepted Answer

Scope of micro economics includes **consumer behaviour and demand theory**, **production and cost analysis**, and **price determination** under different market structures like perfect competition and monopoly. It also covers **factor pricing** (rent, wages, interest and profit) and basic welfare analysis such as consumer surplus and efficiency in allocation of resources.

Question 8

Explain importance/uses of micro economics.

Accepted Answer

Micro economics helps in understanding **price determination** and market equilibrium. It is useful for business decisions like pricing, output and cost control. It helps government in framing policies related to taxation, subsidies, price control and regulation. Micro analysis also explains allocation of scarce resources and helps improve efficiency and consumer satisfaction.

Question 9

Explain limitations of micro economics.

Accepted Answer

Micro economics often assumes **ceteris paribus**, which may not hold in real situations. It may use unrealistic assumptions like perfect competition or full information. It mainly studies individual markets, so interdependence among markets may be ignored. It also does not directly explain macro problems like inflation, unemployment and economic growth.

Question 10

Explain opportunity cost with an example.

Accepted Answer

Opportunity cost is the value of the **next best alternative foregone**. For example, if a student uses 3 hours to study economics instead of working part-time, the wages he could have earned are the opportunity cost of studying. Similarly, using land for wheat means sacrificing production of some other crop.

Question 11

Explain PPC and its implications.

Accepted Answer

PPC shows the trade-off between production of two goods with given resources. It is **downward sloping** due to choice and generally **concave** due to increasing opportunity cost. Points on PPC show **efficient utilisation** of resources, points inside show underutilisation, and points outside are unattainable with current resources. PPC helps explain scarcity, choice and opportunity cost.

Question 12

Differentiate between micro economics and macro economics.

Accepted Answer

Micro economics studies **individual units** like a consumer, firm or a particular market and explains **individual prices and output** using partial analysis. Macro economics studies the **economy as a whole** and explains aggregates like national income, general price level, employment and growth using overall/aggregate analysis.

Question 13

Define micro economics. Explain its nature and scope.

Accepted Answer

Micro economics is the branch of economics that studies individual economic units such as consumers, firms and particular markets. It explains how individual prices and output are determined and how scarce resources are allocated among alternative uses.

**Nature/features of micro economics:** Micro economics studies individual units and therefore uses **partial equilibrium analysis**, examining one market while keeping other things constant (ceteris paribus). It is also called **price theory** because it explains determination of prices of goods and factors. Micro economics uses **marginal analysis** through concepts like marginal utility, marginal cost and marginal revenue. It focuses on allocation and efficiency of resources at micro level.

**Scope of micro economics:** The scope includes theory of **consumer behaviour and demand**, **utility analysis and indifference curve**, theory of **production and costs**, and pricing under different **market structures** such as perfect competition, monopoly, monopolistic competition and oligopoly. It also covers **factor pricing** (rent, wages, interest, profit) and basic welfare analysis such as consumer surplus and efficiency.

Thus, micro economics provides a detailed understanding of market behaviour and price determination in individual markets.

Question 14

Explain importance of micro economics. Also state limitations of micro economics.

Accepted Answer

**Importance of micro economics:** Micro economics explains price determination by analysing demand and supply in individual markets. It is useful for business firms in decisions related to pricing, output, cost control, product planning and profit maximisation. It helps government in policy decisions such as taxation, subsidies, price control and regulation of monopolies. Micro economics also explains resource allocation and efficiency, consumer behaviour and welfare issues like consumer surplus.

**Limitations of micro economics:** Micro economics mainly uses the assumption of **ceteris paribus**, which may not be realistic because many factors change simultaneously. It often relies on simplified assumptions such as perfect competition, full information and rational behaviour. As it is a partial analysis, it may not capture interdependence among markets. Further, micro economics does not directly address macro issues like inflation, unemployment, business cycles and economic growth, which require aggregate analysis.

Therefore, micro economics is very useful for understanding individual markets but has limitations due to assumptions and its narrow scope.

Question 15

Explain the basic economic problem. Discuss central problems of an economy and explain PPC with its main features.

Accepted Answer

The basic economic problem arises because human wants are unlimited while resources are scarce and have alternative uses. Scarcity forces society to make choices regarding allocation of resources.

**Central problems of an economy:** (1) **What to produce and how much?** Society must decide the combination of goods and services to produce. (2) **How to produce?** It must choose techniques of production (labour-intensive or capital-intensive) to use scarce resources efficiently. (3) **For whom to produce?** It must decide distribution of output among people based on income and needs.

**Production Possibility Curve (PPC):** PPC shows different combinations of two goods that can be produced with given resources and technology. It is generally downward sloping due to trade-off and concave to the origin due to increasing opportunity cost. Points on the PPC indicate full and efficient utilisation of resources; points inside show underutilisation or unemployment; points outside are unattainable with current resources. PPC explains scarcity, choice, efficiency and opportunity cost in a simple diagrammatic form.

Hence, central problems and PPC together explain why economic choices are necessary in every economy.

Introduction to Micro Economics: Meaning, Scope, Importance and Basic Concepts

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