Importance of Microeconomics

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ECO 415
1) With examples, give 5 reasons why the study of microeconomics is important.

2) Define “ceteris paribus”. Explain why the device of ceteris paribus is so important in economics.

Prepared for: Prof. Madya Habibah Lehar
Prepared by: Nik Syahirah binti Nik Muhammad
: 2012636032
: BA2F

1) The Importance to study Microeconomics.
Microeconomics as has been stated by those who have studied Latin know that the prefix “micro-“ means “small,” so it shouldn’t be surprising that microeconomics is the study of small economic units (Jody Beggs). As referred to the book on Understanding Economics Third Edition, microeconomics is a study in economic activities and decision-making of an individual like a seller, buyer, or consumer, firm or producer or a government unit or level. This study is concerned about the demand and supply of particular goods and services and resources such as cars, clothes and computers. At the same time, it can determine the aspects which influence individual economic choices and how the choices from various decision makers are organized by markets. To further the understanding of microeconomics, here are a few importance of microeconomics study. First of all, it leads to get a better understanding the working of economy. This study totally gives bird’s eye view of the economic world as it gives understanding of economic works as a whole. This study covers each single aspect which is related to the economic issues. It helps in understanding how the macroeconomic variables behave in aggregate. For example, study of the national income, aggregate output, employment and national expenditure is very essential to understand the working of the economy. Second, the microeconomics is totally important in consumer decision-making process. Business draws upon microeconomic data to make several of critical choices, any one of which could mean the success or failure of their business. It shows that the reliability and currency of the information a business uses, therefore, is of the utmost importance. In a logical aspect to make any decision of an economic business, microeconomic data may be reduced to mathematical constructs from which logical decisions may be made. Let's say we have a theoretical company, Firm D, which manufactures and sells school bags. Microeconomic data from this imaginary company has shown that its customers have a preference for bags with roller at a certain price. The previous year the company sold 50,000 bags at RM40 each. For the sake of argument, let's say that this year the economy has not changed. The gross national product (GNP), unemployment rates, interest rates and the stock and bond markets are all basically the same as the previous year. Logic would dictate that at least another 50,000 bags with roller be manufactured and offered for sale.

Besides that, microeconomics helps to understand the general unemployment. The use of microeconomics is helpful to solve the complex problems nowadays especially in general unemployment. This disaster occurs due to the deficiency of effective demand. The labor force only includes workers actively looking for jobs. People who are retired, pursuing education, or discouraged from seeking work   by a lack of job prospects are excluded from the labor force. Economists divide unemployment into a number of different categories, since defining types of unemployment more precisely sheds some light on why unemployment occurs and what can be done about it. There are a few types of unemployment which are Frictional Unemployment, Cyclical Unemployment, and Structural Unemployment. Next, microeconomics also works to control economic fluctuation. The fluctuations here are like trade cycle, inflation, deflation and so on which need to be handled properly in appropriate period of time to correct them. The reason behind such an economy is to make sure that everything needed is produced and...
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