Saturday, 11 March 2017

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What is Micro Economics? Definition and Utility of Product- Cardinal and Ordinal Approach

In the previous article we’ve defined what economics is and how the term gained its meaning in past few years. Economics itself is a wide term. And we have to look and learn it in certain depth. It has different dimensions and many meaning attached & explained by different economists, thus making it complicated for us!! Moving onto the next segment of our discussion, we shall be discussing the parts of economics or the two main branches, in which economics is bifurcated. Economics is primarily divided into two branches i.e. micro economics and macroeconomics!

What is Micro Economics?

Micro economics, as the name suggests, is the microscopic study of an economy. It deals with individual items and segments of economy. Here, individual items means consumer or group of consumers, firms i.e. industry or group of industries. It is concerned with the decisions made at lower or micro level. This fairly means that how these segments or units of an economy take decisions, which factors influence their decisions and how their decisions affects the economy as a whole!

It has been analysed that micro economic decisions; decisions by small units like business houses or consumers, is largely affected by the cost and benefit consideration. The cost of the goods and services produced or sold in an economy and the utility or benefits associated with such product influences the decisions of these individual market players (consumers or firms).
Let’s understand it more comprehensively.

As you’ve been told earlier, the decisions of these individual units affects the cost or price of the goods and services produced in an economy in relation to its utility. Consumers are the most vital part of any economy in this world. Everything simply revolves around them. All the business decisions are taken keeping in mind the expected response of their consumers. That’s why consumers are said to be “king of an economy”. They help in “price determination”.

How do you define a Consumer and Utility of Product?

Now before jumping to the major segment price determination, we must know what actually we mean by the term ‘consumers’ and ‘utility of a product’. A consumer is a person who consumes or uses good and services for satisfaction of his or her wants. With consumer, we mean, the final person who wishes to use the product with an intention to meet his requirements and not for resale or further processing (manufacturing).

A consumer is one who tries to maximize his satisfaction at low prices. Of course, bargaining is our birth right! Considering utility, it generally means the usefulness of the commodity (product). But, in economics, it means the amount of satisfaction that a person gets from consumption of a commodity during a particular period of time. Now, the question arises can utility or satisfaction be measured?
Like many definitions of economics have contradictory opinions, the same happens for utility. Basically there are two approaches of utility in economics- Cardinal approach and Ordinal approach.

Cardinal Approach and Ordinal Approach in Utility of Economics

Cardinal approach was founded by the father of economics, Alfred marshal, he was of the opinion that utility can be measured in terms of UTILS. UTIL is a psychological an imaginary unit. It measures the amount of satisfaction that a consumer gets after consumption of a commodity in a particular period of time. However, like many other views of marshal, this was too greatly criticized. Oops!
Unlike cardinal approach, ordinal approach meant that utility cannot be measured but definitely can be compared. Agreed! We cannot measure satisfaction. For example, if a person A and B both eats a mango ice-cream. A, being a mango lover, ate it with more zeal but B just might not enjoy it as much as A. here, satisfaction isn’t measured but is simply compared. “A” enjoyed the mango ice cream more than B.

The Cardinal approach was founded by “Hicks and Allen”.  They considered utility as a subjective concept i.e. satisfaction varies (differs) from person to person. They also believed that price is a good measure of utility. The price of the product can tell us it’s utility.
For example, a car worth Rs. 5 Lakhs will not give us a satisfaction of a car worth Rs. 25 lakhs. This is how the utility and cost affects the decisions of consumers in an economy.

As we have studied earlier, economics is allocation of resources in its alternative forms to ensure optimum utilisation of resources. Similarly, “microeconomics studies the behaviour of individuals and businesses and how decisions are made based on the allocation of limited resources. “

We have kept repeating microeconomics is the study of decisions taken by the consumers or business houses. Now what the need of taking decisions? Why do we want to study these decisions? 

Well, all your queries will be answered in the Next Article of Micro Economics. Click to Visit!


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