Limitation of Micro Economics

Despite its importance, microeconomics analysis suffers from certain limitations, which are as follows. 

• What is true in the case of an individual unit may not be true in the case of aggregates. For example, individual thrift may be good, but social thrift is definitely harmful for the community. If the entire community starts saving more, effective demand will be reduced and employments retarded. Likewise wage cutting in a particular firm may promote employment, but general wage cutting may actually result in reducing the volume of employment in a community. The result of microeconomic analysis should therefore be applied to the aggregates with caution.

• Microeconomic analysis assumes other things being equal and is based on the assumption of full employment in society. This is a highly unrealistic assumption. What exists in society normally is not full employment but under employment. As Keynes point out, “to assume full employment is to assume our difficulties away”. 

• Microeconomics instead of studying the total economy concentrates only on small parts of it. Consequently it throws no light on the collective functioning of the national economy. 

• There are certain economic problems which cannot be analyzed with the aid of microeconomics. For example, important problems relating to public finance, monetary and fiscal policies etc are beyond the scope of microeconomics. 

• Microeconomics suffers from abstractness. It fails to provide us with a description of the real world as it is. Its abstractness mostly stems from the fact that it is not in a position to take into account the entire economic data of the real world. Microeconomics may not explain why the price of sugar in Bombay is higher than its price in Delhi, but it does explain in general how the price of sugar is determined in actual practice. 

• Micro economics is based on the assumption of laissez-faire. However, I actual practice it hardly exists and practiced anywhere in the world. 

It is on account of these limitations and weakness that microeconomics has lost its former appeal with the economists. The present professional dissatisfaction against microeconomics can be traced back to the great depression of 1930’s when it failed to grapple with the twin problems of increasing unemployment and falling prices in the capitalist world. The main draw back of micro economics is that it fails to offer practical guidance to government in the formulation of appropriate economic policies. Micro economics, therefore, needs to be reformulated if it is to regain its former glory.


Notes provided by Prof. Sujatha Devi B (St. Philomina's College)