# Function of Microeconomics Theory || Introduction to Microeconomics || Bcis Notes

The Function of Microeconomics Theory
The function of microeconomic theory studies the economic behaviour of consumers, resource owners, and business firms, who individually can play a decision-making role in a free market economy. The main function of microeconomics are explained below:
1. Analysis of individual behaviour: Microeconomics explains the behaviour of individual consumers and producers with the optimum allocation of resources. Microeconomics examines the most basic of economic transactions by focusing on behaviour by individuals. It is assumed that individuals always act with economic rationality; it is further surmised that companies make decisions that will maximize profits.
2. Business decisions: It improves knowledge of various economic tools such as elasticity of demand, cost analysis, demand forecasting, etc. It helps the business managers in making production plans and trade decisions.
3. Pricing: Pricing is the process whereby a business sets the price at which it will sell its products and services, and maybe part of the business’s marketing plan. It gives a clear idea for pricing the firms. For example, the demand-supply model under the perfect competition and law of demand, the elasticity of demand, opportunity cost, etc. under imperfect competition, are considered as the basis of pricing.
4. To formulate the economic policies: Microeconomics provides various tools to formulate various economic policies like tax policy, policies related to foreign trade, pricing policies for public utilities, etc. to the government.

The Circular-Flow Diagram
The circular flow diagram (or circular-flow model) is a graphical representation of the flows of goods and money between two distinct parts of the economy.
It includes two “actors”
i. Household
ii. Firms

• It includes two market
The market for goods and services.
The market for “factors of productions”.

i. Household

• Own the factors of production; sell/rent them to a firm for income.
• Buy and consumer goods and services.
ii. Firms
• Buy/hire factors of production; use them to produce goods and services.
• Sell goods and services.
fig: basic circular flow-digram

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