Question

How Government Policy Impact Microeconomics?

Answer 1

Ans) Microeconomics deals with the individuals, firms and households and how they allocate their scarce resources.

Government no doubt is highly influential organization which has direct or indirect effect on individual's and firm's decision making.

Some government policies that affect decision making are÷ taxes, subsidies, price controls, tariffs etc.

Taxes changes purchasing power of the individuals and firms and thereby affecting their demands. Subsidy lowers the price for individuals and firms, which increases the purchasing power. Therefore affecting demand and supply in the market.

Price controls artificially restricts the market from reaching equilibrium. Further, price controls restrict the price from going beyond the maximum or minimum price as set by the government, which again influences the decision of the people. For eg- if there is a price ceiling, which puts a cap on price of any commodity then demand will increase.

Likewise, tariffs increases the price of imported goods. As a result, people choose to decrease their demand.

In microeconomics we assume that individuals are rational i.e they try to maximise their utility. And for that, they allocate their resources in such a way that they are allocated optimally. Government laws affect the market outcome. And hence changes the purchasing power, price, quantity etc in the market. All these factors have direct influence on individuals and firms. And therefore, it alters the decisions made by them.

Taking real life example ÷ when there is a change in tax on any commodity, lets say car, then your decision will change depending upon whether the price of car has increased or decreased.