Microeconomics Definition and Meaning

Learn the microeconomics definition, a subset of economics concerned with individual factors and individual decisions.

The Microeconomics Definition

Microeconomics is a subset of economics concerned with individual factors and individual decisions. Microeconomics studies individual decision-makers, firms, and households, while macroeconomics studies aggregate concepts, inflation, unemployment, interest rates, currency rates, and so on. Microeconomics studies product, labor, and capital markets, with an emphasis on behavior among individuals, households, and firms, as well as the other entities which constitute an economy.

In particular, microeconomics is concerned with patterns of demand and supply, and with determining prices and output within individual markets (e.g. Microeconomics focuses on the economic forces influencing decisions made by individual consumers, firms, and industries. Microeconomics is focused mostly on factors influencing individual economic choices, the effects of changes that occur in those factors on each decision-maker, and the way that demand and prices are determined within individual markets.

Analyses Market Behaviors

To be more specific, microeconomics is the branch of economics that analyses market behaviors of individual consumers and firms, trying to understand decision-making processes of sellers and buyers. At its core, microeconomics studies the analysis of the market behavior of individuals in an effort to gain a better understanding of their decision-making and how this affects the costs of goods and services. Economists who address the subject of microeconomics analyse the operation of individual markets and industries, as well as the behaviors of the units that make the decisions.

Microeconomics is the branch of economics that studies how individuals, households, and firms allocate finite resources, usually to markets in which goods or services are bought and sold. Microeconomics uses a variety of principles, such as the law of supply and demand and consumer demand theory, to predict how individuals and firms behave in situations that involve financial or economic transactions. Price Theory is the area of economics which uses a framework of supply and demand to explain and predict human behavior.

The Demand-Supply Microeconomics Model

The demand-supply microeconomics model explains the relation between the quantity of a good or service a producer is willing to produce and sell for various prices, and the quantity consumers are willing to purchase for those prices. Supply and demand implies that, in a perfectly competitive market, without externalities, unit taxes, or price controls, the price of an individual unit of a good is the price at which the quantity demanded by consumers equals the quantity supplied by producers. In microeconomics, the law of demand states that the quantity demanded of a good by consumers changes in an inverse relationship to the prices of that goods, with all other factors being constant.

Assuming people behave rationally, and all other determinations of demand are constant, the quantity demanded has an inverse relationship to prices. The more important justification for this principle in microeconomics is the assumption that all other factors are equal/unchanged, that the quantity demanded falls with increasing price, and the quantity demanded rises with decreasing price (inverse relationship). In a non-distorted market, buyers will pay market prices until the point at which they decide additional units are not worth this price, and competitive sellers will supply additional units until they are earning a profit from each increment.

The quantity demanded changes as prices vary, not depending on the market equilibrium. Read More Over the course of time, the quantity supplied would either need to be increased by suppliers, or else increase the prices at which products are sold–they are running short on inventory, or supply.

In microeconomics, supply and demand applies to price and output determination in markets with perfect competition, which includes conditions where neither buyers nor sellers are large enough to have pricing power. Demand-and-supply analysis can also be generalized to explain variables throughout an economy, such as aggregate output (estimated as real GDP) and overall price levels, as studied in macroeconomics. Production theory in microeconomics defines a relation between quantity of goods and factors of production, on one hand, and prices of goods and factors of production, on the other.

Applied Welfare Economics

Microeconomics shows how resource allocation, production of commodities, determination of prices, and so forth are affected by the decisions made independently by consumers, producers, and other economic agents. Applied Welfare Economics deals with costs and benefits from almost everything: public projects, taxes on commodities, taxes on factors of production (corporate income taxes, payroll taxes), farm programs (such as price support and land tenure controls), tariffs on imports, currency controls, the different forms of industrial organization (such as monopolies and oligopolies), and the different aspects of labor market behavior (such as minimum wages, the monopoly power of unions, etc.). Most economics (most microeconomics, as well as macroeconomics, fortiori) deals with some sort of aggregate market behavior.

Microeconomics deals with prices and output within individual markets, as well as interactions among various markets, but leaves the study of aggregates across an entire economy to macroeconomics. Microeconomics is concerned mostly with the behavior of demand and supply within different markets which constitute an economy, the behaviour and expenditure patterns of consumers, the behaviour of wages and prices, the policies of firms, the effects of regulations on firms, and so forth. Unlike macroeconomics, which attempts to understand how the collective actions of individual agents affect the aggregate economic outcomes, microeconomics focusses on a detailed examination of agents themselves, using rigorous mathematical techniques to better describe and understand the decision-making mechanisms involved.

Economic Tendencies

Microeconomics is the study of what is likely to happen (the tendencies) as individuals make choices in response to changes in incentives, prices, resources, and/or modes of production. A microeconomist studies economic tendencies–what is likely to happen when individuals make particular choices, or when factors of production are changed. Mathematical models of economic behavior try to capture human behaviour in a functional mathematical language, allowing economists to design mathematically testable models for individual markets.

Economic theories can also prescribe conditions under which demand and supply via markets are an effective mechanism of resource allocation. Producers and consumers create forces that we refer to as supply and demand, respectively, and it is their interactions within a market that produce a pricing mechanism. The normative undertones in microeconomics stem from the fact that prices in a competitive supply are representative of the value as seen by suppliers, while prices in a competitive demand are representative of the value as seen by demanders.

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