A Gentle Introduction to Microeconomics

The term "microeconomics" comes from the Greek word "Mikros," which means "study of particular needs and desires." The term "micro" refers to anything little. 

 

Microeconomics is the study of many ideas in smaller units, such as a single business or organization. Microeconomics deals with the comprehension of human behaviour.

 

 

What is Microeconomics?

 

Definition according to Prof A. P. Lerner – “Microeconomics consists of looking at the economy through a microscope, as it were, to see how the millions of cells in the body of economy – the individuals or households as consumers and individuals or firms as producers play their part in the working of the whole economic organism.” 

 

Microeconomics is the study of how people make decisions, what influences those decisions, and how those decisions affect the products markets by changing pricing, supply, and demand.

 

Microeconomics is a social science that studies the effects of incentives and behaviours, specifically how they affect resource utilisation and distribution. 

 

Microeconomics explains why and how various things have varying values, how individuals and corporations conduct and profit from efficient production and exchange, and how people may effectively coordinate and cooperate with one another. Microeconomics, in general, gives a more comprehensive and thorough knowledge than macroeconomics.

 

Features of microeconomics

 

• Partial equilibrium

 

Equilibrium is the state of being in a state of balance between two factors. The microeconomic analysis is concerned with partial equilibrium, which investigates the equilibrium position of a single economic unit, such as a single client, a single firm, or an industry. It isolates a single unit from other forces and investigates its equilibrium on its own.

 

• Based on certain assumptions

 

Microeconomics starts with the essential premise that "other things stay constant," such as perfect competition, laissez-faire policy, pure capitalism, full employment, and so on. The analysis is simplified as a result of these assumptions.

 

• Slicing method

 

The slicing method is used in microeconomics studies. The entire economy is broken into smaller pieces using this strategy, and each unit is then thoroughly examined. Individual income analysis is separate from national income analysis, individual demand analysis is separate from aggregate demand analysis, and so on. (source)

 

• Individual unit

 

Microeconomics is a branch of economics that studies the behaviour of individual units such as consumers and producers. Individual economic units, such as a single business, individual prices, individual families, and so on, are studied.

 

• Microscopic approach

 

Microeconomics gives a magnified picture of an individual unit, similar to how a microscope allows us to see a greater view of tiny items. It investigates tiny components in depth. It investigates how these distinct units carry out economic activity and achieve equilibrium.

• Marginalism principle

 

The term "marginal" refers to the change in total owing to the addition of a unit. The marginal unit refers to the extra unit. Because significant economic choices are based on marginal units, microeconomics is founded on the notion of marginalism. 

 

Marginal analysis is a technique for studying a variable as it changes. This idea is used by producers and consumers to make economic decisions.

 

• Limited scope

 

Microeconomics is only concerned with individual units. It ignores national economic issues including inflation, deflation, the balance of payments, poverty, unemployment, population, and economic growth, among others.

 

• Price theory

 

Because it aids in calculating the prices of both commodities and inputs of production in their respective marketplaces, microeconomics is also known as the price theory. 

 

(Also read: Macroeconomics vs microeconomics)

 

Scope of Microeconomics

 

Microeconomics is described as the study of individuals', families', and companies' decision-making and resource allocation behaviour. Microeconomics studies individual economic units and small aggregate units such as market demand and industries. 

 

As a result, microeconomics is concerned with the determination of product and factor prices and quantities in individual markets, as well as resource allocation among various firms and industries. The scope and subject matter of microeconomics is as follow:

 

• Theory of product pricing

 

The market forces of demand and supply decide the price of a single product. Demand analysis, or individual consumer behaviour, and supply analysis, or individual producer behaviour, are both topics in microeconomics.

 

• Theory of factor pricing

 

Land, labor, capital, and the entrepreneur are the components that contribute to the manufacturing process in microeconomics. In the form of rent, wages, interest, and profit, microeconomics assists in establishing the factor incentives for land, labor, capital, and entrepreneurs, respectively.

 

• Theory of economic welfare

 

The Theory of Welfare is primarily concerned with resource allocation efficiency. When the distribution of resources is efficient, it leads to the maximizing of people's pleasure. Three efficiencies are involved in economic efficiency:

 

• Efficiency in production: Production efficiency refers to the ability to produce the greatest number of products and services with the least amount of resources.
• Efficiency in consumption: Efficiency in consumption refers to the allocation of produced products and services among individuals for consumption in such a way that the society's overall pleasure is maximized.
• Overall economic efficiency: This refers to the creation of commodities that people want the most.

 

• Theory of demand

 

Microeconomics is the study of how commodity demand is determined. The buyer's demand and maximal utility are discussed in the theory of demand. Microeconomics theory aims to describe how individuals spend their income among various items and services in order to optimize their utility.

 

• Resource allocation

 

Microeconomics presupposes that the entire amount of resources is known and aims to explain how they are distributed among the numerous items produced. 

 

As a result, microeconomics investigates resource allocation and determines what to produce, how to produce, and for whom to create. Microeconomic theory explains how these efficiencies are obtained under different circumstances.

 

As a result, microeconomics focuses primarily on price theory and resource allocation. It does not look at aggregates for the entire economy. This strategy ignores national economic issues such as unemployment, poverty, and income inequality, among others. Growth theory, business cycle theory, monetary and fiscal policy, and other topics are outside the scope of microeconomics. (source)

Importance of microeconomics

 

• Working of free market economic

 

A free market economy is one in which private persons make economic decisions about the production of products such as "What to create, How much to produce, How to produce, and so on."

 

These choices are made based on the consumer's preferences or the product's demand. Microeconomics theory aids in the comprehension of the free market economy's operation.

 

• Utilization of resources

 

Microeconomics can assist to explain how producers might use few resources effectively and efficiently to maximize output.

 

• Price determination

 

Microeconomics is described as the study of individuals, families, and companies decision-making and resource allocation behavior. It also describes how the prices of various components of production, such as land rent, labor salaries, capital interest, and entrepreneur profits, are set in the commodity and factor markets.

 

• International trade and public service

 

Many elements of international commerce, such as tariff impacts, exchange rate determination, and profits from international trade, may be explained using microeconomics. It is also important in public finance to examine both the incidence and the effect of a certain tax.

 

• Useful to government

 

Microeconomics is the discipline of economics that studies the economic behavior of individual economic units. It is important in developing economic policies such as taxes, public expenditure, and pricing policy, among others. These policies assist the government in achieving its objective of efficient resource allocation and fostering societal economic well-being.

 

• Model building

 

With its basic concepts, microeconomics aids in comprehending numerous complicated economic situations. It has made significant contributions to the science of economics through the invention of new words, ideas, terminologies, economic analytical tools, and so on.

 

• Business decision

 

Microeconomic theories can help business people make important business decisions. These considerations include the cost of manufacturing, pricing, maximum output, consumer preferences, the product's demand and supply, and so on. 

 

It aids corporate executives in making manufacturing and trading choices. It serves as an analytical tool for examining market mechanisms and assisting businesses in making decisions regarding their production and pricing policies.

 

• Demand analysis

 

Microeconomic analysis assists businesses in forecasting demand for their products. As we know, the demand for a firm's product is affected by changes in the price of other goods, which may be substitutes or complementary, the consumer's income, his tastes and fashion, his expectations about future price changes, changes in the age composition of the population, and changes in the total population.

 

• Optimal resource utilization

 

Because productive resources are finite in the economy, microeconomics explains how productive resources are distributed in the creation of various commodities and services. It also helps in deciding what to create, how to make it, and for whom to produce it.

 

 

Conclusion

 

Microeconomics can be used in either a positive or negative manner. Positive microeconomics is concerned with economic behaviour and what to expect when certain factors change. 

 

Positive microeconomics may assist an investor in understanding why Apple Inc. stock prices may decline if people purchase fewer iPhones. A higher minimum wage might potentially require Wendy's Company to recruit fewer workers, according to microeconomics.

 

Microeconomics may then be used normatively to prescribe what individuals, corporations, and governments should do in order to achieve the most value or advantageous patterns of production, exchange, and consumption among market players. 

 

(Must read: What is Monopoly in Economics?)