What is microeconomics

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Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. Economics is divided into two categories: microeconomics and macroeconomics. Microeconomics is the study of individuals and business decisions, while macroeconomics looks at the decisions of countries and governments.

Though these two branches of economics appear different, they are actually interdependent and complement one another. Many overlapping issues exist between the two fields. Microeconomics is the study of decisions made by people and businesses regarding the allocation of resources, and prices at which they trade goods and services.

It considers taxes, regulations and government legislation. Microeconomics focuses on supply and demand and other forces that determine price levels in the economy. It takes a bottom-up approach to analyzing the economy. In other words, microeconomics tries to understand human choices, decisions and the allocation of resources.

Having said that, microeconomics does not try to answer or explain what forces should take place in a market. Rather, it tries to explain what happens when there are changes in certain conditions. For example, microeconomics examines how a company could maximize its production and capacity so that it could lower prices and better compete.

A lot of microeconomic information can be gleaned from company financial statements. Microeconomics involves several key principles, including but not limited to :. The rules in microeconomics flow from a set of compatible laws and theorems, rather than beginning with empirical study. Macroeconomics , on the other hand, studies the behavior of a country and how its policies impact the economy as a whole. List of Partners vendors.

Microeconomics is the social science that studies the implications of incentives and decisions, specifically about how those affect the utilization and distribution of resources. Microeconomics shows how and why different goods have different values, how individuals and businesses conduct and benefit from efficient production and exchange, and how individuals best coordinate and cooperate with one another.

Generally speaking, microeconomics provides a more complete and detailed understanding than macroeconomics. Individual actors are often grouped into microeconomic subgroups, such as buyers, sellers , and business owners.

These groups create the supply and demand for resources, using money and interest rates as a pricing mechanism for coordination. Microeconomics can be applied in a positive or normative sense. Positive microeconomics describes economic behavior and explains what to expect if certain conditions change. If a manufacturer raises the prices of cars, positive microeconomics says consumers will tend to buy fewer than before.

If a major copper mine collapses in South America, the price of copper will tend to increase, because supply is restricted. Positive microeconomics could help an investor see why Apple Inc. Microeconomics could also explain why a higher minimum wage might force The Wendy's Company to hire fewer workers. These explanations, conclusions, and predictions of positive microeconomics can then also be applied normatively to prescribe what people, businesses, and governments should do in order to the most valuable or beneficial patterns of production, exchange, and consumption among market participants.

This extension of the implications of microeconomcis from what is to what ought to be or what people ought to do also requires at least the implicit application of some sort of ethical or moral theory or principles, which usually means some form of utilitarianism. Neoclassical economics focuses on how consumers and producers make rational choices to maximize their economic well being, subject to the constraints of how much income and resources they have available.

Neoclassical economists make simplifying assumptions about markets—such as perfect knowledge, infinite numbers of buyers and sellers, homogeneous goods, or static variable relationships—in order to construct mathematical models of economic behavior.

These methods attempt to represent human behavior in functional mathematical language, which allows economists to develop mathematically testable models of individual markets. Neoclassicals believe in constructing measurable hypotheses about economic events, then using empirical evidence to see which hypotheses work best.

By definition, this is the point at which the quantity supplied equals the quantity demanded Figure 3. If the price is set above the equilibrium price, this will result in the quantity supplied exceeding the quantity demanded. Therefore, in order to clear its inventory, the company will need to reduce its price. Conversely, if the price is set below the equilibrium price, this will result in an excess demand situation, and the only way to eliminate this is to increase the price.

In capitalist systems, allowing markets to operate freely is considered to be desirable, but it is generally accepted that market forces cannot be permitted to operate for all the goods and services required by society. These include law and order and the military. For this reason, the government or supra-national organisations may choose to introduce and maintain systems that will ensure that such goods and services are produced, and may fix prices either above or below the equilibrium price.

A maximum price is sometimes imposed in order to protect consumers. This will result in a situation in which the quantity demanded will exceed the quantity supplied, provided the maximum price is struck below the equilibrium price Figure 4. There are numerous examples of this in real life. During World War 2, the UK government intervened in this way in order to ensure that families could obtain adequate supplies of goods such as bread, butter and petrol.

One consequence of this is that there was excess demand in the system, and this led to an illegal market developing. Maximum price is OP1. At this point, the quantity demanded OQ1 exceeds quantity supplied OQ2. The 'black market' price is OP2. A minimum price is sometimes imposed in order to protect producers.

Here, the quantity supplied will exceed the quantity demanded, provided the minimum price is struck at a level above the equilibrium price. One of the goals of the European Union EU has been to protect the agricultural sector, and the common agricultural policy is a minimum price system.

As a consequence of this, the agricultural sector of the EU has periodically generated surpluses. The impact of intervention in the price system should not be seen as undesirable in all cases. However, one of the contributions that microeconomic analysis makes is that it teaches us that there will be consequences of such interventions, and society has to manage those consequences. The theory of the firm is a branch of microeconomics that examines the different ways in which firms within an industry may be structured, and seeks to derive lessons from these alternative structures.

Perfect competition A perfectly competitive market is one in which:. As these conditions imply, there are few if any examples of perfectly competitive markets in real life. However, some financial markets approximate to this extreme model, and there is no doubt that in some fields of commerce the development of the internet as a trading platform has made the markets for some products, if not perfectly competitive, then certainly less imperfect.

Monopoly A monopoly arises when there is only one producer in the market. It should be noted the laws of many countries define a monopoly in less extreme terms, usually referring to firms that have more than a specified share of a market. Unlike perfect competition, monopolies can and do arise in real life. This may be because the producer has a statutory right to be the only producer, or the producer may be a corporation owned by the government itself.

For this reason, monopolies are usually subject to government control, or to regulation by non-governmental organisations. Oligopoly An oligopoly arises when there are few producers that exert considerable influence in a market. As there are few producers, they are likely to have a high level of knowledge about the actions of their competitors, and should be able to predict responses to changes in their strategies.