Microeconomics

Microeconomics is a part of economics that looks at how people and firms make choices about using things that are not easy to get, called scarce resources. It studies how people and businesses interact when they buy, sell, or trade goods and services. Unlike macroeconomics, which looks at the whole economy, microeconomics focuses on smaller parts like individual markets or specific industries.

One big goal of microeconomics is to understand how prices are set for different products and how resources are shared. It shows when markets work well and when they do not, called market failure. By studying these small parts, microeconomics helps explain bigger economic issues like growth, inflation, and unemployment.

Microeconomics also looks at how government actions, like changing taxation levels, affect the choices people and businesses make. This helps us understand how such policies can influence the whole economy. Today, many ideas about the whole economy are built on what we learn from studying these smaller, individual parts.

Assumptions and definitions

Microeconomics studies how people and businesses make choices about using limited resources. It looks at how prices are set and how resources are shared among different uses.

People are usually thought of as making choices that will make them happiest, given what they can afford. Businesses also make choices about what to produce based on what will cost least and earn the most. This helps explain how markets work and why some things might not be fairly shared.

History

Main article: History of microeconomics

People who study economics often call themselves either microeconomists or macroeconomists. The idea of separating these two areas was first suggested in 1933 by a Norwegian economist named Ragnar Frisch. Though he didn’t use the word “microeconomics,” he talked about “micro-dynamic” and “macro-dynamic” analysis, which are similar ideas. The term “microeconomics” was first used in writing by Pieter de Wolff in 1941.

Microeconomic theory

Consumer demand theory

Main article: Consumer choice

Consumer demand theory looks at how people choose what they want to buy based on their preferences and how much money they have. It helps us understand how these choices affect what people buy and the prices of goods and services. This idea is very important in economics because it shows how people balance what they want with what they can afford.

Production theory

Main article: Production theory

Production theory studies how businesses make products or provide services. It looks at how they use resources like materials, labor, and machines to create things people need or want. This includes making products, storing them, moving them to stores, and getting them ready for customers. Some economists think of production as any activity that isn’t the final purchase by a customer.

Cost-of-production theory of value

Main article: Cost-of-production theory of value

The cost-of-production theory says that the price of something is based on the total cost of all the resources used to make it. These resources can include labor, machines, land, and taxes. Technology can also affect the cost, either as a fixed part of the production setup or as a tool that changes with each product.

In simple terms, the total cost to make something includes fixed costs, which stay the same no matter how much you make, and variable costs, which change depending on how much you produce.

Fixed and variable costs

• Fixed cost (FC) – This cost stays the same, no matter how much a business makes. Examples include rent and salaries.
• Variable cost (VC) – This cost changes with how much a business produces. Examples include materials and delivery fees.

Over a short time, like a few months, most costs are fixed because businesses still have to pay salaries and other regular expenses. But over longer periods, like a few years, these costs can change as businesses adjust their production and resources.

Opportunity cost

Main article: Opportunity cost

Opportunity cost is the idea that when you choose to do one thing, you’re giving up the chance to do something else. It’s about what you miss out on by making a choice. For example, if you choose to buy chocolate instead of waffles, the opportunity cost is the waffles you didn’t get. Opportunity costs help us decide what’s best by showing what we give up with each choice.

Price theory

Microeconomics is also called price theory because prices are very important for buyers and sellers. Price theory uses the idea of supply and demand to explain how people behave and make decisions. It focuses on how competition in markets helps set prices and encourages businesses to act in certain ways.

Price theory is different from microeconomics because it doesn’t always look at tricky situations where a few sellers control the market. Instead, it focuses on competition, which it believes is common in most markets. This helps us understand many economic issues, even ones that don’t seem related to prices at first. Price theory has influenced other areas like public policy and law.

Microeconomic models

Supply and demand

Main article: Supply and demand

Supply and demand is a way to understand how prices are set in a market where many buyers and sellers are competing. It shows that the price of a product is where the amount people want to buy equals the amount sellers want to make. This creates a balance, called equilibrium.

In simple terms, when the price of something goes up, people usually buy less of it. When the price goes down, people buy more. Sellers, on the other hand, will make more of a product when they can sell it for a higher price. This back-and-forth helps set the price that most people agree on.

The idea of supply and demand helps explain many things, like why some jobs pay more than others and how resources are shared in an economy.

Market structure

Main article: Market structure

Market structure looks at features of a market, like how many companies are in it, how much of the market each one controls, and how easy it is for new companies to join or leave. It also looks at how companies compete with each other.

Different types of markets exist in systems like capitalism and market socialism. Competition helps keep markets fair, and sometimes governments need to make rules to protect people and the environment.

Perfect competition

Main article: Perfect competition

Perfect competition happens when many small companies sell the same product. They can't change the price because there are so many others selling the same thing. An example is online marketplaces like eBay, where many sellers offer similar items.

Imperfect competition

Main article: Imperfect competition

Imperfect competition is when markets aren't perfectly competitive but aren't monopolies either. Companies like Pepsi, Coke, Sony, and Nintendo have a lot of control in their industries.

Monopolistic competition

Main article: Monopolistic competition

Monopolistic competition is when many companies sell slightly different products. Examples include restaurants, cereal, clothing, and shoes in big cities.

Monopoly

Main article: Monopoly

A monopoly is when one company controls an entire market or industry. They can charge higher prices because they have no competition. However, some monopolies can be good if having one company is cheaper than many small ones.

Oligopoly

Main article: Oligopoly

An oligopoly is when just a few companies control a market. They might work together to keep prices high or compete fiercely with big advertising campaigns.

Monopsony

Main article: Monopsony

A monopsony is a market with only one buyer and many sellers.

Bilateral monopoly

Main article: Bilateral monopoly

A bilateral monopoly has one seller and one buyer.

Oligopsony

Main article: Oligopsony

An oligopsony is a market with just a few buyers and many sellers.

Game theory

Main article: Game theory

Game theory is a way to study how people make decisions when they are working against each other or need to work together. It helps us understand many different parts of the economy, like how prices are set, how groups join together, and how people share things fairly. This idea is used in many areas, from how people trade to how they make friends and even how votes are counted.

Information economics

Main article: Information economics

Information economics is a part of microeconomics that looks at how information affects decisions and the economy. Information is special because it is easy to make and share, but hard to trust and control. These unique features make it tricky to apply regular economic ideas.

Recently, information economics has become very important, especially with many companies now relying on information. By studying situations where people don’t have all the facts, we can better understand how uncertainty affects decisions and the different results of seeking or getting information.

Applied

Applied microeconomics studies many special areas. These areas use ideas from other subjects to understand how things work.

• Economic history looks at how the economy and its rules have changed over time.
• Education economics studies how schools and learning affect people and fairness.
• Financial economics looks at how money is managed and invested.
• Health economics studies how health care systems work.
• Industrial organization looks at how businesses start, grow, and compete.
• Law and economics uses economic ideas to understand laws and their effects.
• Political economy studies how governments and politics affect decisions.
• Public economics looks at how governments use tax and spending to help people.
• Urban economics studies problems cities face, like traffic and pollution.
• Labor economics looks at jobs and workers, including issues like wages and fairness.