What is Microeconomics?

What is Microeconomics?

Economics studies the production, distribution, and consumption of goods & services. Microeconomics is a part of economics. Adam Smith is considered the father of microeconomics. Microeconomics is the study of the choices and decisions of individuals and firms to allocate resources. The allocations are made for producing, consuming, and exchanging goods and services. The term firm in microeconomics refers to all types of businesses.

In simple words, Microeconomics is also termed price theory. The focus of microeconomics is on the consumer behavior of the agents themselves. The agents here are consumers, households, and firms.

Concepts underlying microeconomics

Supply: In microeconomics, supply is the number of products and services that businesses offer to the consumers.

Demands: Microeconomics considers the consumer wants, needs and desires as demands.

Equilbrium: Equilibrium is a state in the economy where the high process are balanced by low prices. The exchange of goods and services between the buyers and sellers are balanced.

Production theory: Production theory focuses on converting the inputs into outputs. Manufacturers and producers focus on maximizing the output with minimum cost and maximum profit.

Pricing theory: Pricing theory studies the relation between demand and supply. According to this theory, prices should increase when the demand is greater than the supply and decrease when the supply is greater than the demand.

Utility theory: In microeconomics, utility is the value captured by an individual by summing up or purchasing a product or service. It is the dissatisfaction or satisfaction that a person experiences from an economic act.

Incentives and behavior: The incentives are the benefits or costs of an economic activity that he experiences in an economic activity.

Market structure: Market structure encompasses the number of buyers and sellers, their behavior, the market distribution, and the factors that play a predominant role determine a market structure.

Opportunity cost: Opportunity cost is the value of the option not taken and foregone for taking something else. Economists usually use the word cost, which means opportunity cost.

How microeconomics is useful?

Microeconomics is applicable and useful in our society in several ways.

To make policy decisions: Policymakers rely on microeconomics to formulate wage-related policies or production subsidies. The government formulates pricing policies using microeconomics theories.

To make business decisions: Businesses can make numerous decisions regarding labor and wages, how much to produce per unit of time(productivity), consumer satisfaction with goods and services in comparison to others (economic utility), analysis of demand and supply, and utilization of available resources.

To understand how the economy functions: microeconomics helps to understand how businesses operate efficiently, demand and supply fluctuations, and how to reach equilibrium.

To promote international trade: Microeconomics sets rules and fixes international trade regulations and tariffs.

To forecast demand: Microeconomics helps describe the actual economy based on existing demand and suggest the best policies in the economy's interest.

To make economic plans: Microeconomics helps to formulate economic policies for the overall welfare of the economy.

Limitations of Microeconomics

Microeconomics assumes that all the economic factors are constant, which is not true; all the factors are subject to change.

Microeconomics assumes that all the resources are fully occupied in any given situation. Fully occupied is not true in the real-world scenario

Microeconomics has a limited scope. It does not include inflation, monetary policy, income theory, and many others.

Economists should focus on the economy as a whole before formulating policies. However, microeconomics concentrates only on a small portion of the economy.

Microeconomics assumes a laissez-faire policy, which means minimal governmental interference. In reality, government interference is in every aspect of the economy.

Conclusion: Microeconomics is an important concept of economics. If you wish to learn Microeconomics concepts in detail, please enroll in our economic BA course.