Microeconomics Definition, Uses, & Concepts - Investopedia

Microeconomics is the study of what is likely to happen (tendencies) when individuals make choices in response to changes in incentives, prices, resources, and/ ... Economics Microeconomics PartOf GuidetoEconomics ExploreTheGuide Overview IntroductiontoEconomics Overview EconomyDefinition HistoryofEconomics IsEconomicsaScience? UnderstandingFinancevs.Economics Macroeconomics Microeconomics EconomicConceptsandTheories Overview FourEconomicConcepts LawofSupplyandDemand Demand-SideEconomics Supply-SideEconomics MarketEconomy CommandEconomy EconomicValue KeynesianEconomics SocialEconomics EconomicIndicators Overview EconomicIndicator Top10USEconomicIndicators GrossDomesticProduct(GDP) WhatIsGDPandWhyIsItSoImportant? ConsumerSpending RetailSales JobMarket RealWorldEconomies Overview TheTop25EconomiesintheWorld ExamplesofFreeMarketEconomies IstheUSaMarketEconomyoraMixedEconomy? PrimaryDriversoftheChineseEconomy JapanInc. HowIndiaMakesItsMoney EuropeanUnion(EU) TheGermanEconomicMiracle TheEconomyoftheUnitedKingdom HowtheNorthKoreanEconomyWorks WhatIsMicroeconomics? Microeconomicsisthesocialsciencethatstudiestheimplicationsofincentivesanddecisions,specificallyabouthowthoseaffecttheutilizationanddistributionofresources.Microeconomicsshowshowandwhydifferentgoodshavedifferentvalues,howindividualsandbusinessesconductandbenefitfromefficientproductionandexchange,andhowindividualsbestcoordinateandcooperatewithoneanother.Generallyspeaking,microeconomicsprovidesamorecompleteanddetailedunderstandingthanmacroeconomics. 2:23 WhatisMicroeconomics? KeyTakeaways Microeconomicsstudiesthedecisionsofindividualsandfirmstoallocateresourcesofproduction,exchange,andconsumption.Microeconomicsdealswithpricesandproductioninsinglemarketsandtheinteractionbetweendifferentmarketsbutleavesthestudyofeconomy-wideaggregatestomacroeconomics.Microeconomistsformulatevarioustypesofmodelsbasedonlogicandobservedhumanbehaviorandtestthemodelsagainstreal-worldobservations. UnderstandingMicroeconomics Microeconomicsisthestudyofwhatislikelytohappen(tendencies)whenindividualsmakechoicesinresponsetochangesinincentives,prices,resources,and/ormethodsofproduction.Individualactorsareoftengroupedintomicroeconomicsubgroups,suchasbuyers,sellers,andbusinessowners.Thesegroupscreatethesupplyanddemandforresources,usingmoneyandinterestratesasapricingmechanismforcoordination. TheUsesofMicroeconomics Microeconomicscanbeappliedinapositiveornormativesense.Positivemicroeconomicsdescribeseconomicbehaviorandexplainswhattoexpectifcertainconditionschange.Ifamanufacturerraisesthepricesofcars,positivemicroeconomicssaysconsumerswilltendtobuyfewerthanbefore.IfamajorcopperminecollapsesinSouthAmerica,thepriceofcopperwilltendtoincrease,becausesupplyisrestricted.PositivemicroeconomicscouldhelpaninvestorseewhyAppleInc.stockpricesmightfallifconsumersbuyfeweriPhones.MicroeconomicscouldalsoexplainwhyahigherminimumwagemightforceTheWendy'sCompanytohirefewerworkers. Theseexplanations,conclusions,andpredictionsofpositivemicroeconomicscanthenalsobeappliednormativelytoprescribewhatpeople,businesses,andgovernmentsshoulddoinordertothemostvaluableorbeneficialpatternsofproduction,exchange,andconsumptionamongmarketparticipants.Thisextensionoftheimplicationsofmicroeconomcisfromwhatistowhatoughttobeorwhatpeopleoughttodoalsorequiresatleasttheimplicitapplicationofsomesortofethicalormoraltheoryorprinciples,whichusuallymeanssomeformofutilitarianism. MethodofMicroeconomics Microeconomicstudyhistoricallyhasbeenperformedaccordingtogeneralequilibriumtheory,developedbyLéonWalrasinElementsofPureEconomics(1874)andpartialequilibriumtheory,introducedbyAlfredMarshallinPrinciplesofEconomics(1890).TheMarshallianandWalrasianmethodsfallunderthelargerumbrellaofneoclassicalmicroeconomics.Neoclassicaleconomicsfocusesonhowconsumersandproducersmakerationalchoicestomaximizetheireconomicwellbeing,subjecttotheconstraintsofhowmuchincomeandresourcestheyhaveavailable.Neoclassicaleconomistsmakesimplifyingassumptionsaboutmarkets—suchasperfectknowledge,infinitenumbersofbuyersandsellers,homogeneousgoods,orstaticvariablerelationships—inordertoconstructmathematicalmodelsofeconomicbehavior. Thesemethodsattempttorepresenthumanbehaviorinfunctionalmathematicallanguage,whichallowseconomiststodevelopmathematicallytestablemodelsofindividualmarkets.Neoclassicalsbelieveinconstructingmeasurablehypothesesabouteconomicevents,thenusingempiricalevidencetoseewhichhypothesesworkbest.Inthisway,theyfollowinthe“logicalpositivism”or“logicalempiricism”branchofphilosophy.Microeconomicsappliesarangeofresearchmethods,dependingonthequestionbeingstudiedandthebehaviorsinvolved. BasicConceptsofMicroeconomics Thestudyofmicroeconomicsinvolvesseveralkeyconcepts,including(butnotlimitedto): Incentivesandbehaviors:Howpeople,asindividualsorinfirms,reacttothesituationswithwhichtheyareconfronted.Utilitytheory:Consumerswillchoosetopurchaseandconsumeacombinationofgoodsthatwillmaximizetheirhappinessor“utility,”subjecttotheconstraintofhowmuchincometheyhaveavailabletospend.Productiontheory:Thisisthestudyofproduction—ortheprocessofconvertinginputsintooutputs.Producersseektochoosethecombinationofinputsandmethodsofcombiningthemthatwillminimizecostinordertomaximizetheirprofits.Pricetheory:Utilityandproductiontheoryinteracttoproducethetheoryofsupplyanddemand,whichdeterminepricesinacompetitivemarket.Inaperfectlycompetitivemarket,itconcludesthatthepricedemandedbyconsumersisthesamesuppliedbyproducers.Thatresultsineconomicequilibrium. 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Provider Name Description PartOf GuidetoEconomicsGuide Economics 1of33 ExploringHowanEconomyWorksandtheVariousTypesofEconomies 2of33 WhoCreatedEconomics? 3of33 IsEconomicsaScience? 4of33 TheDifferenceBetweenFinanceandEconomics 5of33 EverythingYouNeedtoKnowAboutMacroeconomics 6of33 MicroeconomicsDefinition 7of33 FourEconomicConceptsConsumersNeedtoKnow 8of33 UnderstandingtheLawofSupplyandDemand 9of33 WhatIsDemand-SideEconomics? 10of33 WhatIstheSupply-SideTheory? 11of33 WhatIsaMarketEconomy? 12of33 WhatIsaCommandEconomy? 13of33 EconomicValue 14of33 KeynesianEconomicsDefinition 15of33 HowSocialEconomicsInfluencesYourFuture 16of33 EconomicIndicator 17of33 TopTenUSEconomicIndicators 18of33 GrossDomesticProduct(GDP) 19of33 WhatIsGDPandWhyIsItSoImportanttoEconomistsandInvestors? 20of33 ConsumerSpendingDefinition 21of33 RetailSalesDefinition 22of33 JobMarketisaConceptualMarketplaceofEmployeesandEmployers 23of33 TheTop25EconomiesintheWorld 24of33 WhatAreSomeExamplesofFreeMarketEconomies? 25of33 IstheUnitedStatesaMarketEconomyoraMixedEconomy? 26of33 PrimaryDriversoftheChineseEconomy 27of33 JapanInc.Definition 28of33 HowIndiaMakesMoney 29of33 EuropeanUnion(EU) 30of33 TheGermanEconomicMiracle 31of33 HowtheUKMakesMoney 32of33 HowtheNorthKoreanEconomyWorks 33of33 RelatedTerms MechanismDesignTheory Mechanismdesigntheoryisaneconomictheorythatseekstostudythemechanismsbywhichaparticularoutcomeorresultcanbeachieved. more WhatIstheAustrianSchool? TheAustrianschoolisaneconomicschoolofthoughtthatoriginatedinViennaduringthelate19thcenturywiththeworksofCarlMenger. more LawofSupplyDefinition Thelawofsupplyisamicroeconomiclawstatingthatasthepriceofagoodorserviceincreases,thequantityofgoodsorservicesofferedbysuppliersincreasesandviceversa. more AppliedEconomicsDefinition Appliedeconomicsreferstotheuseofeconomy-framedtheories,combinedwithdataandinformation,toimproverealworldoutcomes. more LeonidVitaliyevichKantorovich LeonidKantorovichwasaRussianmathematicianandeconomistwhowonthe1975NobelPrizeinEconomicsforhistheoryofoptimalresourceallocation. more Economics Economicsisa branchofsocialsciencefocusedontheproduction,distribution,andconsumptionofgoodsandservices. more PartnerLinks RelatedArticles Economics Microeconomicsvs.Macroeconomics:What’stheDifference? Economics IsEconomicsaScience? 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