Economics is a subject that provides guidance on how to reconcile unlimited wants and limited resources. In general, it involves applying the concept of tradeoffs within a context where decisions occur through marginal analysis. As they engage themselves in this framework, students will encounter questions regarding the content, purposes, and processes of production in a market-based economy.

This condensed essay of microeconomics may require readers to consult textbooks and other sources for additional details, examples, and cases due to their deliberate omission for the sake of brevity. The remainder of this essay represents an attempt to apply the world view as introduced above. Microeconomics deals with different production techniques that help to find out the optimal production decision which helps the decision makers to determine the factors needed in order to produce a certain product or a range of products. Economics is a single subject and its analysis is not possible by splitting it into two watertight compartments. In simple terms, microeconomics and macroeconomics are not independent of each other. Macroeconomics is a part of economics that focuses on how a general economy, the market, or different systems that operate on a large scale, behaves.

Microeconomic principles play a central role in individual decision-making. They’ll likely consider various incentives such as rebates or low interest rates when assessing whether to purchase a vehicle. Micro economics is based on the information dealing with individual behaviour, individual customers.

The law of demand states that, in general, price and quantity demanded in a given market are inversely related. That is, the higher the price of a product, the less of it people would be prepared to buy (other things unchanged). As the price of a commodity falls, consumers move toward it from relatively more expensive goods (the substitution effect). In addition, purchasing power from the price decline increases ability to buy (the income effect).

The Term Macro-Economics

Decisions depended on a rational weighing of costs and benefits, leading to a balance or equilibrium. It is this equilibrium that became the most important objective rather than the wealth of nations, that is, growth. Menger, William Stanley Jevons and Alfred Marshall are foremost among these new thinkers who came to be called `marginalists’ scope of micro economics or Neo-Classicals. Elasticity depends on a set of factors known as the determinants of elasticity. Microeconomic theory shows under what conditions these efficiencies are achieved.

microeconomics

Marginal revenue is the change in total revenue that arises from selling one additional unit. A key relationship exists where marginal revenue equals marginal cost and where these two curves intersect. Most, if not all, firms attempt to produce that amount because of their profit-maximizing behaviors.

• Microeconomic analysis and macroeconomic analysis are now considered two important approaches to economic analysis.
• A household can get maximum satisfaction through allocation of its expenses.
• These three elasticities of demand are important considerations for both consumers and producers, but price elasticity of demand is probably the most relevant to a seller’s decision with regard to prices.
• Second, they must receive a price that is equal to or greater than average variable cost.
• Applied microeconomics includes a range of specialized areas of study, many of which draw on methods from other fields.

Microeconomics and Macroeconomics: Meaning, Scope, and Interdependence

It also helps to frame economic policies aimed at achieving public welfare e.g. tax exemption for the poor, determination of rewards according to qualification and productive capabilities, minimum wage laws etc. So far as public policy-making (governmental or even corporate) is concerned, macroeconomics is more relevant. So far as undergraduate and even post-graduate studies are concerned, it is essential for students first to grasp the concepts of Microeconomics and then go over to those of Macroeconomics. For example, the concept of the `margin’ is first learnt through Marginal Utility, Marginal Rate of Substitution, Marginal Productivity etc. and only subsequently used through Marginal Propensities to Consume and Save. The concept of Consumer Equilibrium has to be learnt prior to its application in the box diagrams used, say, in the Heckscher-Ohlin Theorem of International Trade Theory.

Economic profit results when prices are higher than average total cost, which usually invites entry into the market. However, entry into the market for software is virtually impossible for a producer mostly due to legal constraints such as licenses and patents. If firm entry into a market is viable, then it is likely that an increase in supply will result; forcing prices down toward and possibly lower than the normal profit level. That erosion of profits effectively induces firm exit; decreasing supply, increasing price, and generating higher profits, etc.

• Although microeconomic theory can continue without this assumption, it would make comparative statics impossible since there is no guarantee that the resulting utility function would be differentiable.
• All the economic theories of classical economists were mainly microeconomic in nature.
• While a consumer may be satisfied after eating one slice of pizza, a seventh slice of pizza may cause the consumer to feel sick.
• Most universities award Bachelor of Arts and Master of Arts degrees for the study of Economics.
• Average total cost and average variable cost form important U-shaped curves.

Although microeconomic theory can continue without this assumption, it would make comparative statics impossible since there is no guarantee that the resulting utility function would be differentiable. Microeconomic theory typically begins with the study of a single rational and utility maximizing individual. To economists, rationality means an individual possesses stable preferences that are both complete and transitive. Microeconomics may look at the incentives that influence individuals to make certain purchases, how they seek to maximize utility, and how they react to restraints.

Microeconomics studies the determination of prices of goods and services therefore it is known as price theory. Microeconomics studies product pricing in different market situations like perfect competition, monopoly, monopolistic competition, oligopoly, etc. The subject matter of the theory of product pricing is the theory of demand and the theory of production and cost.

Explain the scope of microeconomics – Economics

At those points is where the marginal cost curve, which is J-shaped, intersects them. Marginal cost is the change in total costs that arise from producing one additional unit. Income constraints, marginal utility, and item prices jointly influence a consumer’s purchase plans. Income and item price are primary factors in determining how much the consumer will purchase. Consumer equilibrium is, by definition, a point at which the marginal utility per dollar spent is equal across all items under consideration.

Labor unions also can dictate what wage rate its members will receive in payment for their services. These programs effectively create barriers to entry in terms of the labor market, but such barriers also exist in the product market as described earlier in this essay. The aforementioned set of clarifications, distinctions, and assumptions provide a foundation with which readers can form a better, yet terse, understanding of the way economists view the world. In the exposition ahead, readers will also gain a better sense of microeconomic theory and they will receive suggestions that purport to reinforce their learning.

It studies the individual economic units such as individual consumer, individual producer, individual firm, the price of a particular commodity or a factor etc. Thus, the focus of micro economics is mainly confined to price theory and resource allocation. This approach does not study national economic problems such as unemployment, poverty, inequality of income etc.

Each structure affects how firms set prices, produce goods, and compete, influencing overall market efficiency and consumer choices. On the producer side, industrial organization has grown into a field within microeconomics that focuses on the detailed study of the structure of firms and how they operate in different markets. Labour economics, another field of microeconomics, studies the interactions of workers and firms in the labour market. Microeconomics also examines whether resources are efficiently allocated and it spells out the condition for the optimal allocation of resources so as to maximize output and social welfare. Monopolistic competition is a situation in which many firms with slightly different products compete.

They can check whether the government has used that money for welfare of the people. In order to describe consumer equilibrium basically we have two school of thoughts-Classical and Neo-classical. The classical economists presented the “Utility Approach” or “Cardinal Approach”, while the Neo-classical economists presented”.

Theory of Production and Cost

Even behaviour of one individual cannot be generalised as the behaviour of all. Following are the demerits of micro economic analysis and policies related to it. It enables the consumers to allocate their 1ncome on different goods in such a way that total utility is maximized; thus, helping them to avoid the wastage of resources.