Economics, as a branch of knowledge, is concerned with studying human behaviour based on the allotment of scarce resources such that the producers can maximise their profits, consumers can maximise their satisfaction, and society can achieve the maximum social welfare. In short, economics is about creating and making choices in the face of scarcity.
The subject matter of this discipline is studied under two branches. Microeconomics is one of those two broad branches.
Key Takeaways
- Microeconomics is a branch of economics that studies the behavior of individuals, households, and firms in making decisions about resource allocation.
- Microeconomics analyzes how markets work, how prices are determined, and how individuals respond to changes in prices and income.
- Microeconomics is significant because it helps understand the choices people make and how they affect the economy.
Definition of Microeconomics
The English term ‘Micro’ originates in the Greek word ‘mikros,’ meaning small. In the context of microeconomics, this term refers to small individual units. Specifically, microeconomics is the study of economic problems at the individual level.
It observes and investigates the economic activities of individual units of an economy—for example, a firm, a market, a household, an individual industry and many more.
Characteristics of Microeconomics
In the context of its primary goal to balance scarcity with choice, microeconomics exhibits the following characteristic features:
- It observes, investigates and predicts the behaviour of individual units of an economy.
- As the ambit of its study is limited to individual units, the degree of aggregation tends to be limited. For example, a collection of firms signify an industry.
- It primarily deals with problems like the distribution of resources and related policies and principles.
- The main tools or instruments it uses to study economic problems include supply and demand.
- The principal determinant that solves the problems in microeconomics is the price.
- The method of study that this branch of economics uses is partial equilibrium analysis. Under this method, the impact of one variable over all other variables is considered equal.
- As the determination of the output and price of an individual economic unit forms one of the primary concerns of microeconomics, the branch is also referred to as ‘Price Theory.’
Significant Theories in Microeconomics
The following are some of the significant theories employed in Microeconomics.
- Theory of Production Input Value
This theory argues that a product or service’s cost is determined by the number of inputs used in its production. For example, land, labour, capital, taxation and so on.
2. Theory of Consumer Demand
It concerns the correlation between product and service consumption preference and consumption expenditure.
3. Theory of Opportunity Cost
According to this theory, the value or cost of the next best existing alternative is the opportunity cost. Opportunity cost depends on the quality or value of the next best option, not the number of choices.
4. Production Theory
It is concerned with the process of conversion of inputs into outputs. The goal is to select the right combination of commodities and combining techniques to reduce cost yet maximise profit.
Advantages of Microeconomics
The following are some principal advantages of Microeconomics:
- It helps predict the potential price rise based on the study of demand and supply.
- Observing and analysing the behaviour of small economic units and the demand-supply chain allows the decision-makers to make the authoritative allocation of resources.
- Microeconomics concepts allow business associations to chalk out their future course of action.
- Its simple models of analysing economic problems make understanding the overall economic phenomena more straightforward.
- Microeconomics provides the basis for studying Macroeconomics.
Disadvantages of Microeconomics
Even though Microeconomics is vital for studying the individual units of an economy, it suffers from inherent limitations.
- Microeconomics assumes that the impact of one production variable is equal over all other production variables. Such an assumption is unrealistic.
- It strives for a laissez-faire policy or pure capitalism, which is not practicable.
- It depends on macroeconomics, specifically for the interest rate and profit determination.
Last Updated : 11 June, 2023
I’ve put so much effort writing this blog post to provide value to you. It’ll be very helpful for me, if you consider sharing it on social media or with your friends/family. SHARING IS ♥️
Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
The article effectively conveys the significance and scope of microeconomics, offering a comprehensive exploration of its principles and applications.
Absolutely, Liam73. It’s evident that microeconomics forms the bedrock of economic understanding and plays a pivotal role in shaping economic policies.
The article’s discussion of both the advantages and disadvantages of microeconomics provides a balanced perspective on the subject, fostering critical thinking.
Absolutely, Chris. Acknowledging the limitations of microeconomics is crucial for approaching economic analysis with a comprehensive and discerning mindset.
The critical assessment of microeconomic concepts in the article encourages readers to engage with the subject thoughtfully, recognizing its complexities.
The significant theories in microeconomics presented in the article shed light on the depth and complexity of economic analysis at the individual level.
Indeed, the theories outlined here offer valuable insights into the various aspects of microeconomic decision-making and resource allocation.
The discussion of production theory and consumer demand theory provides a comprehensive understanding of the intricacies involved in microeconomic analysis.
The real-world applications of microeconomics presented here add depth and context to the theoretical underpinnings, creating a more holistic understanding of the subject.
Absolutely, Rowena. Bridging theory and practice in microeconomics offers valuable insights for informed decision-making and policy formulation.
The practical implications of microeconomic principles discussed in the article highlight the dynamic and evolving nature of economic analysis.
While microeconomics offers valuable insights, it’s essential to critically evaluate its assumptions and implications, as the article aptly highlights.
I agree, Kfox. A nuanced understanding of microeconomics requires a careful examination of its underlying assumptions and models.
The comprehensive overview of microeconomics and its principles in this article is a valuable resource for students and practitioners of economics.
While microeconomics has its advantages, the article also acknowledges its disadvantages, offering a balanced view of the subject.
I appreciate how the article discusses the theoretical foundations and real-world applications of microeconomic principles, providing a well-rounded perspective.
That’s true, Rose. It’s essential to recognize both the strengths and limitations of microeconomics to understand its practical implications.
This article provides a comprehensive overview of the subject matter of microeconomics. It is well-written and will be useful for those looking to gain a deep understanding of the field.
I completely agree, Keith. The article captures the essence of microeconomics and its importance in the broader scope of economic studies.
The advantages of microeconomics discussed in the article underscore its practical relevance and its role in shaping economic policies and business strategies.
Absolutely, Cgraham. Understanding microeconomic concepts is crucial for making informed decisions in the business world and anticipating market trends.
The detailed explanation of the characteristics of microeconomics is enlightening. It’s clear that microeconomics plays a crucial role in understanding economic decision-making at the individual level.
Absolutely, Wendy. It’s important for aspiring economists to have a strong foundation in microeconomics to comprehend the fundamental components of the economy.
I’m glad the article highlighted the significance of microeconomics in analyzing market behavior and the impacts of prices and income changes on individual choices.