Microeconomics is the study of individual economic behavior. It investigates the choices of consumers, the decisions of firms, markets, and market equilibrium. It studies the rational behavior of individual economic agents (consumers and firms) in economic decision-making. This branch of economics analyzes how consumers and firms make their choices under conditions of scarcity of available resources.
Difference between Microeconomics and Economics. Microeconomics is a subset of economics. The latter is much broader than microeconomics as it includes both micro and macroeconomics.
Scope of Microeconomics
The study of microeconomics focuses on the behavior of individual economic agents, the functioning of specific markets, and the interactions of markets within an economic system.
In particular, microeconomics studies the allocation of scarce resources through the interaction on the market of the decentralized choices of firms' supply and consumers' demand.
Microeconomic studies primarily focus on the following aspects:
- Market equilibrium
To represent reality in a simplified way, microeconomics formulates economic models by making assumptions about the behavior of economic agents and the functioning of markets. These models are known as economic models.
Note. Microeconomics follows a scientific approach. To build microeconomic models, it uses mathematical analysis. To study strategic interactions among economic agents, it also employs game theory.
Modern theories of the consumer and the firm are at the center of microeconomic analysis.
The main microeconomic theories are:
- Consumer Theory. This theory studies the optimal choice of a basket of goods based on individual preferences, prices of goods, and individual income. Consumer theory investigates the reasons why a consumer chooses one good over another.
- Theory of production. This theory analyzes the optimal choices of a firm regarding production, the choice of productive factors, and technology. Equilibrium theory investigates the reasons why a firm produces one good over another, the quantity of production, and the production process.
- Equilibrium Theory. This theory analyzes market equilibrium, i.e., the conditions under which a given good (or service) is exchanged at a certain market price. The analysis of the equilibrium of all markets is instead known as "general economic equilibrium." The task of microeconomics is to identify the conditions for the existence, uniqueness, and stability of equilibrium allocations.
- Market Theory. This theory analyzes various market regimes, such as monopoly, monopsony, duopoly, oligopoly, perfect competition, etc.
Difference between Micro and Macro Economics
Microeconomics is one of the main branches of economics. It should not be confused with macroeconomics, which studies aggregate economic quantities.
For example, microeconomics studies the rational choices of a firm or consumer as the price varies, while macroeconomics analyzes the changes in aggregate supply and demand in the economic system as a whole, depending on the general inflation of prices or the interest rate.