Microeconomics

By: EconomyWatch   Date: 14 October 2010

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According to Economypedia, "Microeconomics is a division of economics, which studies the ways by which individuals, firms and families take decisions regarding allocation of the limited amount of resources at their disposal. The studies are done in a context of markets where goods and services are traded."

Economypedia entry on Microeconomics

Thus, microeconomics, as the name suggests, is economics on a small scale. It is economics as measured between firms and industries, but not between governments and economies.

Firms use concepts and principles of microeconomics to understand their cost of goods product, cost of labor, and overall profitability.

This in part dictates how much they should charge for those goods or services.They also use this field of economics to deterimine their relative position in their industry and where they stand vis-a-vis the competition.

This ties in directly with the research and development, new product development process (which includes the quality, features, functions, costs, producibility, serviceability, maintainability and more), and overall marketing and positioning.

 

Areas microeconomics covers: 

  • Supply and demand
  • Competition
  • Monopolies
  • Profit and loss
  • Opportunity cost
  • Elasticity
  • Fixed costs
  • Shutdown

Areas microeconomics does not cover, but macroeconomics covers:

  • Money supply
  • Interest rates
  • Fiscal and monetary policy
  • Unemployment
  • Growth
  • Inflation

Contrast microeconomics with macroeconomics: Macroeconomics is the sum of all business and transactions with relation to government policy, overall growth, unemployment, and inflation.

Microeconomics is important because it examines the way prices of products fluctuate according to both supply and demand. It is also important in how businesses and enterprises are run, how they make a profit or a loss, and how they relate to the rest of their industry.

All of our day-to-day commerce is within the scope of microeconomics. Household shopping, personal budgets, our salaries, and how our employers do business are all related to microeconomics.

 

Opportunity cost is an important aspect of microeconomics. It refers to the next best alternative in any given situation. It the implied cost of not doing something that could have led to higher returns.

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