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What is Microeconomics?

2016-10-25T16:44:24+00:00

The term 'Microeconomics' is included in the Economics edition of the Financial Dictionary. Get yours now on amazon in ebook or paperback format. Read more here...

Microeconomics is an economic social science that examines the results of individual human behavior. Unlike the big picture macroeconomics, it is most concerned with how peoples’ choices impact distribution and utility of scarce economic resources. The science demonstrates and explains the ways that various goods possess different values from each other. It also considers how people engage in more productive and efficient decisions and how they can work together most effectively. This science has long been regarded as a better settled and more advanced one than macroeconomics.

Microeconomics studies economic tendencies. This means it considers what will occur when people pursue particular choices or as production factors change in some way. It categorizes the actors according to microeconomic divisions such as sellers, buyers, and owners of businesses. Such participants engage with supply and demand in order to obtain resources. They employ both interest rates and money as means for coordinating pricing.

Microeconomics does not attempt to reveal the way a market should work. Rather it is interested in describing what will occur if specific conditions alter. As an example, a car maker might increase the cost of its vehicles. This science states that buyers will purchase a smaller number of them after the price increase. Similarly, if silver mines in Peru are shut down, supply will be constrained and the global silver prices will likely rise. The study is able to explain why slower sales of smart watches will tend to make Apple’s stock fall. It can also describe how an increase in the minimum wage will lead Burger King to put on fewer employees. It leaves the future levels of gross domestic product of countries in the European Union to macroeconomics.

Microeconomic study typically follows Leon Walras’ general equilibrium theory as described in his 1874 “Elements of Pure Economics” and Alfred Marshall’s partial equilibrium theory from his 1890 work “Principles of Economics.” Their methods seek to distill the behavior of people down to a language of functional mathematics. This way economists can come up with a model for individual markets that can be tested mathematically.

Their methods fit in with the neoclassical microeconomic umbrella. Followers of the neoclassical view believe that economists can create hypotheses for economic events which are quantifiable and can apply empirical evidence to determine which function best. The efficiency of the models is decided by how effectively real world markets fall into place according to a given model’s rules.

There is one substantial alternative view within the study of microeconomics. This is the Austrian school followers’ ideas. They disregard the ides of static equilibrium espoused by the neoclassical view as irreparably flawed. They choose instead to use logical deduction as the basis for their analysis.

Their two principles are subjective conditions and spontaneous order. Their model explains the way that economic incentives allow people to overcome uncertainty and lack of knowledge. They would claim that markets happen because individuals possess varying interests and preferences and an imperfect knowledge. Markets allow people to overcome these handicaps, according to proponents of the Austrian school.

The term 'Microeconomics' is included in the Economics edition of the Financial Dictionary. You can get your copy on amazon in Kindle or Paperback version. See more details here.