What is Microeconomics | Definition & Its Importance

What is Microeconomics

Microeconomics is a detailed study and knowledge of economics dealing with the behavior of individuals and businesses in the decision-making process at the individual level and for corporations in presence of limited or scarce financial and natural resource. Microeconomics also deals with the ways of dealing with the decision-making processes with limited resources, the main actors in making economic decisions is supply and demand; there is a third factor named economic equilibrium in a highly competitive and balanced market. The other factors are production cost, labor, and input/output of production.

There are two major theories of microeconomics followed as of today by modern economists i.e. by Leon Walras and Alred Marshall. The two equilibrium theories, general equilibrium theory was presented by Leon Walras in his book, “Elements of Pure Economics” and partial equilibrium theory by Alfred Marshall in “Principles of Economics”. Both the theories present measurable methods and formulas to overcome economic problems and methods of solving them. Both the theories follow the neoclassical school of thought led by Alfred Marshall. Neoclassical microeconomics is a normative science that deals with the socioeconomic problems of people and the ways of solving them through hypothetical analysis and mathematical techniques to overcome it.

The neoclassical science deals with the methods of predicting the behavior of markets and ways to increase or decrease production and utilization and also cost reduction and appreciation in view of the equilibrium theories. The modern school of thought rejects the neoclassical normative theories of economics as a fictitious method and not a real world theory of economics. The uncertainty of the market in microeconomics can’t be overcome by the present equilibrium theories.

Importance of Microeconomics

Microeconomics is all about the choices made by investors, businesses, or individuals for economic prosperity and balance of goods and services. It is not about shaping an economy, it’s about how to tackle with the smaller things such as consumer needs, selling and buying by varying economic indicators. It tells us what would happen if something changes in supply and demand; if the prices go up, the demand for elastic products or luxury goods will lower accordingly.

In microeconomics, if the demand does not meet the supply, prices go up and reduces or at least maintains the demand of the product. Stock market shares and oil prices are directly related to the supply of oil and dollar fluctuations in the international market.

The scarce resources of a country are dealt with by application of working microeconomics for allocation of labor and services staff as per the needs and available human resources. The scarce resources must be utilized in the balanced proportion to avoid deficit phenomenon. It makes policies to tackle economic imbalance and improve the efficiency of human resources and machinery to meet consumer demands and production.

Microeconomics helps in creating a suitable environment for international trade and investments; the international investments are only possible when all the economic indicators are in right direction i.e. balance of payments, law, and order, favorable laws for investors and international businesses. Taxation is another important aspect of microeconomics; it is directly related to social welfare. The duty or tax is considered a burden on citizens; microeconomics deals with ways of using taxation laws to produce goods favorable in price to end users.

Factors affecting Microeconomics

There are several factors such as supply and demand, the elasticity of the market, consumer trends, import and export balance, the theory of production, and opportunity cost. The theory of microeconomic is dealing with the smaller things apart from macroeconomics that has GDP, GNP in focus and other bigger things. We will break it up accordingly:

The main aspect is supply and demand factor; before analyzing an organization’s economy or a neighborhood economic index, search for demand and supply of goods and services of the neighborhood under observation to make an economic chart of its prosperity. The demand is directly related to the climate and economic conditions of a country, or a home at the microscopic level. For example, OPEC is the largest oil distribution body in the world; the supply becomes scarce worldwide when the Kingdom of Saudi Arabia decides to cut from its share. The rise in prices is directly proportional to the supply and demand; more supply means lesser price and vice versa.

The elasticity is an important factor affecting microeconomics, it is a tool to determine the real demand and the consumer demand that changes with the increase or decrease in the price of a product. An elastic product is the one whose demand increases or decreases with its price. Inelastic products usually have the same demand and supply graph if its price increases or decreases. Luxury products are elastic in nature; their demand increases significantly when they are cheaper in the off-season because of a decrease in price.

Production theory is another important aspect of microeconomics; it deals with the production of goods from raw materials to usable outputs. In the process from the conversion of raw materials to the finished products, there are multiple resources exhausted such as labor, machinery, and money. The commodities are bought with the capital that is the basic part of an economy. Theory of production deals with the resources exhausted during conversion of inputs to outputs.

An important factor is microeconomics is stepping towards investment in a product, the opportunity cost is the value of the best alternative choice when making a choice. It is the benefit an individual or a business gets when choosing an alternative over the other. It is an opportunity missed when a person or business makes choosing between two prospects; it is about better decision-making. For example, the opportunity cost is spending 20 thousand dollars on a college degree in 4 years instead of working and making money for the same period of time and later on. Calculating the worth of college degree for the next 20 years in comparison with the alternative, the latter would be a hundred times more paying than the former one.