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Business

An Introductory Guide to Microeconomics

Written by MasterClass

Last updated: Nov 8, 2020 • 4 min read

Economics is a social science that examines how people affect markets and industries. Sometimes pejoratively called “the dismal science,” it seeks to connect human behavior to the production, distribution, and consumption of society’s goods and services. Economics is divided into branches of study. The two broadest branches are macroeconomics—which directs its focus toward large-scale economies, such as those of an entire nation—and microeconomics—which focuses on smaller-scale economic trends and behaviors.

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What Is Microeconomics?

Microeconomics is a branch of economics that specifically examines the economic behavior of individual people, family units, companies, and industries. Microeconomists—those who specialize in the particular field of microeconomics—specifically consider the following:

  • The factors that influence the real-world economic decisions individuals and businesses make.
  • How changes in those factors—such as scarcity of resources—affect decision-making.
  • How individual decisions in a particular market affect supply and demand, which determine prices.

5 Key Microeconomic Concepts

Microeconomists consider a wide array of factors when studying economies on the scale of individuals, companies, and groups. Here are some of the key concepts:

  1. Supply and demand: Supply and demand is a form of economic modeling based on the concept that prices for goods and services fluctuate until achieving a point where the quantity demanded (at the current price) will equal the quantity supplied (at the current price). This point is known as economic equilibrium and can be visually illustrated on a graph by using a supply curve and a demand curve. The study of supply and demand can obviate problems like producer surplus or niche individual markets.
  2. Opportunity cost: Opportunity cost refers to the sacrifice made when an individual or company pursues an economic decision. For instance, if a company has limited means of production and chooses to pursue a certain market, it will give up the opportunity to pursue a different market (because it can only manufacture enough goods to service a single market).
  3. Production theory: Also known as the Theory of Production, this subfield studies the relationship between resources—from raw materials to electricity to human labor—and the goods and services created from those materials. Production theory covers everything from mining, hunting, and extracting all the way through manufacturing, packaging, storing, and shipping. However, this subfield does not concern actual consumption.
  4. Elasticity: Studies of elasticity look at the interconnected values of different economic variables. Simply put, when one economic variable changes—like the cost of labor goes up or a new deposit of aluminum ore is discovered—it will promote change to other variables within a microeconomy. Microeconomists may specialize in one particular form of elasticity, such as price elasticity of supply, price elasticity of demand, income elasticity of demand, elasticity of substitution, and various other elasticities in terms of both production and consumption.
  5. Market structure: Also known as market form, this microeconomic subfield refers to features of a given market. Such features include the number of competing companies in the market, as well as how market shares are split between them. Comparison of firms’ products also fits this subfield. Depending on local customs and laws, markets may follow a communist, socialist, or capitalist structure. Each of these structures produces idiomatic characteristics that affect everything from elasticity to opportunity cost to supply and demand.
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What Do Microeconomists Study?

The study of microeconomics helps us understand the societies we live in, from the perspectives of both of businesses and consumers. Some of the things that microeconomics can reveal include:

  • What factors make people more likely to make major purchases
  • Why some companies succeed while others fail in the same industry
  • Why some markets operate more efficiently than others
  • How taxes can affect the behavior of both companies and individuals
  • How short-run costs and long-run costs affect the solvency of businesses
  • How cost minimization can be balanced with profit maximization
  • How to set prices for goods and services
  • The effects of wages and benefits on a labor force
  • How monopolies and cartels shape economies
  • How duopolies and oligopolies, which are a moderated version of monopolies, are formed

What’s the Difference Between Microeconomics and Macroeconomics?

Microeconomics specifically focuses on individual actors within an economy. By contrast, macroeconomics considers the effect of larger-scale factors on an entire economy.

What Do Macroeconomists Study?

Macroeconomists study a wide array of trends and indices, including:

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