Microeconomics is the part of economics that studies how individuals, households, and businesses make decisions about using limited resources available to them. As such, microeconomics focuses on small-scale economic activities rather than the entire economy, which economists refer to as ‘macroeconomics’. With microeconomics, economists study how buyers and sellers interact in markets to determine the prices, production and consumption of different goods and services.
WHAT IS MICROECONOMICS?
The study of economics is usually broken into two basic concepts which are microeconomics and macroeconomics. Microeconomics is centered on parts of the economy that relates to individual people and businesses. It focuses on the decisions that individuals and businesses make in relation to the dynamic nature of the economy. For example, a business may decide to alter the price of a product or the wages of its workers based on the conditions in the economy. This is referred to as the idea of supply and demand, meaning that businesses change aspects of their operation to meet the levels of supply and demand for their product or service in the larger economy. The study of these individual and smaller decisions are called microeconomics by economists.
MICROECONOMICS – MAIN PRINCIPLES
The main principles of microeconomics focus on how individuals and businesses make choices in a world of limited resources, which is a concept that economists refer to as ‘scarcity’. As such, scarcity is an important principle of microeconomics, because it means that resources such as time, money, and materials are limited. Therefore, microeconomics attempts to understand the process which people go through economically as they make decisions regarding the scarcity of the economy.
Another important principle of microeconomics is the economic concept of supply and demand. In short, supply and demand determines how prices are set in the larger economy. For example, when demand for a particular good or service rises or supply falls, prices usually increase. This is an important concept to microeconomics, because individuals and businesses are constantly considering the opportunities and challenges of supply and demand when they consume goods and services.
MICROECONOMICS – HOW DOES IT COMPARE TO MACROECONOMICS?
In contrast to microeconomics, macroeconomics focuses on the larger aspects of the economy that are usually carried out by governments. For example, macroeconomics usually centers on large issues that impact entire industries or economies and not just individual businesses. The boom and bust cycle and larger issues such as employment and taxation are considered to be areas of macroeconomics. Modern macroeconomic theory is considered to have emerged from the ideas of the famous economist John Maynard Keynes. Keynes’ ideas had a profound impact on the 20th century and specifically the Great Depression, when American President Franklin D. Roosevelt developed his New Deal based on the macroeconomic ideas of Keynes.
While microeconomics and macroeconomics have many differences it is important to understand that there are also several key ways in which the two are connected. More specifically, there is a great deal of overlap between the concepts of microeconomics and macroeconomics. For example, a business owner may decide the adjust the price of a product (which is a microeconomic decision) due to an increase in taxation brought about by the government (which is a macroeconomic decision). As well, the overall condition of an economy of a country or industry is based upon the many smaller decisions made by individuals and businesses within that economy. Therefore, microeconomics and macroeconomics are constantly impacting each other and causing changes in both.
