A branch of economics that studies how individuals, households, and firms choose to use scarce resources efficiently in order to satisfy diverse wants or minimize losses. Individuals, households, and firms are considered to be economic units. By focusing on individual units rather than aggregate units or variables, the methodology of microeconomics is distinct from that of macroeconomics.
The economic variables of interest are usually prices, income or wages, employment, saving, and cost of production. Of course, these variables are important to the study of both microeconomics and macroeconomics and there might be a sense of overlap, but there are occasions when economists are interested in how individuals make a decision to work or to prefer leisure and on how hiring or production decisions are made. These micro decisions ultimately have an impact on the aggregate economy, and to that extent, they form an integral component of aggregate analysis, or the measurement of national economic performance.
Normative issues arise in microeconomics just as they emerge in macroeconomics. In microeconomics, they normally involve the ability of firms or industry to pay workers an efficient or decent wage, provide health coverage and old age benefits, and show restraint (social responsibility) in the use of environmental resources or provide compensation to society for the degradation caused. Firms may also be expected to show interest in fulfilling societal goals by their largesse; in effect, there is a welfare component to microeconomics. At the macrolevel, a government might be expected to promote these welfare-enhancing policies through legislation, in order to influence the aggregate outcome.
Economics has evolved as an empirical social science, and several theories in microeconomics and macroeconomics are drawn from scientific analyses to inform decision making at all levels. As such, microeconomics is also dependent on actual occurrences that are closely linked to cause-effect relationships, collectively known as positive economics.
Virtually settled empirical findings in microeconomics, which are the result of data collection and various hypotheses tests, are considered to be laws. These laws form proven guidelines to understand or rationalize economic decisions, even when there might be limited exception or aberrant variances to empirical observances.
Fundamental laws in microeconomics involve the basis of demand and supply in relation to price, scarcity and choice, and the opportunity costs that are the corresponding results of choices made. For example, the law of demand presupposes that under rational conditions, an increase in the price of a good will result in a reduction in the consumption of that good when real income falls, if other variables or factors do not instantaneously change (ceteris paribus). Similarly, an increase in wage rate will induce more workers to work, and an increase in the price of borrowing money (interest rate) will discourage investors or consumers from borrowing money.
Some economists argue that most decisions in microeconomics should be influenced by market conditions to obtain efficient outcomes. When expectations are realized, there is equilibrium in microeconomic markets, and when competition is promoted, microeconomic markets tend to be more efficient. Equilibriums do not last forever because markets are susceptible to shocks. Policy intervention can therefore ultimately influence the performance of microeconomic markets. For further reading, see Boyes and Melvin (2002), Case and Fair (2003), McConnell and Brue (2008), Salvatore (2002), and Schiller (2006).
Demand, Economics, Market, Monopoly, Perfect Competition, Supply
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