Introduction to Microeconomics
By Notes Vandar
What is Microeconomics?
Microeconomics is a branch of economics that studies individual economic agents’ behavior within specific markets, focusing on decision-making, supply and demand, market structures, production, costs, and the impact of government policies on these interactions.
Introduction / Definitions of Microeconomics
The terms ‘micro’ and ‘macro’ originate from the Greek words “mikros” and “makros,” meaning ‘small’ and ‘large’ respectively. Therefore, microeconomics pertains to the analysis of individual units, while macroeconomics focuses on the economy as a whole.
Stonier and Hague describe microeconomics as the study of specific parts of the economy and macroeconomics as the examination of the entire economy. For instance, microeconomics investigates how prices of goods or factors of production are determined, while macroeconomics explores the reasons behind high or low levels of employment.
Edwin Mansfield supports this view, stating that microeconomics analyzes the economic behavior of individual units, such as consumers, firms, and resource owners, while macroeconomics deals with economic aggregates like gross national product and employment levels.
Classical economists like Adam Smith, David Ricardo, T.R. Malthus, and J.S. Mill primarily focused on microeconomic theories. On the other hand, neo-classical economists like Alfred Marshall and A.C. Pigou emphasized macroeconomic theories.
The development and popularity of macroeconomics can be attributed to the influential economist J.M. Keynes. His book ‘A General Theory of Employment, Interest, and Money,’ published in 1936, revolutionized macroeconomic analysis, often referred to as the ‘Keynesian revolution’ and the advent of new economics.
Meaning of Microeconomics
The meaning of microeconomics lies in its focus on the study of individual economic units and their interactions within specific markets. It delves into the behavior of consumers, firms, and households, aiming to understand how these economic agents make decisions concerning the allocation of resources, such as goods and services.
Microeconomics analyzes the factors that influence consumer choices, like preferences and budget constraints, and how these decisions impact market demand and supply. Additionally, it explores the functioning of different market structures, such as perfect competition, monopoly, and oligopoly, and their implications for pricing and competition levels among firms.
Furthermore, microeconomics investigates production and cost theories, helping us comprehend how firms make decisions to maximize profits while considering factors like labor, capital, and technology. By examining the behavior of individual units, microeconomics lays the groundwork for understanding the broader economic landscape and contributes to making informed decisions at both individual and market levels.
Scope of Microeconomics
The Scope of Microeconomics studies small, individual units. This is obvious from the mentioned definitions. As mentioned by H. Craig Peterson and W. Cris Lewis “Micro-economics focuses on the behavior of the individual actors on the economic stage: firms and individuals and their interactions in markets.” Likewise, in the words of E.K. Browning and J.M. Browning “Micro-economics is the branch of economics based on the economic behavior of ‘small’ economic units: Consumers, workers, savers, business managers, firms, individual industries and markets, and so on”.
Microeconomics studies small, individual units. This is obvious from the aforementioned definitions. As opined by H. Craig Peterson and W. Cris Lewis “Micro-economics focuses on the behavior of the individual actors on the economic stage: firms and individuals and their interactions in markets. “Likewise, in the words of E.K. Browning and J.M. Browning microeconomics is the branch of economics based on the economic behavior of ‘small’ economic units: Consumers, workers, savers business managers, firms, individual industries and markets, and so on. It is, thus, obvious that the study of individual units or individual consumers, individual firms, or their small groups form the scope of micro-economics.
The study of individual units or individual consumers, individual firms, or their small group form the scope of micro-economics. Broadly speaking, the scope of microeconomics covers the following topic.
1. Theory of demand
2. Theory of production and costs
3. Theory of product pricing
4. Theory of factor pricing
5. Theory of economic welfare
Theory of demand
The goods are produced due to the consumer’s demand. Hence in micro-economics, at first the theory of demand or the theory of customer behavior is studied. This includes the meaning, types of law, and determinants of demand, the elasticity of demand, the law of diminishing utility, the law of equity-marginal utility, in difference curve revealed preference theory, and so on. Besides, the practical importance of these theories is also included in microeconomics.
Theory of production and costs
One of the important branches of economics is production and cost theory. The theory of production consists of the factors of production, concepts of different types of products, and the theories like the law of variable proportions, laws of returns to scale, least-cost combinations of inputs, and so on. Similarly, the theory of costs consists of the different concepts of cost, the nature of short-run and long-run costs, etc. It also includes linear programming, a mathematical technique of cost-minimization or output maximization.
Theory of product pricing
Since micro-economics studies the determination of prices of goods and services, it is also known as price theory. The relative price of different goods is determined under different market situations. The market situations may be perfect competition, monopoly monopolistic competition, oligopoly, and so on. Micro-economics studies the process of pricing of goods in these markets. The theory of factor pricing includes the study of the costs, revenue, profit, position of loss, and behavior regarding profit maximization or cost minimization. Hence, the theory of product pricing is also known as the theory of the firm.
Theory of factor pricing
The theory of factor pricing is another important branch of micro-economics. The theory of factor pricing is also called the theory of distribution. The goods are produced with the joint efforts of land, labor, capital, and entrepreneur. These are called factors of production. The rewards of these factors are called rent, wages, interest, and profit respectively. In factor pricing, the determination of rents wages, interest, and profit is studied. There are different traditional and modern theories regarding the determination of the rewards of factors of production.
Theory of economic welfare
The theory of economic welfare is also known as welfare economics. Welfare economics is an important branch of micro- economics. The normative price theory is called welfare economics. The subject matter of welfare economics includes the potential measures of maintaining the economic prosperity of men as consumers and producers and improving that prosperity or welfare. One of the important functions of welfare economics is to define and analyze the law of economic efficiency. The economy is said to be efficient when a number of goods and services are produced so as to yield maximum satisfaction to the consumers. Economic efficiency is the subject matter of economics. Welfare economics is an important branch of microeconomics. Hence, microeconomics is intimately related to economic efficiency or welfare. A.P. Lerner has rightly remarked, “In microeconomics, we are more concerned with the avoidance or elimination of waste.” Micro-economics identifies the conditions of efficiency a suggests measures to avoid inefficiency. This helps to improve the economic condition of the people.