Microeconomics
Microeconomics is the branch of economics that studies the behaviour of individual economic agents—households, firms, and workers—and how their decisions determine the allocation of scarce resources through markets. It examines how prices emerge from the interaction of supply and demand, and how consumers and producers make choices under conditions of scarcity.[1]
Microeconomics contrasts with macroeconomics, which studies aggregate phenomena such as inflation and unemployment.[1]
Subject matter
Microeconomics focuses on a set of core questions:
- How do consumers decide what to buy, and how do firms decide what to produce?
- How are prices and quantities determined in different market structures?
- How is income distributed among the factors of production?
- When do markets succeed or fail in allocating resources efficiently?
- How do individuals and firms make decisions under uncertainty?
Key concepts
| Concept | Description |
|---|---|
| Supply and demand | The model that determines equilibrium price and quantity in a market. |
| Opportunity cost | The value of the best alternative forgone when a choice is made. |
| Marginal utility | The additional satisfaction from consuming one more unit of a good. |
| Elasticity of demand | The responsiveness of quantity demanded to a change in price. |
| Market failure | A situation in which the market fails to allocate resources efficiently. |
| Perfectly Competitive Market | A market with many buyers and sellers, homogeneous products, and free entry. |
Applications
Microeconomic analysis underpins many areas of applied economics, including labour economics, industrial organisation, public economics, and welfare economics. It also provides the analytical foundations of game theory and of the study of externalities and public goods.[1]