Microeconomics: Definition, Uses, Problems & Theories
Microeconomics
Microeconomics is the study of the behavior of the simplest and smallest units and magnitudes of the economy. These units and magnitudes are individual units (consumers, companies or firms, workers, and investors), markets and, payments of factors of production (rent, wage, interest, and profit). (1)
That is, microeconomics studies economic activity at a smaller level than macroeconomics, which studies larger magnitudes such as production, income and national consumption, economic development, inflation, etc.
Contents
Field of study in microeconomics
Microeconomics studies the simplest and most elementary units of the economic universe, such consumers and companies and variables such as the price of goods, household consumption, and production.
Microeconomics uses economic models for microeconomic analysis, such as homo economicus (2). The homo economicus model is based on the generalized hypothesis that consumers are rational beings who distribute their limited income amongst the goods that they consider to be more useful, leaving aside those that provide less utility and cost more money.
In the analysis of economic phenomena, the ceteris paribus assumption is also common, it assumes that if all the other components of a phenomenon remain constant, the variation of only one of them can explain the whole. (3)
Microeconomic analysis includes the following theoretical structures:
Basic problems of microeconomics
In modern market economies, consumers, workers, and businesses have much more flexibility and options for allocating scarce resources and microeconomics describes the trade-offs they face and shows the best way to deal with them.
Nowadays, smaller consumer units such as households, workers, and firms have more purchasing power than many years ago and more options in which to use their scarce resources. Microeconomics is responsible for studying and establishing the decisions they face on a day-to-day basis regarding this reality and describes the best way to maximize their economic well-being.
Problems faced by consumers
Consumers have a limited income and the market offers a great variety of goods and services, they face the issue of what to buy with their limited income and seek to maximize it or get the most out of it. Regarding this, theory of consumption describes how consumers improve their well-being and take advantage of their resources, acting rationally.
According to this theory, they prioritize their needs and assign resources to the goods and services that provide them with greater utility buying more units of certain goods
Problems faced by workers
Workers also face some dilemmas, such as deciding between the security from a paid job or receiving commission payments. Another example is the dilemma some people have when deciding whether to get a job now, or to go to college in order to increase the possibility of having a better income in the future.
Problems faced by companies or firms
Companies also have scarce resources, they must determine what to produce, and how to produce and for whom to produce in order to maximize their profits. For this reason, they take into account production costs and seek to reduce them to have a competitive advantage in the market.
They must figure out how to combine the different factors of production and techniques and have a proper financial management.
See also