Microeconomics
Microeconomics is a branch of economics that studies the behavior of the economic agents in a production-distribution-consumption cycle. It demonstrates why different products and services have different prices, how the economic agents make decisions to use limited resources effectively in production and how they get profit from it. In general, microeconomics focuses on more specific issues.
Microeconomics explained
Microeconomics refers to the study of what is going to happen in the future when economic agents change their behavior in response to changes in incentives, values of goods, production methods. Individuals can join together to form groups, for example, groups of people who buy or sell goods. They influence the supply and demand for resources used in economic activities.
Positive and normative Microeconomics
Depending on the approach to explaining the behavior of individual economic agents, microeconomic theory is divided into positive and normative. Positive microeconomics describes the current situation and forecasts further economic development and changes. Positive microeconomics seeks to detect cause-effect relations between economic phenomena and the influence of certain structures on the overall state of the economic system.
For instance, if automakers announce a hike in car prices, positive microeconomics shows that the volume they can sell goes down. With the help of positive microeconomics investors can gain an understanding of why stock prices of the technology company may go down if consumers purchase fewer products from them.
Based on the explanations and outcomes of this method of microeconomics, normative microeconomics suggests actions and determines desirable or undesirable economic conditions. It explains what actions individuals, companies or governments should take in order to improve and optimize production, exchange, and consumption activities.
Method of Microeconomics
General equilibrium theory and partial equilibrium theory laid the foundation for the development of microeconomic study. General equilibrium theory describes the behavior of demand, supply and values of goods and services in several interconnected markets, while partial equilibrium theory is based on an unrealistic situation, according to which the decisions of the subject don’t affect the rest of the economy.
The Marshallian and Walrasian methods are related to the broader term – neoclassical microeconomics. The neoclassical approach studies the behavior of the economic agent (consumer, entrepreneur, employee), who seeks to maximize income and minimize costs.
Such methods aim at modeling human behavior using mathematics, which helps researchers build models of markets. In the research, neoclassicists concentrate on practical problems, use quantitative analysis, empirical evidence, and mathematics to prove their hypotheses. Neoclassical economics had a great impact on the development of many areas of modern economics.
In general, there is a wide variety of methods of microeconomics that can be determined by a research question or behavioral patterns.
Key terms of Microeconomics
Below are the key terms used in the study of microeconomics:
- Incentives and behaviors: interrelated actions carried out by the agent (an individual or a company) when it interacts with the environment.
- Utility theory: according to the theory, a consumer buys a good to receive the “utility” from using it.
- Production theory: the aim of the theory is to study production. Production theory explains how business owners make decisions on the quantity of goods they produce and sell and the quantity of raw materials they use in the production. Manufacturers strive to choose the best combination to reduce operational costs and get more profit.
- Price theory: theory of supply and demand determines the impact of prices on consumer demand and the production of goods by a company. It studies the process of setting equilibrium prices in the market.
