Microeconomics is a branch of economics that studies how individuals, households and firms make decisions to allocate limited resources,^[1] typically in markets where goods or services are being bought and sold. Economics is the social science that studies the production distribution, and consumption of goods and services.

Microeconomics examines how these decisions and behaviours affect the supply and demand for goods and services, which determines prices; and how prices, in turn, determine the supply and demand of goods and services. Supply and demand is an Economic model describing effects on price and quantity in a Market. ^[2][3]

Macroeconomics, on the other hand, involves the "sum total of economic activity, dealing with the issues of growth, inflation and unemployment, and with national economic policies relating to these issues"^[2] and the effects of government actions (such as changing taxation levels) on them. Macroeconomics is a branch of Economics that deals with the performance structure and behavior of a national or regional Economy as a whole Economic growth is the increase in the amount of the goods and services produced by an economy over time In economics inflation or price inflation is a rise in the general level of prices of goods and services over a period of time Unemployment occurs when a person is available to work and currently seeking work but the person is without work. ^[4] Particularly in the wake of the Lucas critique, much of modern macroeconomic theory has been built upon 'microfoundations' — i. The Lucas Critique, named for Robert Lucas 's work on macroeconomic policymaking says that it is naive to try to predict the effects of a change in economic policy entirely on In economics the term microfoundations refers to the microeconomic analysis of the behavior of individual agents such as households or firms that underpins a e. based upon basic assumptions about micro-level behaviour.

One of the goals of microeconomics is to analyze market mechanisms that establish relative prices amongst goods and services and allocation of limited resources amongst many alternative uses. Sao Paulo Stock Exchangejpg|thumb| Virtual market arena where buyer and seller are not present and trade via intemediates and electronical information Price in Economics and Business is the result of an exchange and from that trade we assign a numerical Monetary value to a good, Microeconomics analyzes market failure, where markets fail to produce efficient results, as well as describing the theoretical conditions needed for perfect competition. Market failure is a concept within economic theory wherein the allocation of goods and services by a Free market is not efficient. In Neoclassical economics and Microeconomics, perfect competition describes a market in which no buyer or seller has Market power. Significant fields of study in microeconomics include general equilibrium, markets under asymmetric information, choice under uncertainty and economic applications of game theory. General equilibrium theory is a branch of theoretical Microeconomics. In Economics and Contract theory, information asymmetry deals with the study of decisions in transactions where one party has more or better Information Uncertainty is a term used in subtly different ways in a number of fields including Philosophy, Statistics, Economics, Finance, Insurance Game theory is a branch of Applied mathematics that is used in the Social sciences (most notably Economics) Biology, Engineering, Also considered is the elasticity of products within the market system. In Economics, elasticity is the ratio of the percent change in one variable to the percent change in another variable

Assumptions and definitions

The theory of supply and demand usually assumes that markets are perfectly competitive. Supply and demand is an Economic model describing effects on price and quantity in a Market. In Neoclassical economics and Microeconomics, perfect competition describes a market in which no buyer or seller has Market power. This implies that there are many buyers and sellers in the market and none of them have the capacity to significantly influence prices of goods and services. In many real-life transactions, the assumption fails because some individual buyers or sellers or groups of buyers or sellers do have the ability to influence prices. Quite often a sophisticated analysis is required to understand the demand-supply equation of a good. However, the theory works well in simple situations.

Mainstream economics does not assume a priori that markets are preferable to other forms of social organization. Mainstream economics is a loose term used to refer to the non- heterodox economics taught in prominent universities "A priori" redirects here For other uses see A priori. In fact, much analysis is devoted to cases where so-called market failures lead to resource allocation that is suboptimal by some standard (highways are the classic example, profitable to all for use but not directly profitable for anyone to finance). Market failure is a concept within economic theory wherein the allocation of goods and services by a Free market is not efficient. In such cases, economists may attempt to find policies that will avoid waste directly by government control, indirectly by regulation that induces market participants to act in a manner consistent with optimal welfare, or by creating "missing markets" to enable efficient trading where none had previously existed. A missing market is a situation in Microeconomics where a competitive Market allowing the exchange of a Commodity would be Pareto-efficient This is studied in the field of collective action. Collective action is the pursuit of a goal or set of goals by more than one person It also must be noted that "optimal welfare" usually takes on a Paretian norm, which in its mathematical application of Kaldor-Hicks Method, does not stay consistent with the Utilitarian norm within the normative side of economics which studies collective action, namely public choice. Pareto efficiency, or Pareto optimality, is an important concept in Economics with broad applications in Game theory, Engineering and the Kaldor-Hicks efficiency (named for Nicholas Kaldor and John Hicks) is a measure of Economic efficiency that captures some of the intuitive appeal of Market failure in positive economics (microeconomics) is limited in implications without mixing the belief of the economist and his or her theory.

The demand for various commodities by individuals is generally thought of as the outcome of a utility-maximizing process. The interpretation of this relationship between price and quantity demanded of a given good is that, given all the other goods and constraints, this set of choices is that one which makes the consumer happiest.

Modes of operation

It is assumed that all firms are following rational decision-making, and will produce at the profit-maximizing output. Given this assumption, there are four categories in which a firm's profit may be considered.

• A firm is said to be making an economic profit when its average total cost is less than the price of each additional product at the profit-maximizing output. The economic profit is equal to the quantity output multiplied by the difference between the average total cost and the price.
• A firm is said to be making a normal profit when its economic profit equals zero. This occurs where average total cost equals price at the profit-maximizing output.
• If the price is between average total cost and average variable cost at the profit-maximizing output, then the firm is said to be in a loss-minimizing condition. The firm should still continue to produce, however, since its loss would be larger if it were to stop producing. By continuing production, the firm can offset its variable cost and at least part of its fixed cost, but by stopping completely it would lose the entirety of its fixed cost. Fixed costs are business Expenses that are not dependent on the level of production or sales
• If the price is below average variable cost at the profit-maximizing output, the firm should go into shutdown. In economics shutdown occurs if Marginal revenue is below Average variable cost at the profit-maximizing output Losses are minimized by not producing at all, since any production would not generate returns significant enough to offset any fixed cost and part of the variable cost. Variable costs are expenses that change in proportion to the activity of a business By not producing, the firm loses only its fixed cost. By losing this fixed cost the company faces a challenge. It must either exit the market or remain in the market and risk a complete loss.

Market failure

Main article: Market failure

In microeconomics, the term "market failure" does not mean that a given market has ceased functioning. Market failure is a concept within economic theory wherein the allocation of goods and services by a Free market is not efficient. Instead, a market failure is a situation in which a given market does not efficiently organize production or allocate goods and services to consumers. Sao Paulo Stock Exchangejpg|thumb| Virtual market arena where buyer and seller are not present and trade via intemediates and electronical information Economists normally apply the term to situations where the inefficiency is particularly dramatic, or when it is suggested that non-market institutions would provide a more desirable result. Institutions are structures and mechanisms of Social order and Cooperation governing the Behavior of a Set of Individuals On the other hand, in a political context, stakeholders may use the term market failure to refer to situations where market forces do not serve the public interest. The public interest refers to the "common well-being" or "general welfare

The four main types or causes of market failure are:

• Monopolies or other cases of abuse of market power where a "single buyer or seller can exert significant influence over prices or output". In Economics, a monopoly (from Greek monos, alone or single + polein, to sell exists when a specific individual or enterprise has sufficient Abuse of market power can be reduced by using antitrust regulations. ^[5]
• Externalities, which occur in cases where the "market does not take into account the impact of an economic activity on outsiders. In Economics, an externality is an impact on any party not directly involved in an economic decision " There are positive externalities and negative externalities. ^[5] Positive externalities occur in cases such as when a television program on family health improves the public's health. Negative externalities occur in cases such as when a company’s processes pollutes air or waterways. Negative externalities can be reduced by using government regulations, taxes, or subsidies, or by using property rights to force companies and individuals to take the impacts of their economic activity into account.
• Public goods are goods that have the characteristics that they are non-excludable and non-rivalous and include national defense^[5] and public health initiatives such as draining mosquito-breeding marshes. In Economics, a public good is a good that is non-rivaled and non-excludable. Public health is "the science and art of preventing disease prolonging life and promoting health through the organised efforts and informed choices of society organisations For example, if draining mosquito-breeding marshes was left to the private market, far fewer marshes would probably be drained. To provide a good supply of public goods, nations typically use taxes that compel all residents to pay for these public goods (due to scarce knowledge of the positive externalities to third parties/social welfare); and
• Cases where there is asymmetric information or uncertainty (information inefficiency). In Economics and Contract theory, information asymmetry deals with the study of decisions in transactions where one party has more or better Information ^[5] Information asymmetry occurs when one party to a transaction has more or better information than the other party. For example, used-car salespeople may know whether a used car has been used as a delivery vehicle or taxi, information that may not be available to buyers. Typically it is the seller that knows more about the product than the buyer, but this is not always the case. An example of a situation where the buyer may have better information than the seller would be an estate sale of a house, as required by a last will and testament. A real estate broker purchasing this house may have more information about the house than the family members of the deceased.

This situation was first described by Kenneth J. Arrow in a seminal article on health care in 1963 entitled "Uncertainty and the Welfare Economics of Medical Care," in the American Economic Review. Kenneth Joseph Arrow (born August 23, 1921) is an American Economist and joint winner of the Nobel Memorial Prize in Economics George Akerlof later used the term asymmetric information in his 1970 work The Market for Lemons. George Arthur Akerlof (born June 17, 1940) is an American Economist and Koshland Professor of Economics at the "The Market for Lemons Quality Uncertainty and the Market Mechanism" is a 1970 paper by the economist George Akerlof. Akerlof noticed that, in such a market, the average value of the commodity tends to go down, even for those of perfectly good quality, because the buyer has no way of knowing whether the product they are buying will turn out to be a "lemon" (a defective product). A commodity is anything for which there is demand but which is supplied without qualitative differentiation across a market

Opportunity cost

Main article: Opportunity cost

Although opportunity cost can be hard to quantify, the effect of opportunity cost is universal and very real on the individual level. Opportunity cost or economic opportunity loss is the value of a product forgone to produce or obtain In fact, this principle applies to all decisions, not just economic ones. Since the work of the Austrian economist Friedrich von Wieser, opportunity cost has been seen as the foundation of the marginal theory of value. The Austrian School, also known as the “ Vienna School ” or the “ Psychological School ” is a heterodox school of economics that advocates Friedrich Freiherr von Wieser ( July 10, 1851 – July 22, 1926) was an early member of the Austrian School of economics Marginalism is the use of Marginal concepts within Economics.

Opportunity cost is one way to measure the cost of something. Rather than merely identifying and adding the costs of a project, one may also identify the next best alternative way to spend the same amount of money. The forgone profit of this next best alternative is the opportunity cost of the original choice. A common example is a farmer that chooses to farm his land rather than rent it to neighbors, wherein the opportunity cost is the forgone profit from renting. In this case, the farmer may expect to generate more profit himself. Similarly, the opportunity cost of attending university is the lost wages a student could have earned in the workforce, rather than the cost of tuition, books, and other requisite items (whose sum makes up the total cost of attendance). A university is an institution of Higher education and Research, which grants Academic degrees in a variety of subjects The opportunity cost of a vacation in the Bahamas might be the down payment money for a house. The Bahamas, officially the Commonwealth of The Bahamas, is an independent sovereign English -speaking country consisting of two thousand Cays and Money is anything that is generally accepted as Payment for Goods and services and repayment of Debts.

Note that opportunity cost is not the sum of the available alternatives, but rather the benefit of the single, best alternative. Possible opportunity costs of the city's decision to build the hospital on its vacant land are the loss of the land for a sporting center, or the inability to use the land for a parking lot, or the money that could have been made from selling the land, or the loss of any of the various other possible uses—but not all of these in aggregate. The true opportunity cost would be the forgone profit of the most lucrative of those listed.

One question that arises here is how to assess the benefit of dissimilar alternatives. We must determine a dollar value associated with each alternative to facilitate comparison and assess opportunity cost, which may be more or less difficult depending on the things we are trying to compare. For example, many decisions involve environmental impacts whose dollar value is difficult to assess because of scientific uncertainty. Valuing a human life or the economic impact of an Arctic oil spill involves making subjective choices with ethical implications.

Applied microeconomics

The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). Supply and demand is an Economic model describing effects on price and quantity in a Market. The graph depicts a right-shift in demand from D₁ to D₂ along with the consequent increase in price and quantity required to reach a new market-clearing equilibrium point on the supply curve (S).

Applied microeconomics includes a range of specialized areas of study, many of which draw on methods from other fields. Much applied works use little more than the basics of price theory, supply and demand. Supply and demand is an Economic model describing effects on price and quantity in a Market. Industrial organization and regulation examines topics such as the entry and exit of firms, innovation, role of trademarks. Law and economics applies microeconomic principles to the selection and enforcement of competing legal regimes and their relative efficiencies. Law and Economics, or economic analysis of law is an approach to Legal theory that applies methods of Economics to law Labor economics examines wages, employment, and labor market dynamics. Public finance (also called public economics) examines the design of government tax and expenditure policies and economic effects of these policies (e. g. , social insurance programs). Political economy examines the role of political institutions in determining policy outcomes. Health economics examines the organization of health care systems, including the role of the health care workforce and health insurance programs. Urban economics, which examines the challenges faced by cities, such as are sprawl, air and water pollution, traffic congestion, and poverty, draws on the fields of urban geography and sociology. The field of financial economics examines topics such as the structure of optimal portfolios, the rate of return to capital, econometric analysis of security returns, and corporate financial behavior. The field of economic history examines the evolution of the economy and economic institutions, using methods and techniques from the fields of economics, history, geography, sociology, psychology, and political science.

References

Further Reading

• Bade, Robin; Michael Parkin (2001). Foundations of Microeconomics. Addison Wesley Paperback 1st Edition.  
• Eaton, B. Curtis; Eaton, Diane F. ; and Douglas W. Allen. Microeconomics. Prentice Hall, 5th Edition: 2002.
• Frank, Robert A. ; Microeconomics and Behavior. McGraw-Hill/Irwin, 6th Edition: 2006.
• Friedman, Milton. Price Theory. Aldine Transaction: 1976
• Jehle, Geoffrey A. ; and Philip J. Reny. Advanced Microeconomic Theory. Addison Wesley Paperback, 2nd Edition: 2000.
• Hicks, John R. Value and Capital. Value and Capital is a book by the British economist John Richard Hicks, published in 1939 Clarendon Press. [1939] 1946, 2nd ed.
• Katz, Michael L. ; and Harvey S. Rosen. Microeconomics. McGraw-Hill/Irwin, 3rd Edition: 1997.
• Kreps, David M. A Course in Microeconomic Theory. Princeton University Press: 1990
• Landsburg, Steven. Price Theory and Applications. South-Western College Pub, 5th Edition: 2001.
• Mankiw , N. Gregory. Principles of Microeconomics. South-Western Pub, 2nd Edition: 2000.
• Mas-Colell, Andreu; Whinston, Michael D. ; and Jerry R. Green. Microeconomic Theory. Oxford University Press, US: 1995.
• McGuigan, James R. ; Moyer, R. Charles; and Frederick H. Harris. Managerial Economics: Applications, Strategy and Tactics. South-Western Educational Publishing, 9th Edition: 2001.
• Nicholson, Walter. Microeconomic Theory: Basic Principles and Extensions. South-Western College Pub, 8th Edition: 2001.
• Perloff, Jeffrey M. Microeconomics. Pearson - Addison Wesley, 4th Edition: 2007.
• Pindyck, Robert S. ; and Daniel L. Rubinfeld. Microeconomics. Prentice Hall, 5th Edition: 2000.
• Ruffin, Roy J. ; and Paul R. Gregory. Principles of Microeconomics. Addison Wesley, 7th Edition: 2000.
• Varian, Hal R. (1987). Hal Ronald Varian (born March 18 1947 in Wooster Ohio) is an economist specialising in Microeconomics and Information technology. "microeconomics," The New Palgrave: A Dictionary of Economics, v. The New Palgrave A Dictionary of Economics (1987 is a 4-volume reference edited by John Eatwell, Murray Milgate and Peter Newman 3, pp. 461-63.
• Varian, Hal R. Microeconomic Analysis. W. W. Norton & Company, 3rd Edition.

External links

• Open Source Introduction to Microeconomics by R. Preston McAfee - California Institute of Technology
• A free textbook of microeconomics, supplemented by software and data - Key concepts of microeconomics easily explained and thoroughly criticised.
• Amosweb.com homepage - online economics dictionary
• BasicEconomics.info - Introduction to Economics - main subject matters relating to the study of microeconomics
• X-Lab: A Collaborative Micro-Economics and Social Sciences Research Laboratory