TABLE OF CONTENTS

INTRODUCTION
DECISIONS OF MICROECONOMICS
CENTRAL THEMES OF
MICROECONOMICS
USES OF MICROECONOMICS
REFERENCES

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Introduction

Study of the economic behavior of individual units of an economy (such as a

person, household, firm, or industry) and not of the aggregate economy (which is
the domain of macroeconomics). Microeconomics is primarily concerned with the
factors that affect individual economic choices, the effect of changes in these
factors on the individual decision makers, how their choices are coordinated by
markets, and how prices and demand are determined in individual markets. The
main subjects covered under microeconomics include theory of demand, theory of
the firm, and demand for labor and other factors of production.

The price mechanism

Much of the study of microeconomics is devoted to analysis of how prices are

determined in markets. A market is any system through which producers and
consumers come together. In early subsistence economies, markets were usually
physical locations where people would come together to trade. In more complex
economic systems, markets do not depend on humans actually meeting one
another, so many markets today arise when producers and consumers come
together less directly, such as by post and on the internet.
Producers and consumers generate forces that we call supply and demand
respectively, and it is their interaction within the market that creates the price
mechanism. This mechanism was once famously
that guides the actions of producers and consumers.
Markets are essential to produce the goods and services required for everyday life.
Even if an individual can produce all the food needed to survive, that person will
still need clothes, shelter and other necessities. Therefore, from very early times,
communities learned that they would benefit from exchange. The crudest form of
exchange was barter, but the evolution of money as a medium of exchange and
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unit of account accelerated the development of the process.

But how would people know what they could charge, or what they should pay, for
goods and services? Before any formal thought was given to this, traders soon
discovered that if they fixed their prices too low they would soon run out of
inventory, while if they set their prices too high they would not sell what they had
produced. In physical markets there would often be perfect knowledge, as traders
would be able to check the prices of those who had similar goods and services to
trade, simply by walking around the stalls. Once markets became more remote,
less perfect knowledge of prices was inevitable and the process became less
certain.

Alfred Marshall, whose Principles of Economics was published in 1890, drew

heavily on the writings of Jevons and Mill. However, much of what you read today
about supply and demand, elasticity, revenues and costs and marginal utility are

analysis of supply and demand, and consequently the determination of prices in

markets, could be built.

Demand

Demand is created by the needs of consumers, and the nature of demand owes
much to the underpinning worth that consumers perceive the good or service to
have. We all need necessities, such as basic foodstuffs, but other products may be
highly sought after by some and regarded as worthless by others.

The level of demand for a good or service is determined by several factors,

including:

the price of the good or service

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prices of other goods and services, especially substitutes and complements
income
tastes and preferences
expectations.

In orthodox economic analysis, these determinants are analysed by testing the

quantity demanded against one of these variables, holding all others to be constant
(or ceteris paribus).
The most common way of analysing demand is to consider the relationship
between quantity demanded and price. Assuming that people behave rationally,
and that other determinants of demand are constant, the quantity demanded has an
inverse relationship with price. Therefore, if price increases, the quantity
demanded falls, and vice versa. Figure 1 portrays the conventional demand curve.

Demand Curve

For any change in price, there is an inverse change in quantity demanded. The
price increase from OP1 to OP1 results in a reduction in quantity demanded from
OQ1 to OQ2.

Decisions of Micro Economics

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 Microeconomics theory provides an explanation for the routine decisions that
we all make. The impact of these decisions is more observable by a small
business because the owner is closer to the customer.

Decisions at the Margin: Microeconomic decision-making is based on the

principal that people make rational choices. Given that, people make decisions
at the margin. Each choice we make has an opportunity cost that is the next best
foregone alternative. Decision-making at the margin is the basis for your
choices as well as those of your customers.

Consumer Choices:
i.e., should he buy the athletic shoes or the sandals; is tonight a movie or
bowling night. If the choices cost the same, then the decision is based on which
alternative provides the most marginal utility or satisfaction. The more he
consumes the less satisfaction each additional unit provides. This means that he
will continue to go to the movies, for example, until his taste is satisfied after
which bowling will have more appeal.

Hiring Employees: Within your small business operations, how much time you
spend looking for a new employee is an example of a microeconomic decision.
Suppose you post an ad for a vacancy that needs to be filled quickly. As the
resumes flow in, the marginal benefit of interviewing candidates -- the
probability of finding a better candidate -- declines with each additional
candidate you interview. At the same time, the marginal cost of leaving the
position vacant grows. As long as the marginal benefit exceeds the marginal
cost, it pays to keep looking.

Management Decisions: Your decision as a business owner regarding how

much to produce or how much inventory to stock is also a microeconomic

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 decision. In reaching a decision about how much of a product to produce, you
will make more as long as the marginal benefit is greater than the marginal cost
of producing it; if you get more when you sell it than it cost to make it, you will
make it. On the other hand, if it costs more to make than you can recoup in
sales, you won't make it.

Central Themes of Microeconomics

Microeconomics: Branch of economics that deals with the behavior of
individuals -- workers, firms and consumers as well as how markets are
organized
It deals with limits:
Limited budgets
Limited time
Limited ability to produce
How do we allocate these limited resources?
Workers, firms and consumers must make trade-offs
Do I work or go on vacation?
Do I purchase a new car or save my money?
Do we hire more workers or buy new machinery?
How are these trade-offs best made?
Consumers
Limited incomes
Consumer theory describes how consumers maximize their well-
being, using their preferences, to make decisions about trade-offs.
How do consumers make decisions about consumption and savings?
Workers
Individuals decide when and if to enter the work-force
Trade-offs of working now or obtaining more
education/training
What choices do individuals make in terms of jobs or work places?

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 How many hours do individuals choose to work?
Trade-off of labor and leisure
Firms
What types of products do firms produce?
Constraints on production capacity & financial resources create
needs for trade-offs.
Theory of the Firm describes how these trade-offs are best made.
Prices
How are prices determined?
Centrally planned economies -governments control prices
Market economies prices determined by interaction of market
participants
Markets collection of buyers and sellers whose interaction
determines the prices of goods.

Themes of Microeconomics

Theme 1: Trade-offs are unavoidable. Every choice involves trade-offs. In

selecting one alternative, you forgo others. Recognizing trade-offs is an essential
part of good decision making. When we ignore trade-offs, we risk giving up
something we value highly for something that is less important, and we tend to
regret our choices.

Theme 2: Good choices are usually made at the margin. While some
decisions have an all-or-nothing quality, most are matters of degree. For
decision involving matters of degree, microeconomic principles teach us to

whether a small adjustment of the choice-also known as a marginal change will

lead to improved results.

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Theme 3: People respond to incentives. To determine whether an action is
desirable, a good decision maker carefully weighs her benefits and costs.
Benefits provide incentives to take the action; costs provide disincentives. The
action becomes more attractive when benefits rise or costs fall, and less
attractive when benefits fall or costs rise. So any development that changes
benefits or costs has the potential to alter behaviour.

Theme 4: Prices provide incentives. The costs of buying goods and the
benefits of selling them depend on their prices. An increase in the price of good
provides a disincentive to buy, because it raises the costs of buying. It also
provides an incentive to sell because it raises benefits of selling. Conversely, a
reduction in the prices of a good provides an incentive to buy, because it
reduces the cost of buying. It also provides a disincentive to sell, because it
reduces the benefits of selling.

Theme 5: Trade can benefit everyone. Trade occurs whenever two or more
people exchange valuable goods or services. Through trade, someone who owns
a good that is of relatively little value to him, but substantial value to another,
can exchange it for something he values more highly. Trade also frees him from
the need to produce everything he needs or wants.

Theme 6: The competitive market price reflects both value to consumers and
costs to producers. In a market, every buyer requires a seller, and every seller
requires a buyer. The market price adjusts to balance supply and demand,
falling when supply exceeds demand and rising when demand exceeds supply.
As a result, the market price reflects both demand and supply.

Theme 7: Compared to other methods of resource allocation, markets have

advantages. The cold war, which lasted from the end of World War II in 1945 to
the fall of the Berlin Wall in 1989, was in large part a struggle between two
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competing economic systems, capitalism and communism. Ultimately, the
communist economies were unable to keep pace with the capitalist economies.
Economic pressures caused the collapse of the Soviet Union and forced other
arket
reforms.

Theme 8: Sometimes, government policy can improve on free-market resource

perfect. There are some legitimate concerns about the way in which markets
allocate scarce resources. In many instances, there are potential justifications for
government intervention in markets.

Uses of microeconomics

Individual behavior analysis

Micro economics studies behavior of individual consumer or producer in a
particular situation.
Resource allocation
Resources are already scarce i.e. less in quantity. Micro economics
explains efficient allocation and utilization of resources to produce various
types of goods and services.
It explains economizing of scarce resources to achieve maximum welfare.
Business planning
Micro economics helps business planning i.e. helps the business
community to plan their costs, production etc. in anticipation of demand in
order to maximize profits.
Price determination
Micro economics is useful in explaining how market mechanism
determines price in a free market economy. Price mechanization or the
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 market forces of demand and supply determines prices of goods and
services without any government intervention.

Economic policy
Micro economics helps in formulating various economic policies [price
policy, tax policy etc.] and economic plans for economic welfare of the
people and to promote all round economic development.
Free enterprise economy
Micro economics explains the operating of a free enterprise economy
where the individual has the freedom to take his own economic decisions.
All economic decisions such as what, how, how much, where, when. For
whom etc. to produce are taken by producers without any commanding
force but with the market forces of demand and supply.
Public finance
It helps the government in fixing the tax rate and the type of tax as well as
the amount of tax to be levied on the buyer and the seller.
Foreign trade
It helps in explaining and fixing international trade and tariff rules, causes
of disequilibrium in balance of payments, effects of factors deciding
exchange rates impact of tariffs on prices etc. It explains and analysis how
a country can gain from international trade.

Social welfare
It not only analyses economic conditions but also studies social needs
under different market conditions like monopoly, oligopoly etc. It explains
how maximum social welfare can be achieved under perfect competition.
It also studies how taxes affect social welfare.
Simple models
Micro economics uses simple models to understand actual economic
phenomenon. These simple models remove the complexities in economic

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 analysis.
Predictions
Micro economics is useful in making predictions based on conditions.eg
demand forecasting depends on the micro economic principles of demand.
Basis of macro economics
The study of behavior of individual units provides the base for
understanding the behavior of aggregates.

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References
http://www.businessdictionary.com/definition/microeconomics.html
http://people.tamu.edu/~gtian/econ323/323ec01.ppt
https://zeepedia.com/read.php?economics_themes_of_microeconomics_theo
ries_and_models_micro_economics&b=70&c=1
http://www.econleaks.com/importance-uses-significance-advantages-of-
micro-economics/
https://www.investopedia.com/terms/m/microeconomics.asp
https://yourbusiness.azcentral.com/examples-microeconomic-decision-
16743.html

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