How Microeconomics Affects Everyday Life

Microeconomics studies how the behaviors of individual market participants—such as buyers, sellers, and business
owners—affect the allocation of resources.

Microeconomics is the study of how individuals and businesses make choices regarding the best use of limited
resources. Its principles can be usefully applied to decision-making in everyday life—for example, when you rent an
apartment. Most people, after all, have a limited amount of time and money. They cannot buy or do everything they
want, so they make calculated microeconomic decisions on how to use their limited resources to maximize personal
satisfaction.

Similarly, a business also has limited time and money. Businesses also make decisions that result in the best outcome for
the business, which may be to maximize profit.

The field of microeconomics interests investors because individual consumer spending accounts for roughly 68%, or
about two-thirds, of the U.S. economy.1 Microeconomics and macroeconomics (the study of the larger aggregate
economy) together make up the two main branches of economics.2

Microeconomics uses a set of fundamental principles to make predictions about how individuals behave in certain
situations involving economic or financial transactions.

These principles include the law of supply and demand, opportunity costs, and utility maximization.

Microeconomics also applies to businesses.

Applying Microeconomics to Renting an Apartment

To help understand how microeconomics affects everyday life, let’s study the process of renting an apartment. In New
York City there is a limited supply of housing and high demand. This explains why housing costs in New York are high,
according to the principles of microeconomics just outlined.

Maximizing utility - is a strategic scheme whereby individuals and companies seek to achieve the highest level of
satisfaction from their economic decisions.

To rent an apartment, first you must determine a budget. For this you will have to take into account your income and
how much money you are looking to spend on housing, in such a way as to maximize your utility or satisfaction. If you
allocate too much of your income to rent, you will limit the money you have left for other expenses. Thus, you will have
to decide what amount of money is the maximum you are willing to part with for rent, what amenities you must have in
your apartment, and which neighborhoods are acceptable to you. All of these decisions and calculations are about
maximizing utility.

Opportunity cost - is the forgone benefit that would have been derived from an option not chosen. To properly evaluate
opportunity costs, the costs and benefits of every option available must be considered and weighed against the others.

Based on all the above factors, you set a budget to get the most satisfaction for the least possible rent. You will not pay
more than you have to in order to get what you want. Given that in this supply-constrained market there are others also
interested in renting the more in-demand apartments, you might find that you will have to increase your budget. To do
this you will have to cut down on spending in another area, such as entertainment, travel, or eating out. That is the
opportunity cost of finding the right apartment.

Supply and demand

Similarly, a landlord will seek to rent an apartment at the highest price possible, as their motivation generally is to get
the best return from renting out the apartment. In setting the rent, the landlord would have to take into account the
demand for the apartment in that specific neighborhood. If there are enough potential renters interested in the
apartment, the landlord would set a higher rent. If the rent is set too high, compared with what other landlords in the
neighborhood are charging for comparable apartments, renters will not be interested. Thus the business owner, in this
case the landlord, also makes decisions based on supply and demand.

The Bottom Line

In a capitalist economy, both consumers and businesses make thousands of big and small decisions each year guided by
microeconomic issues. Consumers seek to maximize their satisfaction when they go out and shop for anything from
paper towels to apartments, houses, and cars. Businesses set prices and make other decisions based on
microeconomics. The prices that consumers will pay depends on the supply of a specific good, such as an apartment, as
well as how much others are willing to pay for it. https://www.investopedia.com/articles/personal-finance/032615/how-microeconomics-affects-
everyday-life.asp

Inputs and outputs in a generalized production function

Economic production is an activity carried out under the control and responsibility of an institutional unit that uses
inputs of labour, capital, and goods and services to produce outputs of goods or services.

Capital refers to the material objects necessary for production. In the short run, economists assume that the level of
capital is fixed.

Labor refers to the human work that goes into production. Typically economists assume that labor is a variable factor of
production.

The marginal product of an input is the amount of output that is gained by using one additional unit of that input. It can
be found by taking the derivative of the production function in terms of the relevant input.

A production function relates the input of factors of production to the output of goods. In the basic production function
inputs are typically capital and labor, though more expansive and complex production functions may include other
variables such as land or natural resources. Output may be any consumer good produced by a firm. Cars, clothing,
sandwiches, and toys are all examples of output.

Capital refers to the material objects necessary for production. Machinery, factory space, and tools are all types of
capital. In the short run, economists assume that the level of capital is fixed – firms can’t sell machinery the moment it’s
no longer needed, nor can they build a new factory and start producing goods there immediately. When looking at the
production function in the short run, therefore, capital will be a constant rather than a variable.

Labor refers to the human work that goes into production. Typically economists assume that labor is a variable factor of
production; it can be increased or decreased in the short run in order to produce more or less output. The price of labor
is the prevailing wage rate, since wages are the cost of hiring an additional unit of capital.

https://stats.oecd.org/glossary/detail.asp?ID=725

https://courses.lumenlearning.com/boundless-economics/chapter/the-production-
function/#:~:text=In%20the%20basic%20production%20function%20inputs%20are%20typically%20capital%20and,are%20all%20examples%20of%20output.

Supply and Demand: 7 Real Life Examples for Better Understanding

 Supply and demand: it’s the cornerstone of business. The amount in which a service or product is needed/desired
regulates its price and determines the success of a company.

Supply refers to the market’s ability to produce a good or service, whereas demand refers to the market’s desire to
purchase the good or service.

Demand is an economic concept that relates to a consumer's desire to purchase goods and services and willingness to
pay a specific price for them.

Here are some of the most significant, influential instances of supply and demand that we’ve seen in recent years – and
today.

1. The iPhone 11

When the iPhone 11 was released in the fall of 2019, there was an enormous demand for the new phone. Surprisingly,
Apple wasn’t able to meet this demand with a steady supply – the company hadn’t expected this many consumers to
purchase the iPhone 11 over their higher-end models.

Although prices weren’t necessarily affected by this issue – since Apple maintained the same price tag for the iPhone 11
– even when it was in sharp demand, timelines were. It took roughly 21 days during the first two weeks for Apple to get
iPhone 11 orders out – and that didn’t look great for the company.

Understanding supply and demand isn’t just about making sure your business turns a profit. It’s also about being able to
anticipate the needs and wants of your consumers and ensuring that your production processes can keep up.

2. Face Masks in China

Unless you’ve been living under a rock, you know that 2020 has been rocked by the arrival of the coronavirus, starting in
Wuhan China. People in China, and in neighboring countries, have become desperate to protect themselves from the
transmission of the virus – and that has led to an increased demand for face masks.

Hospitals, private sellers, doctor offices, and even transportation services are working to meet this high demand with a
steady supply of face masks, but of course, that hasn’t stopped the prices of face masks from rising in China.

Unfortunately, this is an instance in which some criminals are using a high demand as a chance to make a killer profit.
Just recently, China seized more than 31 million fake face masks that were being sold during shortages.

Not only are these face masks inadequate, they’re not even approved by the CDC.

The lesson here is that when demand is high and supply is running out, there’s room for people to make lower-quality
products for a higher price – and get away with it.

4. Insulin

There will always be a demand for insulin as long as there are people diagnosed with diabetes. Millions of people
struggle to produce their own insulin, and as a result, must purchase it from other sources. In fact, it’s estimated that
millions more will be diagnosed with the disease in the next few decades.

Unfortunately, there’s a problem with the supply of insulin. Scientists have made the claim that millions of people
around the world with diabetes may not be able to access insulin over the next decade or more due to shortages.
We’ve already seen the prices of insulin skyrocket, thanks to private industries and this constant demand. However, we
may yet see the prices climb. This is a time when the law of supply and demand could relate to life and death, not just
buying and selling.

6. The Oil Market

Now, let’s talk about an industry that’s experiencing problems with demand, not supply. The oil industry has wielded
immense influence in our world, both politically and economically, for many decades.

However, as 2020 takes flight, we’re realizing that the demand might not be what it once was. The coronavirus in Asia
has caused oil prices to drop significantly as restrictions on transportation are enacted.

Additionally, there’s been a huge backlash against fossil fuels in the past few years, forcing international oil companies
to face growing pressure from investors and buyers to find ways to fuel the world without damaging it.

Although there’s still a huge demand for oil, supply is finite, and as a result, people are turning to other sources of
power. The question is, which will die out first: supply or demand?

7. Vacation Rentals in Hawaii

The islands of Hawaii have always been a paradise, but in recent years, occupancy and tourism have increased, resulting
in high demand for homes and vacation rentals.

In wake of this demand and a very limited supply of housing options on small islands like Oahu, legislation has cracked
down on illegal vacation rentals. Economists and politicians in the state are working to bring supply and demand to a
more balanced state.

If they don’t, prices for homes and vacation rentals in Hawaii will continue to surge, making it difficult for residents to
maintain their way of life on the islands. This is a time when a lack of supply might actually end up disrupting the
economy rather than making the area more profitable.

Supply and Demand in Real Life

Supply and demand becomes all the more real when you talk about it in current, relevant situations. These instances
show just how powerful an overwhelming demand, or a lack of supply, can be to people’s lives and the economy.

https://www.lessonpaths.com/supply-and-demand-real-life-examples/

What Is the Scarcity Principle?

The scarcity principle is an economic theory in which a limited supply of a good—coupled with a high demand for that
good—results in a mismatch between the desired supply and demand equilibrium.

Scarcity is one of the key concepts of economics. It means that the demand for a good or service is greater than the
availability of the good or service. Therefore, scarcity can limit the choices available to the consumers who ultimately
make up the economy.

The scarcity principle is an economic theory that explains the price relationship between dynamic supply and demand.
According to the scarcity principle, the price of a good, which has low supply and high demand, rises to meet the
expected demand.
When the supply of a good is greater than the demand for that good, a surplus ensues. This drives down the price of the
good. Disequilibrium also occurs when demand for a commodity is higher than the supply of that commodity, leading to
scarcity and, thus, higher prices for that product.

Utility, in economics, refers to the usefulness or enjoyment a consumer can get from a service or good.
Economic utility can decline as the supply of a service or good increases.
Marginal utility is the utility gained by consuming an additional unit of a service or good.