Microeconomics is an economics branch that studies the behavior and interactions of individual economic actors. Economic actors consist of consumers, producers, and governments. Sometimes, the government also intervenes through some forms of regulation, taxation, and price controls. Demand, supply, price, and market are the main discussion topics.
Another branch of economics is macroeconomics, which studies the behavior and interactions of economic agents concerning overall economic performance. Economic actors (consumers, producers, and government) form three main sectors of the macroeconomy: households, businesses, and government. There is also an external sector, although it also consists of three sectors and is outside the borders of a country’s territory. Macroeconomics focuses on aggregate numbers rather than individual figures.
Focus and essential concepts of microeconomics
Microeconomics studies decisions made by people and businesses regarding the allocation of resources. Decisions need to be made because of limited resources available to meet unlimited human needs. Therefore, humans must make resource allocation choices, and that involves trade-offs.
For example, you have Rp100, and you want to buy shoes and a bag. Because both are worth Rp100 per unit, you end up choosing shoes. In this case, money represents the resources you have. And shoes and bags are your needs. Because you don’t have enough money to purchase both, you have to make a choice.
Microeconomics focuses on supply, demand, prices, and competition, and market structures. The discussion is not only for goods and services but also for factors of production.
To explain these various variables, economists bring up various concepts such as:
- Supply and demand theory
- Laws, functions, and supply and demand curves
- Production theories such as economies of scale and cost minimization
- Production possibility curve
- Various marginal concepts such as marginal utility, marginal revenue, marginal cost, and marginal product
- Market structure, starting from perfect competition to monopoly
- Game theory
- Price discrimination
- Breakeven point
- Economic profit
- Budget constraint
Important assumptions in microeconomics
Economists view humans as rational economic creatures. In a sense, humans try to maximize their interest in allocating resources. Consumers seek to maximize the utility of the consumption of goods and services. Meanwhile, producers try to maximize profits from the production of products and services.
Because scarcity allocations require us to make choices, not all of our alternatives are taken. There is something we sacrifice. From there, opportunity costs arise, which represents the next best alternative to the choice we make, and we must sacrifice.
Microeconomics also relies on the assumption of ceteris paribus. Microeconomic phenomenons are complex, and in simplifying the explanation, economists try to isolate the effects of other factors beyond what is being explained. Economists assume those other factors are constant, unchanging, or ceteris paribus.
Why is microeconomics essential?
Studying microeconomics is useful in our daily life. If you are a marketer, microeconomic knowledge helps you to set prices that provide optimal profit and cover product costs. You can also anticipate the reactions you might see from competitors by analyzing the market structure of the product.
If you are an investor, microeconomics helps you to assess the profitability of a company under different scenarios. For example, you want to determine whether a company can increase revenue by cutting the price and increasing the quantity sold. To do this, you must consider the demand for the company’s products and the level of competition in the company’s market environment.
Likewise, the concept of microeconomics helps you allocate stock investments. Knowing how microeconomics affects company revenue, costs, and profits are very important in understanding the health of the company and the company’s stock price.