Microeconomics (Meaning and Explanation)

We explain what microeconomics is and what branches it is divided into. Also, its importance and examples.

What is microeconomics?

Microeconomics is the branch of economics that contemplates the individual actions of economic agents (such as consumers, companies, workers and investors) and their interaction with the market. Its analysis focuses on basic economic elements: goods, services, prices, markets and economic agents.

This discipline seeks to know, understand and predict the behaviors of individual economic agents and analyzes these processes. It is based on the law of supply and demand which is the basic free market economics principle that explains the relationship between consumer demand for a good or service and its supply. Microeconomics aspires to model the market, which is equivalent to understanding its operational dynamics and proposing a structure.

Microeconomics is distinguished from macroeconomics, which is the branch of economics that globally studies the functioning of the economy of a certain territory. Macroeconomics studies aspects such as inflation, unemployment, GDP, among others.

Elements of microeconomics

The main elements of microeconomics are:

Goods and services. They are those products and services that are made and offered to meet the needs of individuals and that have a certain economic value. Goods are characterized by being tangible, for example: a kilo of bread. Services are characterized by being intangible, for example: a hairdressing service.
Price. It is the amount or quantity required to acquire a certain good or service, which is regulated by the law of supply and demand. This amount is usually expressed in a monetary value.
Economic agents. They are those groups or individuals that participate in economic activity, such as an individual, a family, a company or the State.
Market. It is the set of processes and movements that occur in the purchase/sale of goods or services between economic agents.

Branches of microeconomics

The microeconomic approach can be divided or structured into several main branches:

Consumer theory. It is the branch of microeconomics that aims to understand the logic of consumption from the perspective of those who buy goods and services, that is, consumers. It raises questions such as: What choices does the consumer make when choosing a product and why? What are your preferences and your logic when it comes to consuming? How could its consumption be predicted?
Demand theory. It is the branch of microeconomics that studies and seeks to understand demand, that is, the desire of an individual or group to consume a specific good or service. This theory attempts to approach the economy from the elements that raise or alter the demand for a product.
producer theory. It is the branch of microeconomics that seeks ways to plan and supervise production to understand and try to predict the economic flow in its entirety and seek efficient production. Some of the questions it raises are: How should a company manage its costs? How much should you produce and how can you maximize your profit?
General equilibrium theory. It is the branch of microeconomics that attempts to explain the behavior of production, consumption and prices in an economy that has one or more markets.
Theory of financial asset markets. It is the branch of microeconomics that studies financial markets, which are the mechanisms for the exchange of financial assets by economic agents. This occurs whenever the purpose of consumption is not the immediate use of the good, but rather the delay of consumption over time: the increase of capital, the transfer of risks, among others.

Importance of microeconomics

Microeconomics is a branch of economics important because it studies the behaviors of economic agents and some variables, such as consumption, prices and forms of production, since it serves to have information about the functioning of markets and economic agents.

Some of the factors that microeconomics studies are variations in prices, the efficient way of executing production and the way in which consumers act and decide. This allows predictions and approximations that help to understand how markets work.

The microeconomics analyzes the interactions between different markets which allows predicting what will happen if certain variables are modified. This is useful to organize behaviors, decisions and preferences and deal with changes in other economic agents.

The microeconomic study It is done from both the point of view of the consumer and the producer and other economic agents. This makes microeconomics present in the daily lives of individuals, who are a fundamental actor within the economic market.

Examples of microeconomics

Some phenomena or situations that occur within the field of microeconomics are:

The price of a product in the supermarket.
The savings.
An online purchase.
The productivity of a car company.
A purchase paid in cash at a store.
The service offered by a dry cleaner.
The annual profit of a company.
The investment of a company.
The opening of a new branch.
The salary of a worker.
The monthly expense of a family.
Payment in installments for a product.
The increase in demand for bicycles in Mexico City.
The process of manufacturing and distributing a good.
The choice of a consumer between two products.
Payment of electricity and gas service.
Renting a house.
The increase in fuel prices.

Macroeconomy

Macroeconomics is the branch of economics that studies the economy globally that is, it studies the economic behavior of a given territory or country and not the interactions between economic agents that occur there. This economic branch studies variables and indices such as global GDP, the inflation rate, the economic growth of a country, investments, crises, among others.

This part of the economy It is closely linked to microeconomics since both develop and work at the same time and influence each other. Macroeconomic indicators allow regulation and decision-making within the microeconomic sphere, because they provide information about the global state of the economy that affects all economic decisions and transactions. Both approaches seek to improve or respond to economic questions by facilitating or providing information necessary for decision-making by market agents and actors.

Continue in: Macroeconomics