What Is Microeconomics?
Microeconomics refers to the small economy. The term micro is the Greek expression for the small, so in this economic area it is about consumers and companies and how they interact with each other.
In microeconomics, we look at what makes consumers shop more or less and what companies do to achieve the desired results.
Microeconomics is also about jobs and how our households provide companies with labor. Thus, issues of wages and working conditions will also be included in this part of economics.
Microeconomics in-depth explanation
The word micro originates from the Greek micros and means about small. Therefore, the microeconomic area is about the “small parts” of the economy.
Why you and I react in different ways, why a company decides to invest, how the purchases should be carried out effectively, in what way an advertising campaign should be carried out, how companies handle employment, seek financial help, manage their accounting and so on.
It is basically based on the decisions we as consumers make. Why do we make those decisions?
There are a lot of theoretical models that are used to explain different parts of the microeconomics. Formulas and curves that show what happens at different events.
We talk about supply curves and demand curves and about equilibrium positions. How these work in a market of, for example, free competition.
Each individual consumer always has the opportunity to make a choice, to buy or not to buy or to choose between different goods or services.
Price can be a part that influences choice, income another factor.
Another important factor in our choice is the preferences we have i.e. tastes such as different fashion preferences, wanting to be placed in a group based on our choices, our moral perception and more.
Something that is also usually described is substitution effects. The easiest thing is to think about food. If someone increases their price sharply, most people exchange it for something else.
But it can sometimes take a lot before a consumer switches, think of coffee. Here we can talk about different price elasticity.
There is also a market for labor and capital. In this case, the company is the buyer.
Different “quantities” and “price” of this obviously affect how much quantity is produced by different goods and services.
What is the difference between micro and macro economy
The difference is that macroeconomics studies economics as a whole, as opposed to microeconomics, which applies economic theory to individual companies.
You can delve more into the difference between microeconomics and macroeconomics here.
Macroeconomics is a part of economics that deals with such things as economics, inflation, economic fluctuations, unemployment, growth and deflation.
The labor force and its cost and purchasing power
In microeconomics, the cost of labor is of great importance. When the cost of labor rises, this is reflected in the prices of the products and services offered.
Macroeconomics takes a look at what this does to the production itself.
At the same time, the workforce is also households, ie those who are to buy the products and services. When prices go up, it affects households’ finances as well as their buying patterns.
Microeconomics and Price Sensitivity
Price sensitivity is a measure which is referred to as price elasticity in microeconomic theory.
If the price of a product decreases and demand as a result of the price change increases, the product is said to have a negative price elasticity.
This is what economic theory normally expects, but for special products, demand may increase as a consequence of a price increase.
The products whose demand increases when the price increases are called “Giffen goods”. According to the theory, how price-sensitive a product or service is thus determines demand.
The word micro originates from the Greek micros and means about small.
In addition to price sensitivity, microeconomics is used to predict what happens in connection with changes in the production chain.
For example, if the price of labor increases, ie employer contributions and wages make production more expensive, how will it affect the production of various goods.
It can also be about how production will be affected by, for example, new technology.
In addition to the labor force’s impact on the production of goods and services, it is also studied how changes in demand and the price of input products change production.
Microeconomics advocates that we can expect that if the price of oil rises, the end product of almost all goods and services that make up the economy will become more expensive.
Supply and demand
The concepts of supply and demand are central to microeconomics.
The companies’ production of products and services is governed by the demand that households, ie customers, have.
The range will be affected by things such as whether there is free competition and the opportunities to offer a certain type of product or service.
In microeconomics, there is talk of supply curves and demand curves.
In an attempt to arrive at what drives the development of supply and demand, the microeconomics looks at several key concepts:
Prices can affect what demand looks like and in microeconomic theory the term price elasticity is used. Price elasticity is the same as price sensitivity among consumers.
2. Negative price elasticity
If a price reduction on a product leads to increased demand, it is called negative price elasticity.
3. Giffen Good
Demand can also increase when a price increases. When this happens, the product is called, which with a higher price increases the demand for Giffen goods.
4. Non-price sensitive goods
Of course, there are goods that are not price sensitive.
Coffee is an example of this. Even if the price goes up, people will continue to buy the product as they can not imagine a morning without at least two cups with or without milk.
Oil is another commodity that will not be missed just because the price goes up.
More factors that affect production
It is not just labor and its cost, as well as household consumption, that will affect companies’ production.
Other things that are taken into account in the calculation of micro-economists are the following:
Modern technology can affect work processes to such an extent that final prices change markedly.
In addition, technology can lead to the need for human labor no longer as before.
All production depends on specific raw materials and their prices. A good example of this is oil.
When the price of oil rises, it means that production also costs more, which is seen in the final price of a product or service.
The goal in microeconomics is to achieve equilibrium
In microeconomics, equilibrium is also a key concept. You look at equilibrium curves. The idea is that supply should meet demand in a perfect way in equilibrium.
The theory is that all business is based on rational decisions.
Here we avoid things like that people can buy things of pure impulse and that we do not necessarily go to several different stores to buy different goods as they are all in one store.
The basic theory of equilibrium only works when the customer and company act in a rational way and thus it is built on with theories of what makes us buy more or less at different prices.
An economy in equilibrium
In the field of microeconomics, economic equilibrium is a key concept. Theoretically free markets consist of so-called “Homo Economicus”.
These actors make exclusively rational economic decisions in order to maximize their economic benefits.
Since it is only rational individuals as I have mentioned and companies that make up the economy, no business will be based on anything other than purely economic factors.
For example, no one will buy an extra chewing gum package because an impulse led to adding the item while the customer was waiting in line at the store and in addition, all items will be traded at the best possible price even if it involves visits to different stores.
As a result, goods sold by companies will be priced exactly where they perfectly meet the customer’s willingness to pay.
There is equilibrium in the economy as supply meets demand, in agreement with the theory book from microeconomics.
In the area of microeconomics, an economy is said to be in balance when the price from the producers meets the consumers’ willingness to pay.
This requires that the actors are rational. To measure how a price change will affect the demand for a product, the price elasticity is used.
Furthermore, microeconomics is a tool for predicting how production changes as a result of changes in the production chain.
Here you can read about what Macroeconomics is?