Monopolistic competition is a situation in which many firms with slightly different products compete. Production costs are above what may be achieved by perfectly competitive firms, but society benefits from the product differentiation. Examples of industries with market structures similar to monopolistic competition include restaurants, cereal, clothing, shoes, and service industries in large cities. Market equilibrium occurs where quantity supplied equals quantity demanded, the intersection of the supply and demand curves in the figure above.
Distribution Theory
Microeconomics is the study of individual units of the economy, such as individual consumers, individual firms, and small groups of individual units like various industries and markets. Microeconomics studies the economic behavior of specific economic elements and specific economic variables. The units of study in microeconomics are parts of the economy like households, firms, and industries. Thus, the study of the economic performance of households, firms, and industries creates the subject matter of microeconomics.
Microeconomics helps in contemplating the attributes of different economic decision-makers like individuals, enterprises, and households. In simple terms, microeconomics helps in understanding why and how different goods have different values, how individuals make certain decisions, and how they cooperate. Microeconomics is not only concerned with analyzing economic condition but also with the maximization of social welfare. It studies how given resources are utilized to gain maximum benefit under various market conditions like monopoly, oligopoly, etc. Analysis of production efficiency, consumption efficiency, and overall economic efficiency are conducted on the basis of microeconomics.
For example, an organization can decide to produce necessity goods for the poor section of society. However, another firm can decide to produce luxury goods for the rich section of society. Microeconomics is a condition where economic actors already have information about the ins and outs of a particular market.
Absence of Large-Scale Production:
- The link between personal preferences, consumption and the demand curve is one of the most closely studied relations in economics.
- The producers attempt to maximize their profit by increasing the quantity when the price rises.
- Decisions depended on a rational weighing of costs and benefits, leading to a balance or equilibrium.
- Microeconomics studies the economic actions and behaviour of individual units and small groups of individual units.
- Policymakers may use microeconomics to understand how public economic policies affect decision-making by consumers and businesses, such as the effect of setting a minimum wage or subsidizing the production of certain commodities.
In the third quarter of the 18th century, with the publication in 1776 of An Inquiry into the Nature and Causes of the Wealth of Nations by Adam Smith, Classical Economics was born. Smith emphasized the Division of Labour or Specialization as the source of productivity or efficiency in factories contributing aggregately to the nation’s wealth or prosperity. scope of micro economics Opportunity costs can tell when not to do something as well as when to do something. The opportunity cost of eating waffles is sacrificing the chance to eat chocolate. Because the cost of not eating the chocolate is higher than the benefits of eating the waffles, it makes no sense to choose waffles. Of course, if one chooses chocolate, they are still faced with the opportunity cost of giving up having waffles.
Imperfect competition
So, microeconomics is a determining factor in the global economic market. Microeconomics tools are useful for introducing policies relating to tax, tariff, debt, subsidy, etc. it helps the governmental bodies to fixate on the tax rate, types of tax, and the amount of tax to be charged to buyers and sellers. It includes the potential measures of maintaining the economic prosperity of men as consumers and producers and improving that prosperity.
In other words, theory of utility, concepts of demand and elasticity of demand are studied in it. 1) Consumer Microeconomics studies how individuals allocate limited income to maximise satisfaction, focusing on utility, preferences, and budget constraints. It is the study of you, your choices, your budget, your habits and how they connect to a bigger economic picture. In this blog, we’ll unpack What is Microeconomics, its three types, and reveal why it’s one of the most useful tools you didn’t know you already had in your toolkit.
Each economic system has to make the decisions regarding what is to produced, how it is to be produced and how the resources to be allocated amongst the different competing uses. Thus, in the micro economics, we deal with the problem of production, consumption, distribution and resource allocation. Microeconomics studies the determination of prices of goods and services therefore it is known as price theory. Microeconomics studies product pricing in different market situations like perfect competition, monopoly, monopolistic competition, oligopoly, etc. The subject matter of the theory of product pricing is the theory of demand and the theory of production and cost.
Importance of Microeconomics :
Microeconomics studies the economic actions and behaviour of individual units and small groups of individual units. It establishes the relationship between facts and results, which are called economic laws. Microeconomics is also called “The Price Theory”, because it deals with the price of goods and services, rewards of the factors of production and interaction of the markets. In economics, understanding the distinction between microeconomics and macroeconomics is essential. While both branches study how economies function, they do so at different levels.
Theory of Costs and Revenues:
It understands how choices affect prices, output, resource distribution and economics. The term ‘micro’ in microeconomics is derived from the Greek word ‘mikros’ meaning ‘small.’ It was founded by the father of economics, Adam Smith. It means that in microeconomics, we study the behavior and choices made by individual businesses and consumers with the changes in different aspects of goods and services in an economy. The four major components of microeconomics are consumer behavior, market supply and demand, individual preferences driving producers, and market-specific labor markets. It helps in determining how one can achieve equilibrium at a small scale. For example, consumer equilibrium, individual demand, individual supply, individual savings, price determination of a commodity, etc.
- Microeconomics is a part of economics that contemplates the traits of the decision-makers within the economy such as households, individuals, and enterprises.
- However, some universities are now offering both courses in the same semester or academic year.
- This international trade too is analyzed in Microeconomics, beginning with the theories of the Mercantilists and Adam Smith to more modern ones.
- So when the price is determined it is influenced by economic conditions, demand and supply curves, and also costs that can continue to change.
- The price of an individual commodity is determined by the market forces of demand and supply.
Both microeconomics and macroeconomics have a place of their own and are important; hence, it is not possible to dispense any of the two. The concentration of microeconomics is on the working of the individual components and macroeconomics studies the economy in general. Also, microeconomics is concerned with the aggregate structure and macroeconomics is concerned with the aggregates themselves. Therefore, both microeconomics and macroeconomics are supplementary to each other, and the superiority of one approach over the other cannot be claimed.
Most universities make the students first take a course in Micro-Economics and then go on to Macro-Economics. However, some universities are now offering both courses in the same semester or academic year. Political Science too helps in the study of Economics, which originally was called `Political Economy’. Knowledge of history and geography too, is essential for a grasp of Economics. Contemporary Economics is largely built upon this Robbinsian understanding of Economics.