Definition of Micro Economics

Definition of Micro Economics

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Microeconomics is a branch of economics that studies the market behaviour of individuals and businesses so that their decision-making processes can be understood in terms of their deployment of scarce resources. In addition, it also studies the interactions between individuals and businesses on the implications of incentives and decisions. Microeconomics is concerned with how and why various commodities have different values, how businesses and individuals are involved in and profit from efficient exchange and production, and how individuals coordinate and work together. In short, it is a social science that provides a complete and detailed understanding of firms and individuals.

Micro economic meaning assumes significant importance while analysing a scenario because it states what is likely to happen when people make choices while responding to changes in prices, methods of production, incentives or resources. Single entities are often grouped under Microeconomic subgroups like buyers, sellers of business owners. These groups are responsible for creating the demand and supply for resources, using the capital and interest rates as a mechanism of pricing for better coordination. Thus, microeconomics deals with production and prices in single markets and the synergy between different markets.

Micro economic notes several key concepts that include Utility Theory, Production Theory, Price Theory, and Incentives and behaviours. Utility Theory states that consumers choose to procure and use combinations of goods that maximize their well-being or ‘utility’, subject to the constraints of the income that they can spend. Production Theory studies production or the process of changing inputs into outputs. All producers try to select different types of inputs and the method of their combination to minimize costs and maximize profits. Price Theory states that the price required by consumers in a perfectly competitive market is the same as offered by producers. This happens with the interaction of Utility and Production Theory and it results in economic equilibrium. And finally, incentives and behaviour study how people and businesses react to different types of situations.

Thus Microeconomic analysis tries to explain the conduct of organizations and individuals within a given economy. It helps in understanding economics that works on a small scale so that proper analysis and observations can be derived on a micro level. It functions by emphasising interests and through modeling to allow an observer to create a better understanding of fiscal decision-making on a small scale.