Microeconomics Course Overview

    Introduction To Microeconomics

    Microeconomics and Macroeconomics constitute the two nodal branches of economics. In Microeconomics, individuals are often categorised as belonging to microeconomic subgroups such as business owners, buyers and sellers. The study of microeconomics is basically an analysis of the tendencies that are supposed to originate when these individual actors make a decision. Changes with reference to incentives, resources and prices of production coupled with production methods are recorded.


    There are both positive and negative uses of microeconomics. Positive microeconomics discusses economic behaviour and what to expect when particular variables change. Positive microeconomics tends to provide insight into a company's sales, productivity and profit based on any recent changes in their manufacturing or marketing strategy.


    These insights are then used to prescribe the course of action for these companies or governments to work effectively and undertake measures such that their profits remain intact and the demand chain is sated.

    What Is Microeconomics?

    Microeconomicsis a branch of social science that looks at how decisions and incentives affect how resources are allocated and used. Microeconomics explains how and why different things have varying values, how people behave and profit from efficient production and trading, and how people may work together and coordinate best. In general, microeconomics offers a fuller and more thorough understanding than macroeconomics.


    According to the official definition, microeconomics is the area of economics that examines how people and businesses behave and how decisions are made in light of scarce resources. Microeconomics research demonstrates how households and businesses interact or work together. This contact develops a market for products and services, which significantly impacts product pricing.


    A key idea in modern macroeconomics is the circular flow of economic activity, which demonstrates how families and businesses interact. The components of the economic activity flow are:

    components of economic activity flow
    1. Money flowing to and from homes and businesses as revenue

    2. Receiving of goods and services by households

    3. Sale of resources under private ownership to companies so they can make products

    4. The relationship between business and household spending

    5. Microeconomics pays special attention to this relationship and economic activity to monitor total firm output, household income, and total spending

    The following examples and circumstances illustrate how to apply the definition of microeconomics:

    1. Searching for the best loan interest rates as first-time homebuyers.

    2. Customers favour one product over another when making a purchase.

    3. Company acquiring capital assets to grow.

    4. Two companies are vying for the same market.

    5. Customers' demand is declining as a result of rising service costs.

    6. Businesses reducing product supply as a result of price hikes.

    The Meaning Of Microeconomics

    A subfield of social science known as macroeconomics theory focuses on analysing separate, individual economic entities that collectively make up the whole economy. Each individual, family, business, or industry is a separate economic unit. It is the area of economics where the consequences of specific elements and individual decisions are discussed.


    The primary focus of microeconomics is on the variables that affect individual economic decisions, the impact of changes in these variables on each decision-maker, and how demand and prices are established in specific markets.


    The study of phenomena that affect the entire economy, such as unemployment, GDP (gross domestic product) growth or decline, and inflation, is called macroeconomics, in contrast to microeconomics.


    Analysing market processes that set relative prices for goods and services and dividing scarce resources among several possible uses are some of the objectives of microeconomics. It demonstrates the circumstances under which open markets finally result in favourable distributions.


    Simply put, it is the study of how people make decisions in light of the fact that they have a certain amount of time and money to spend on things.


    Microeconomics also examines market failure, or when markets fail to deliver useful and efficient outcomes.


    Microeconomics is defined as follows in the Financial Times' glossary of business terms:


    “The study of trends that pertain to the different elements (companies, industries, consumers, etc.) that make up the economy.”

    Basic Principles Of Microeconomics

    Supply And Demand: 

    Over time, when demand outpaces supply, suppliers either increase their supply or raise their pricing. In an ideal world, demand would decline as prices rose since fewer people could afford it. By doing this, providers buy themselves some time to resume meeting demand. In contrast, suppliers would have to reduce their supply or lower the pricing of the goods offered if supply rose faster than demand. Keep in mind that manufacturers currently have an excess of stock. So as prices decline, demand would increase, and the supply would balance out. Finally, equilibrium is reached when supply and demand are at their best. The relationship between supply and demand and the equilibrium condition presupposes that all other variables, outside price and demand, remain constant.

    basic principles of microeconomics

    Opportunity Cost:

    A consumer who also makes decisions has a finite amount of money and an infinite number of ways to spend that money. The opportunity cost is the price a buyer pays for not selecting the optimal option. This presumes that the options are exclusive of one another. It's a chance that a decision-maker passes up. If Sandra decides to purchase a car and opts for an SUV rather than a hatchback, she will pay the opportunity cost of her decision.


    Law of Decreasing Marginal Utility

    The utility of consumers is maximised by using this microeconomics approach. Diminishing marginal utility is very important in determining what people will buy. This law emphasizes how the demand for specific goods declines when a customer consumes more units in a row. For instance, a person might purchase some ice cream, eat it, and then purchase more. Finally, after consuming three ice creams, he decides he no longer wants them and quits buying them.


    Giffen Goods: 

    Giffen products are essentials whose price increases have no impact on sales; this is a part of advanced microeconomics. Giffen products are distinctive due to the price and demand relationship. These are likely logical choices where the purchasers are prepared to spend more despite price hype. These extraordinary items are called "Giffen goods," with a positively sloping demand curve. For instance, a rise in gasoline prices does not result in a decrease in demand. Products that want to be categorised as Giffen Goods need to meet some of the requirements listed below:

    • A lack of available alternatives.

    • The replacement should be subpar.

    A significant amount of the customer's budget should go toward purchasing the goods.


    Veblen Goods:

    Giffen goods are comparable to Veblen goods. These items are regarded as a sign of status, esteem, or luxury. Consumers don't mind shelling out more money for these products. Typical examples are jewellery, jewels, and Rolls Royce vehicles are the greater costs. The more expensive something is, the more eagerly people will buy it.


    Elasticity And Income:

    The demand for more expensive things rises along with income. Additionally, as income declines, so does demand. Alternatively, as the cost decreases, customers can purchase more products. The customer's purchasing power increases in both scenarios. On the other hand, the products of Giffen and Veblen are illustrations of inelastic pricing demand.


    Elasticity And Substitution:

    Substitution effect: People may select a less expensive option when prices are greater than they can afford. The price elasticity of demand refers to this phenomenon of changing demand due to price.


    For instance, if leather jacket prices increase, people will buy woollen overcoats instead to keep warm in the winter.

    Opportunity Cost

    Opportunity cost is the advantage that was lost because a particular option was not selected. It is necessary to weigh each choice's advantages and disadvantages to assess opportunity costs correctly. Opportunity costs have a value that can help people and businesses make more lucrative decisions. Opportunity cost is a wholly internal expense that is only utilised for strategic consideration; it is not included in accounting profit and is not reported externally. Opportunity cost examples include choosing to build a new manufacturing facility in Los Angeles as opposed to Mexico City, forgoing an equipment upgrade, or selecting the most expensive product packaging over less expensive alternatives.

    An opportunity cost is just the difference between the expected returns of each choice, and this is the formula for doing so. Formula and Calculation of Opportunity CostOpportunity Cost=FO−CO Where: FO=Return on best-forgone optionCO=Return to the chosen option. Most day-to-day decisions aren't made with a complete grasp of the potential opportunity costs. Still, before making major decisions like buying a home or establishing a business, you will probably meticulously investigate your financial decision's advantages and disadvantages. 

    For instance, many people would check the balance in their savings account before making a purchase when they feel cautious. But when people make that spending choice, they frequently don't consider the items they have to give up. The issue arises when you never think about what else you could do with your money or make purchases without considering the missed options. Occasionally ordering takeaway for lunch can be a smart move, especially if it gets you away from the workplace for a much-needed break.

    However, if you purchase one cheeseburger per day for the next 25 years, you might lose out on several opportunities. Spending that $4.50 on a burger over that period of time, assuming a fairly realistic 5 percent RoR, might add up to a little over $52,000, excluding the lost possibility for better health. Although this is just a simple example, the main point applies to many different circumstances. It might seem excessive to consider opportunity costs each time you want to buy a candy bar or take a trip. Opportunity costs, however, are present everywhere and affect all choices, big or small.

    Scarcity And Choice

    When funds are few, choices must be made, which is what we learn inbasic microeconomics. Scarcity refers to the restricted nature and availability of certain resources, whereas choice refers to people's options over distributing and using those resources.


    The issue of choice and scarcity sits at the core of economics, which is the study of how people and society decide how to distribute limited resources. While certain resources are common, others are scarce. We frequently focus more on how we will spend our time on any particular day t