Microeconomics is 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 focuses on the issues that affects individual, groups, or organisations as compared to the macroeconomics which focuses on issues affecting the national and global economy.
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 microeconomics is the circular flow of economic activity, which demonstrates how families and businesses interact. The components of the economic activity flow are:
Money flowing to and from homes and businesses as revenue
Receiving of goods and services by households
Sale of resources under private ownership to companies so they can make products
The relationship between business and household spending
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:
Searching for the best loan interest rates as first-time homebuyers.
Customers favour one product over another when making a purchase.
Company acquiring capital assets to grow.
Two companies are vying for the same market.
Customers' demand is declining as a result of rising service costs.
Businesses reducing product supply as a result of price hikes.
A subfield of social science known as microeconomics 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.”
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.
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 a commuter takes train to work instead of driving. The train takes 70 minutes and the driving takes 40 minutes. The opportunity cost would be the hour that will be spent elsewhere each day.
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 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.
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.
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.
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.
When funds are few, choices must be made, which is what we learn in basic 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 abundant, others are scarce. We frequently focus more on how we will spend our time on any particular day than the air we breathe. That's because there seems to be a lot of air to breathe, and there are only so many hours in a day. Because we do not choose to breathe, it is not particularly fascinating to an economist.
On the other hand, a whole field of economics is dedicated to comprehending and explaining our decisions regarding how to spend our free time. The labour market places great significance on the number of hours we choose to spend working and playing. People's abilities are also in short supply, in addition to their time. The effectiveness of any allocation is often a problem for economists: how can most of such limited resources be utilised?
While the focus of mainstream economics microeconomics is on the choices and preferences of individuals in society, assessing the equitable distribution of limited resources necessitates the aggregate of preferences in order to assess the usefulness of distribution to society as a whole (see welfare economics). Therefore, the study of scarcity and choice should take into account both an allocation's efficiency as well as its equity or distributive fairness. In fact, the dispute between planned economies and free-market economies centres on the topic of equity.
A resource's rarity in a given situation can be measured and assessed objectively. In the past, economists have also looked at how people make decisions about scarce resources as though they were reached through straightforward, impartial calculations. Obviously, people's decision-making is influenced by emotion as much as logic. The quickly growing discipline of behavioural economics uses psychological insights to deepen economists' understanding of decision-making at a more individualised level.
A government or community can utilise a microeconomics policy system as a tool to plan and distribute resources, services, and products across a region or country. Economic systems control the factors of production, including land, capital, labour, and natural resources. The various institutions, organisations, entities, decision-making processes, and consumption patterns form the economic structure of a community.
i. Traditional Economic System
ii. Command Economic System
iii. Market Economic System
iv. Mixed System
This method of computing percentage changes contains a small problem. We get different reactions based on where we are on the demand curve. By taking the average of two prices and two quantities across the span we are analysing, we may circumvent this issue by comparing the change in the average rather than the price or amount at the start of the change.
Whether a change in the price of 1 percent causes a change in quantity demanded of more or less than 1 percent, we have distinct ranges of price elasticities.
Price-Elastic Demand: As a basic intro to microeconomics,the concept of price-elastic demand should be known to us. This is referred to as a price-elastic demand if it exceeds one. Price changes of 1% result in responses higher than 1% changes in quantity demanded: ΔP < ΔQ.
Unitary Price Elasticity of Demand: In this situation, a 1% change in price results in a corresponding 1% change in the amount sought.
Price-Inelastic Demand: Consequently, a 1 percent change in price results in a response of less than a 1 percent change in quantity demanded: delta P > delta Q. This is known as price-inelastic demand.
In principle, a market will naturally reach equilibrium if left alone. Everyone who wants to sell at that price and everyone who wants to buy at that price will be able to close their deals at that price. Supply and demand are exactly equal right now. However, the government may occasionally step in and impose price ceilings or restrictions, collect taxes, or take other actions to change the microeconomic environment.
A price ceiling is a cap on an item's cost; vendors are not allowed to charge more once it has been set. Price caps are frequently less expensive than market rates. A price cap set at or above market value largely serves as a preventive measure and has no noticeable effects. But if the ceiling is set below market value, there won't be enough goods.
For instance, if the government decides that 1) people need food to exist and 2) the market price of bread is too high, it may impose a price ceiling.If the government imposes a price ceiling, the quantity requested will exceed the amount delivered, meaning that there will be inadequate bread to fulfil the demand.
Scarcity is the term for this situation. Because price controls are in place to safeguard consumers' interests, the government must decide whether the situation is preferable for buyers: being unable to afford bread or not having enough bread to go around.
A price floor is the opposite of a price ceiling. A price floor is a fictitiously lower minimum price for an item. The price floor is often higher than the market price. Price floors are typically set to aid vendors. For agricultural products, for instance, price floors are occasionally applied. There are instances when the market price is so low that farmers cannot maintain themselves. When this occurs, the government intervenes and establishes a price floor, which might lead to other issues.
Taxation is another instrument the government may use to affect the market. To discourage the sale and consumption of alcohol, for example, the government might levy a tax on alcoholic beverages sold by restaurants and bars. As is seen in most cases, sellers pass on the increased cost to buyers as much. Sellers incorporate the tax amount into the selling price and make sure they suffer no harm to their profit.
The supply curve in such cases shifts vertically by the amount of tax levied. Therefore, if the government levies a Rs 5 tax on each bottle of alcohol and the vendors want to add this tax on to the customers, the supply curve will shift upward by Rs. 5. Shops would eventually sell fewer bottles of alcohol at whatever price in order to offset the tax's higher cost.
In reality, if customers continue drinking at their previous rates, alcohol will now cost Rs. 5 extra for each bottle. But according to the new equilibrium post-tax curves, prices will range between x and (x+5) or (x-5) and x, and the new quantity will be less than the first.
According to thetheory of consumer behaviour in microeconomicsis important in the tactics that corporations might use to gain a competitive edge. According to consumer behaviour theory, customers are rational and want to maximise their utility. However, in a monopolistic market, such as the fast food business in many countries, additional variables such as advertising and other promotional activities that the corporation employs as part of its marketing plans significantly influence the consumer's reasoning.
Furthermore, a variety of factors impact consumer decision-making processes. Marketing communication and culture are prominent among these aspects. The consequence of the marketing communication mix is to encourage impulsive buying, undermining the rationality that the consumer behaviour theory promotes. Additionally, because culture is not uniform, customers' purchasing habits vary among nations due to various cultural orientations.
There are many economic actors in a fully competitive market, but none has the capacity to establish the market price for a specific product. The market forces of supply and demand entirely regulate the price per unit, and each business in the market must sell its goods at this fixed market price. In perfect competition, marginal revenue (MR) equals the product price and may be represented by a horizontal line (MR = P)Examining the expenses related to creating and selling items
Fixed costs (FC) are constant outlays regardless of the volume of product generated (Q). Rent and yearly salary are two instances of fixed expenditures. Variable costs (VC) are costs that rise in proportion to the amount of production generated (Q). Hourly and piece rates for labour as well as the expenses of raw materials used in production are examples of variable costs. Total cost (TC), often known as FC + VC, is the total of fixed and variable costs.
Average fixed cost (AFC) is defined as fixed costs divided by the total output quantity generated; AFC = FC//Q. AVC is the average variable cost divided by the total amount of product generated; AVC = VC//Q. ATC is the total cost divided by the total amount of product generated; hence ATC = TC//Q. The marginal cost (MC) is the additional cost incurred by producing one more unit of output, MC= deltaC/ deltaQ. All these formulae are a part of advanced microeconomics.
The MC curve always intersects the AVC and ATC curves at their respective minimum points. AVC or ATC must fall when marginal cost is smaller than the average variable or average total cost. AVC or ATC must rise when the marginal cost exceeds the average variable or total cost. As a result, the lowest point is the only conceivable position at which marginal cost equals average variable or average total cost.
The break-even point is a particular moment at which the marginal cost of a product or service equals the average total cost of said product/service (MC = ATC). When the MR = P line, at some point, crosses through the aforementioned point, as has been indicated by the black circle on the illustrated graph, the product or service is then marked to be selling at its break-even price because now the marginal revenue equals to the marginal cost of production, and the total acquired revenue equals to the total cost of the product or service in question. In which case, the corporation that is associated will break even: it will not be making any profits, but it will also not be losing any money at all.
If by chance the MR = P line is somehow above the break-even point, the company will be making a considerable profit for the revenue from each of the units of output that was sold shall be well more than the average cost of producing one unit of that same output, thus total revenue incurred will be higher than the total cost. The company will be running on a loss if the MR = P line is below the break-even point because then each unit of the output will generate progressively less revenue than the average cost of total production, which lowers total revenue below total cost.
The concepts of free markets are usually misunderstood. It is not that Free markets have no government intervention. Rather, governments intervene into the free market economy to overcome market failure. Government interventions ensure market stability, distribution of resources, a strong market economy, and legal transactions. When markets fail, governments can also take emergency measures like bailouts.
For those investors who end up observing soaring corporate earnings and share prices, the sheer amount of inflationary money initially appears to be absolutely terrific, but eventually leads to a general decline in its value. People who are Bond buyers and savers often bear the brunt of it because savings have no virtual value. The fact that the debtors now have to pay less money to be able to satisfy their commitments is favorable news, but it also exponentially damages those who have initially bought bank bonds based on those loans once again. This also heightens the enticement of borrowing, but if interest rates rise up fast, that allure is ultimately lost.
Interest rates still continue to be a very potent tool although they are generally employed to otherwise combat inflation. This is so because they may end up strengthening the economy by ultimately reducing borrowing rates. The Federal Reserve should consider reducing the interest rates instead of raising them in order to encourage the relevant companies and consumers to withdraw more loans and make more purchases. On the other hand, this might also lead to forming asset bubbles, which is when huge amounts of money are lost in the blink of an eye, rather than gradually as it is the case with inflation. Rates of Interest or ROI is a third way that the government influences the market.
The Maryland legislature increased usury limitations in response to rising interest rates in the 1970s so that more mortgages would be accessible. After four years of arduous work, Apple Computers went public in December 1980, rewarding its founders handsomely for their efforts. Pharmaceutical firms spend millions on marketing fresh medications. How much money do they make back in total? These narratives illustrate the financial justifications for interest payments and the connections between facility and equipment investments, interest rates, and anticipated return on investments.
The American government's readiness to assist struggling industries in the 2008–2010 financial crisis is well recognised. As part of advanced microeconomics theory, prior to the crisis, this reality was well acknowledged. Although the 1989 savings and loan crisis and the 2008 bank bailout were strangely similar, the government has a history of salvaging non-financial companies like Chrysler (1980), Penn Central Railroad (1970), and Lockheed (1971). The remarkable strategy of the government is that it did not bailout these companies based on direct investments based on the Troubled Asset Relief Program(TARP) but did so by the method of loan guarantees.
These corporations would ultimately shut down all operations and functions and eventually sell off their acquired assets to more profitable undertakings, under normal market conditions with the intention to pay off their debts and, if at all possible, shareholders. Luckily, the government uses this authority only to protect the most significant companies, including the ones in the banking, insurance, aviation, and auto industries. Fortunately, the government only uses this authority to protect the most important companies, including those in the banking, insurance, aviation, and auto industries.
From the taxpayer's viewpoint, tariffs and subsidies are the one and the same. A subsidy is when the government levies taxes on the general populace and distributes the proceeds to a particular industry in order to increase its profitability. With a tariff, the government imposes taxes on imported goods to raise their prices, enabling domestic providers to mark their prices. These two activities have an immediate effect on the market.
Financial institutions such as banks have a really strong incentive to offer advantageous terms to companies that get a certain level of assistance from the government. Even if the provided government assistance is the company's one and only source of some competitive advantage, the favorable treatment and enough financing provided by the government will eventually result in the additional money and resources being finally invested in the company.
Other competing industries that are more globally competitive will be impacted by this drain of resource and now shall need to work harder and smarter to get finance. When the government is somehow a company's primary source of income, the influence can and will be more prominent and has been known to result in involved contractors being overcharged and delays in ongoing projects.
Any absence of any kind of opposition from the business community to the bailout of any specific sectors may explain because they are uncertain of when their home sector would need some kind of assistance. Taxes and regulations are generally a concern for Wall Street, however. This is especially true because while yes, regulations and taxes may end up having a negative effect on profitability, subsidies and tariffs may provide a firm a competitive edge.
Technology's development has fundamentally altered how education is delivered. Onlinelearning has developed into a flexible teaching style that allows students to access study materials from the comfort of their homes quickly. Online learning also supports students in choosing their own study pace and offers a great chance for those unable to enrol in regular classroom settings.
An online microeconomics course is much better as you can attend the classes at your own pace. You don’t need to go by the strict syllabus of any board. You get the best teachers and can rewatch any lesson. They also solve each and every doubt. It is usually cheaper compared to offline courses.
Many students take online courses to prepare for a certain topic for entrance and other such exams. With growing technology all over the world, these macroeconomics courses onlineare just an affordable ticket to easy and simple knowledge at your fingertip.
The study finds that the extension of the European war, rising commodity prices, supply-side disruptions, and gloomy global growth forecasts are the main threats to India's economic recovery. The survey's participants believed that the trajectory of inflation, the size of interest rate increases necessary to preserve price stability, and the effects of higher rates on household consumption and investment demand would influence the outlook for the world economy in 2023.
A recession in the long term cannot be completely ruled out, however, as negative risks to growth are increasing, and there is significant doubt surrounding the U.S. Federal Reserve's capacity to stabilise inflation levels.
According to The Hindu, due to geopolitical unpredictability and its effects on the Indian economy, the growth prediction has been revised downward from the 7.4 percent estimate in the previous survey round (April 2022).
While industrial and services sectors are expected to increase by 6.2 percent and 7.8 percent, respectively, the median growth prediction for agriculture and related activities has been set at 3 percent for 2022–2023.
"As seen by the intensifying inflationary pressures and rising market uncertainty, the Indian economy is not immune to global turbulence. The delegates noted that these factors are likely to prolong the recovery and are putting pressure on India's economic prospects,” it read.
The salary of a Microeconomics specialist salary depends on a number of factors like:
Mode of education
University passed out from
Working experience, etc
1000+
Top Companies
50%
Average Salary Hike
Top 1%
Global Universities
Analyse the environment, conduct user research across online and offline retail shoppers, suggest features of improvement for a seamless experience and metrics to measure your success for a niche e-commerce apparel brand.
Establish the target market for hourly booking of hotels, user needs, growth opportunities, and build a Minimum Viable Product (MVP) and identify relevant success metrics.
Analyse and improve the transnational funnel of the online ticketing platform.
Help increase the number of recharges for Freecharge by improving the growth hack funnel. Propose retention, referral and revenue growth hacking strategies to achieve business goals.
Conduct an analysis of key competitors of a healthcare product
Create a business plan for cab-sharing app’s expansion to the Indian market and represent it using the Business Model Canvas
Design and sketch a wireframe for a hypothetical health-based app that tracks and monitors health and fitness
Create a product backlog and figure out epics and user stories for a feature for an OTT platform
Prioritise tasks and feature updates for a cab-sharing app’s operations
Because a product's price has gone up, demand in a certain market has decreased. Another illustration is a company expanding its resources to provide additional items.
The three key ideas are supply and demand, consumer behaviour, and income levels. The greatest research has been done on these ideas for tracking microeconomic data.
The acts and conduct of families and enterprises are the main topics of microeconomics. Microeconomics demonstrates the fundamental movement of resources, money, products, and services.
Microeconomics addresses issues related to how families and companies interact. The primary subjects are supply and demand, equilibrium, competition, profit maximisation, and opportunity cost.
The financial accounts of a corporation do not immediately reflect opportunity costs. However, from an economic perspective, opportunity costs remain quite significant. Opportunity cost is a somewhat abstract idea, though, so many businesses, executives, and investors neglect to consider it while making daily decisions.
There are four different forms of consumer behaviour: complicated buying behaviour, dissonance reduction, variety seeking, and habitual buying behaviour. The sort of product a customer requires, their degree of engagement, and the variations across companies all influence the many forms of consumer behaviour.
Take choosing a city getaway for two as an illustration of consumer behaviour. It could need substantial decision-making for someone just starting to date, but it might just require minimal decision-making for a couple dating for at least five years.
Making a reservation at a restaurant is another instance of customer behaviour. Scheduling a reservation for a night out with friends just takes a short amount of time; however, making one for an anniversary or a marriage proposal takes more thought.
The widespread consensus is that too much or too little inflation damages an economy. Many economists support a medium ground of 2 per cent annual inflation that is low to moderate.
In general, rising inflation is bad for savers since it reduces the purchase value of their savings. However, the fact that their outstanding loans' inflation-adjusted values decline over time might be advantageous to borrowers.
When the supply and demand curves for a given good or service move in the same direction or climb simultaneously, the equilibrium amount of that good or service will likewise increase. The equilibrium price, however, could or might not be affected.
A degree in economics may open the door to various fascinating — and frequently highly-paid — occupations. No matter if you work in the public or private sectors, having the capacity to understand the elements influencing economic decision-making is a highly valued talent.
That threat is probably real right now. But there are wonderful choices for countermeasures that we can use. As usual, prevention is preferable to treatment.
Consider a farmers' market where every seller sells the same brand of jam. Since they all use the same recipe and charge the same price for their products, there is little difference between them. Sellers are few and can freely engage in the market without any restrictions at the same time. In this scenario, customers would be completely aware of the product's formula and any other pertinent details.
The U.S. and global inflation rates in 2022 reached their greatest levels since the early 1980s. Although there is no one cause for the sharp increase in global prices, several factors combined drive inflation to such high levels.
A profession in economics might be pursued as a trader, data analyst, or financial analyst in a bank or other financial organisation.
In Monopoly, one business has outgrown every rival and is now the sole supplier in the market. It can regulate demand by adjusting supply and prices.
In a market with perfect competition, all providers engage in fair competition. Contrarily, competition is vulnerable to imbalances in imperfect markets where businesses do not compete on an even playing field.