What Is Microeconomics? - Definition & Topics

What Is Microeconomics? - Definition & Topics
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  • 0:00 Microeconomics Defined
  • 1:07 Supply and Demand & Elasticity
  • 3:03 Opportunity Cost &…
  • 4:20 Forms of Competition &…
  • 5:18 Lesson Summary
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Lesson Transcript
Instructor: Aaron Hill

Aaron has worked in the financial industry for 14 years and has Accounting & Economics degree and masters in Business Administration. He is an accredited wealth manager.

Learn about microeconomics and a few of the most popular topics that are typically studied in the field, such as supply and demand, opportunity cost, and different forms of competition that exist.

Microeconomics Defined

Microeconomics is a branch of economics that studies the behavior of individuals and businesses and how decisions are made based on the allocation of limited resources. Simply put, it is the study of how we make decisions because we know we don't have all the money and time in the world to purchase and do everything. Microeconomics examines how these decisions and behaviors affect the supply and demand for goods and services, which determine the prices we pay. These prices, in turn, determine the quantity of goods supplied by businesses and the quantity of goods demanded by consumers.

Microeconomics explores issues such as how families reach decisions about what to buy and how much to save. It also affects how firms, such as Nike, determine how many shoes to make and at what price to sell, as well as how competitive different industries are and how that affects consumers.

Microeconomics should not be confused with macroeconomics, which is the study of economy-wide things such as growth, inflation and unemployment.

Common Topics in Microeconomics

Microeconomics is a high level branch of economics that has many different components. Let's take a closer look at common topics found in microeconomics.

Supply and Demand

Supply and demand are the most fundamental tools of economic analysis. Many topics and economic reasoning involve supply and demand in one form or another. So what is supply and demand?

Let's look at a simple example. In the winter, the cold causes you to heat your house for more hours than you would in other months. This is likely true not just for you, but for all of your neighbors as well. As a result, demand for heat is higher. Because demand is higher, gas companies can charge more for gas.

Similarly, an oil spill from a tanker, bad weather, or war in the Middle East may often create a short-term gas shortage, which is a reduction in supply and can affect the price you pay, also.

The diagram seen here is a common supply and demand curve in microeconomics.

Elasticity

Elasticity is used to help determine the change in consumer demand (how much you want of something) as a result of a change in the good's price. When a good or service is elastic, this suggests that the demand for the good or service is affected by a change in price, whereas something that is inelastic is insensitive to price.

An example of an elastic good may be an apple. If the price of apples goes up, you most likely will think about switching to a different fruit that is cheaper. The demand for the fruit will go down.

A couple of examples of inelastic goods are baby formula and electricity. Even if the price goes up, you will most likely keep buying them. Businesses often strive to sell products or services that are, or seem, inelastic in demand because doing so can mean that few customers will be lost if they raise prices.

Opportunity Cost

Opportunity cost really dives into how individuals and businesses weigh different options. The opportunity cost is the value of the best foregone alternative. This definition captures the idea that the cost of something is not just its monetary cost but also the value of what you didn't get.

For example, the opportunity cost of spending $50 on a pair of shoes is what you would have done with the $50 instead, and perhaps the value of the time spent shopping. The opportunity cost of purchasing a pet includes not just the purchase price of the pet but also the food, carpet cleaning, veterinary bills, and so on. So the pet that initially costs $100, may really have an opportunity cost of $800. What could you purchase for $800 instead?

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