Learn what microeconomics is and learn the concepts related to microeconomics. Discover its definition and examples with branches and applications of microeconomics.
Updated: 03/10/2022
The Fundamentals of Microeconomics
What is Microeconomics?
The study of economics is divided into two major sections: microeconomics and macroeconomics. Microeconomics focuses on the smaller parts of the economy while macroeconomics focuses on the larger concepts of the economy. Microeconomics meaning is the study of economic activity for individuals and businesses. Macroeconomics studies the larger scale economic factors like government regulation, banking activity, independent agencies, and international finance. Most economists choose which field of economics to study and become experts in it. Microeconomics is needed to analyze information for the day-to-day economic activity. The field of microeconomics helps illuminate issues or events that affect consumer and business spending.
Microeconomics Definition
The formal microeconomics definition is the branch of economics that studies the behavior of individuals and businesses and how decisions are made based on the allocation of limited resources. Studies in microeconomics show how businesses and individual households interact or cooperate. This interaction creates a market for goods and services that greatly impacts the price level of products.
For example, the circular flow of economic activity is an important concept studied in microeconomics to show the interaction between businesses and households. The flow of economic activity consists of:
- Flow of money as revenue for businesses and flow of income to households
- Flow of goods and services being received by households
- Flow of resources from private ownership being sold to businesses to create products
- Flow of expenditures of businesses and expenses of households
Both this relationship and economic activity are studied closely in microeconomics to track the overall output of businesses, income level of households, and overall household expenditure.
Microeconomics Examples
The situations below will display where the microeconomics definition and examples come into play:
- First-time homebuyers shopping for the best loan interest rates
- An individual choosing to purchase one product over another
- A business investing in capital goods in order to expand
- Two businesses competing in the same market
- Customers' demand decreasing because price of a service has increased
- Businesses lowering supply of a product because of cost increases
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.
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Microeconomics Topics
There are numerous microeconomics topics that economists use to better explain interactions of businesses and individuals. The most common microeconomic terms are supply and demand, elasticity, opportunity cost, market equilibrium, forms of competition, profit maximization, and cost-of-production.
Supply, Demand, and Market Equilibrium
Supply is the number of products and services a business will offer in a market that has a direct relationship with price. Meaning, the higher the price level, the more likely a business will increase supply. Lower the price level, and supply will likely decrease.
Demand shows the desire of consumers to purchase products. Demand will decrease as prices increase and vice versa.
In the context of supply and demand, equilibrium refers to a condition where the pressure for higher prices is exactly balanced by the pressure for lower prices, so that the current state of exchange between buyers and sellers can be expected to persist.
Elasticity
Elasticity refers to the degree of price, demand, or supply change. The larger of the changes in price level, demand, or supply is known as elastic change. If there is just a small change in these factors, then it is known as inelastic change.
Opportunity Cost
The opportunity cost is the value of the best alternative given up when a choice is made. This definition captures the idea that the cost of something is not just its monetary cost but also the value given up.
Forms of Competition
Competition plays an important role in business and consumer interactions. Perfect competitive markets are the most beneficial for prices and efficiency in the market. Monopolies are the least favorable because the market is controlled by one business, which usually results in higher prices since there is no competition. The term oligopoly refers to a situation in which a particular market is controlled by a small group of firms.
Profit Maximization and Cost-of-production
Businesses must earn a profit to operate. To do this, businesses seek strategies to increase sales and lower costs. They can analyze their cost-of-production systems to get a better understanding of where they can cut costs and increase efficiency.
Microeconomics and Macroeconomics
This table shows the key differences between micro and macroeconomic topics.
| Microeconomics Topics | Macroeconomics Topics |
|---|---|
| Studies individual and business activity | Studies the economic system as a whole |
| Individual income levels, business output, price of goods | GDP, national income, aggregate price levels |
| Resource distribution and price fluctuations | Unemployment and interest rates |
| Supply and demand of particular goods and services | Overall national supply and demand levels |
| Specific price level elasticity and market equilibrium | Inflation and poverty levels |
Microeconomic and macroeconomic topics do overlap in many areas of economic activity. The interconnectedness between the two topics is very common in economic studies. A study on a microeconomic topic could affect the results of a macroeconomic topic. For example, a macroeconomic report on employment levels can be impacted by a price change microeconomic study for a certain business.
Applications of Microeconomics
Microeconomic applications exist in everyday life. Common applications are:
- A business determining a price for a new product
- Consumers not purchasing a certain product because the price is too high, so the business lowers the price to create equilibrium
- A business increasing their efficiency by cutting down production time to increase output
- A family increasing their income level and increasing their savings
Lesson Summary
There are two fields of study in economics: microeconomics and macroeconomics. 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. Macroeconomics is the study of the economy as a whole. Microeconomics shows the circular flow of economic activity and interaction between buyers and sellers, or businesses and individuals. Macroeconomics usually focuses on topics of unemployment, aggregate income levels, interest rates, gross domestic product, and inflation. This concept helps economists track the flow of money, products, and resources.
Common microeconomics topics are supply and demand, elasticity, opportunity cost, market equilibrium, forms of competition, and profit maximization. The opportunity cost is the value of the best alternative choice that was given up over another choice. Supply is the amount a producer is willing to supply in the market while demand is the desire of consumers to purchase a product. Price level affects both supply and demand greatly and is usually determined by the balancing of the pressure of lower prices and higher prices, which is considered market equilibrium. Elasticity is the concept of levels of change in price, supply, and demand. More competitive markets are typically beneficial to consumers and businesses, but some competitive markets are not so competitive. An oligopoly refers to a situation in which a particular market is controlled by a small group of firms, such as the gasoline industry.
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?
Market Equilibrium
In the context of supply and demand, equilibrium refers to a condition where the pressure for higher prices is exactly balanced by the pressure for lower prices, so that the current state of exchange between buyers and sellers can be expected to persist. This is often not the case, however. Many times surpluses and shortages exist for products that cause prices to go up and down.
Forms of Competition
There are a few different forms of competition:
- Perfect Competition means that there are many businesses with identical products, no barriers to entry (such as political barriers or large up front investments), and good pricing information. This usually results in good prices for consumers.
- Oligopoly refers to a situation in which a particular market is controlled by a small group of firms, such as the gasoline industry.
- Monopoly is a market structure characterized by a single seller, selling a unique product in the market. In a monopoly market, the seller faces no competition, as he is the sole seller of goods with no close substitute. An example of this may be a company in your area that provides electricity or water.
Profit Maximization
Profit maximization is the process by which a firm determines the price and output level that returns the greatest profit.
Lesson Summary
Let's review. Microeconomics is a key area of economics that studies the behavior of individuals and businesses and how decisions are made based on the allocation of limited resources, such as time and money. Common topics are supply and demand, elasticity, opportunity cost, market equilibrium, forms of competition, and profit maximization. Microeconomics should not be confused with macroeconomics, which is the study of economy-wide things such as growth, inflation, and unemployment.
Microeconomics Terms
 |
- Microeconomics: an area of economics that studies the behavior of individuals and businesses and the ways in which decisions are made based on the allocation of limited resources
- Supply and Demand: the relationship between the supply of goods and the demand for them
- Elasticity: how much the demand for the good or service is affected by a change in price
- Opportunity Cost: the value of the best foregone alternative
- Market Equilibrium: this occurs when the pressure for higher prices is evenly balanced by the pressure for lower prices so that the current state of exchange between buyers and sellers continues
- Profit Maximization: the process by which a company determines the most profitable price and output level
Learning Outcomes
Discover how well this lesson can prepare you to:
- Understand areas and behaviors addressed by microeconomics
- Discuss the main topics usually covered in microeconomics
To unlock this lesson you must be a Study.com Member.
Create your account
Video Transcript
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?
Market Equilibrium
In the context of supply and demand, equilibrium refers to a condition where the pressure for higher prices is exactly balanced by the pressure for lower prices, so that the current state of exchange between buyers and sellers can be expected to persist. This is often not the case, however. Many times surpluses and shortages exist for products that cause prices to go up and down.
Forms of Competition
There are a few different forms of competition:
- Perfect Competition means that there are many businesses with identical products, no barriers to entry (such as political barriers or large up front investments), and good pricing information. This usually results in good prices for consumers.
- Oligopoly refers to a situation in which a particular market is controlled by a small group of firms, such as the gasoline industry.
- Monopoly is a market structure characterized by a single seller, selling a unique product in the market. In a monopoly market, the seller faces no competition, as he is the sole seller of goods with no close substitute. An example of this may be a company in your area that provides electricity or water.
Profit Maximization
Profit maximization is the process by which a firm determines the price and output level that returns the greatest profit.
Lesson Summary
Let's review. Microeconomics is a key area of economics that studies the behavior of individuals and businesses and how decisions are made based on the allocation of limited resources, such as time and money. Common topics are supply and demand, elasticity, opportunity cost, market equilibrium, forms of competition, and profit maximization. Microeconomics should not be confused with macroeconomics, which is the study of economy-wide things such as growth, inflation, and unemployment.
Microeconomics Terms
|
- Microeconomics: an area of economics that studies the behavior of individuals and businesses and the ways in which decisions are made based on the allocation of limited resources
- Supply and Demand: the relationship between the supply of goods and the demand for them
- Elasticity: how much the demand for the good or service is affected by a change in price
- Opportunity Cost: the value of the best foregone alternative
- Market Equilibrium: this occurs when the pressure for higher prices is evenly balanced by the pressure for lower prices so that the current state of exchange between buyers and sellers continues
- Profit Maximization: the process by which a company determines the most profitable price and output level
Learning Outcomes
Discover how well this lesson can prepare you to:
- Understand areas and behaviors addressed by microeconomics
- Discuss the main topics usually covered in microeconomics
To unlock this lesson you must be a Study.com Member.
Create your account
Frequently Asked Questions
What are examples of microeconomics?
Demand in a certain market decreases because the price level of a product has increased. Another example can be a business investing in more resources to offer more products.
What are microeconomics and macroeconomics?
The two economic fields are microeconomics and macroeconomics. Microeconomics studies individual behavior and actions while macroeconomic studies national or international economic activity.
What are the three main concepts of microeconomics?
The three main concepts are supply and demand, consumer behavior, and income levels. These concepts are the most studied to track microeconomic data.
What is microeconomics in simple words?
Microeconomics focuses on the actions and behaviors of households and businesses. Microeconomics shows the basic flow of money, goods, services, and resources.
What topics are covered in microeconomics?
The topics covered in microeconomics refer to the interaction of households and businesses. The main topics are supply and demand, equilibrium, competition, profit maximization, and opportunity cost.
What is microeconomics and what are some examples?
Microeconomics is the study of individual and business economic activity. Two examples are: an individual creating a budget to put themselves in a better financial position; and a business cutting costs in order to maximize profit.
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Microeconomics Topics & Examples | What is Microeconomics?
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