Microeconomics is the social science that studies the implications of human action, specifically about how those decisions affect the utilization and distribution of scarce resources. Microeconomics shows how and why different goods have different values, how individuals make more efficient or more productive decisions, and how individuals best coordinate and cooperate with one another. Generally speaking, microeconomics is considered a more complete, advanced, and settled science than macroeconomics.
Microeconomics is the study of economic tendencies, or what is likely to happen when individuals make certain choices or when the factors of production change. Individual actors are often grouped into microeconomic subgroups, such as buyers, sellers, and business owners. These groups create the supply and demand for resources, using money and interest rates as a pricing mechanism for coordination.
Nature of Microeconomics
Microeconomics represents the study of how members in a society use available resources to make choices in the marketplace. Those choices refer to purchases of goods and services from business providers. As a business, part of your role is to provide and promote products that are demanded by a target market group within the population. In essence, you want to influence the choices of consumers who have limited budgets to spend on various products and services.
(i) Supply and Demand
Supply and demand is one of the most critical concepts at the microeconomic level. This is the comparison of the level of consumer demand for particular goods to the available supply in the marketplace. In a highly competitive industry in which consumers possess many choices, supply might exceed demand. Over time, this can cause some businesses to fail. In a more niche market with few providers, your opportunity to succeed in meeting demand may be higher if you offer and promote a quality product with desired benefits.
Business pricing strategies correlate strongly with microeconomic factors. The ideal, or equilibrium price point exists at the point at which quantity supplied in the market exactly equals demand. The higher your prices, the lower the size of the population who will buy them. However, if you offer lower prices than the market demand dictates, you leave money on the table and you might also end up with shortages of your product or services. This can cause customer alienation and negatively affect the business in the long term.
(iii) Research and Promotion
Understanding microeconomics helps in effectively researching and promoting products. Research is useful in investigating potential customer demand and in developing products that best match desired benefits. This benefits you once you pay for advertising and use other promotional techniques to promote your brand and its benefits. These marketing techniques are critical in achieving competitive advantages over other companies trying to optimize performance as customers make choices based on their needs and budgets.
Scopes of Microeconomics
The scope or the subject matter of microeconomics is concerned with:
(i) Commodity pricing
The price of an individual commodity is determined by the market forces of demand and supply. Microeconomics is concerned with demand analysis i.e. individual consumer behavior, and supply analysis i.e. individual producer behavior.
(ii) Factor pricing theory
Microeconomics helps in determining the factor prices for land, labor, capital, and entrepreneurship in the form of rent, wage, interest, and profit respectively. Land, labor, capital, and entrepreneurship are the factors that contribute to the production process.
(iii) Theory of economic welfare
Welfare economics in microeconomics is concerned with solving the problems in improvement and attaining economic efficiency to maximize public welfare. It attempts to gain efficiency in production, consumption/distribution to attain overall efficiency and provides answers for ‘What to produce?’, ‘When to produce?’, ‘How to produce?’, and ‘For whom it is to be produced?’