Although microeconomic theory can continue without this assumption, it would make comparative statics impossible since there is no guarantee that the resulting utility function would be differentiable. Microeconomic theory typically begins with the study of a single rational and utility maximizing individual. To economists, rationality means an individual possesses stable preferences that are both complete and transitive. Paradox means a contradictory or seemingly absurd statement, which is often true.

Therefore, microeconomics explains how individual economic units such as consumers, resource owners, and business firms play their part in the working of the whole economic system. Instead of studying the whole economy, it takes a small unit of the economy and studies the economic behavior of such part in detail. Macroeconomics, on the other hand, examines the broader economy as a whole.

Perfect competition

« Microeconomics is the studyof economic action of individual and well defined group of individuals. Microeconomics doesn’t try to answer or explain what forces should take place in a market. Rather, it tries to explain what happens when there are changes in certain conditions. It includes the potential measures of maintaining the economic prosperity of men as consumers and producers and improving that prosperity. One can do only one thing at a time, which means that, inevitably, one is always giving up other things.

1. Neoclassicals believe in constructing measurable hypotheses about economic events and then using empirical evidence to determine which hypotheses work best.
2. The cost can comprise any of the factors of production (including labor, capital, or land) and taxation.
3. This area focuses on how firms decide on the optimal combination of inputs to produce goods and services efficiently.
4. Microeconomics for firms may look at how producers decide what to produce, in what quantities, and what inputs to use based on minimizing costs and maximizing profits.

Similarly, demand-and-supply theory predicts a new price-quantity combination from a shift in demand (as to the figure), or in supply. In the mathematical model for the cost of production, the short-run total cost is equal to fixed cost plus total variable cost. The fixed cost refers to the cost that is incurred regardless of how much the firm produces. The variable cost scope of micro economics is a function of the quantity of an object being produced. The cost function can be used to characterize production through the duality theory in economics, developed mainly by Ronald Shephard (1953, 1970) and other scholars (Sickles & Zelenyuk, 2019, ch. 2).

Understanding Business Economics: Nature, Scope, and Key Concepts Question and answers

Microeconomics studies individual and firm behavior in decision-making and allocation of resources. It focuses on supply and demand, price determination, and the impact of market structures on competition and pricing. Key concepts include elasticity, which measures how quantity demanded or supplied responds to price changes, and marginal utility, the added satisfaction from consuming one more unit of a good. It also explores how market failures, like externalities and public goods, can lead to inefficient outcomes.

Interdependence of Microeconomics and Macroeconomics

Microeconomics is concerned with the actions of individuals and businesses. Macroeconomics focuses on the actions that governments and countries take to influence broader economies. Both will impact an investment portfolio but most investors focus primarily on microeconomic considerations when making their investment decisions.

This approach is useful for understanding immediate economic conditions and short-term decision-making. Monopolistic competition is a situation in which many firms with slightly different products compete. Production costs are above what may be achieved by perfectly competitive firms, but society benefits from the product differentiation. Examples of industries with market structures similar to monopolistic competition include restaurants, cereal, clothing, shoes, and service industries in large cities.

The following are major definitions relating to the meaning and scope of microeconomics. The terms ‘micro’ and ‘macro’ were first used in economics by Norwegian economist Ragnar Frisch in 1933. These terms were derived from the Greek words ‘mikros’ and ‘makros’ respectively which refer to the small individual unit and large. Applied microeconomics includes a range of specialized areas of study, many of which draw on methods from other fields. Macro economics deal with the problem of unemployment , trade cycles, international trade, economics growth etc. Microeconomics may look at the incentives that influence individuals to make certain purchases, how they seek to maximize utility, and how they react to restraints.

Because the cost of not eating the chocolate is higher than the benefits of eating the waffles, it makes no sense to choose waffles. Of course, if one chooses chocolate, they are still faced with the opportunity cost of giving up having waffles. But one is willing to do that because the waffle’s opportunity cost is lower than the benefits of the chocolate. Opportunity costs are unavoidable constraints on behavior because one has to decide what’s best and give up the next-best alternative. The demand for various commodities by individuals is generally thought of as the outcome of a utility-maximizing process, with each individual trying to maximize their own utility under a budget constraint and a given consumption set. Macro economics is the study of the aggregate covering the whole economy.

1. It is a way of analyzing how consumers may achieve equilibrium between preferences and expenditures by maximizing utility subject to consumer budget constraints.
2. Mainstream economics does not assume a priori that markets are preferable to other forms of social organization.
3. It investigates the behavior of these units, the interactions between them, and how they make decisions regarding resource allocation.
4. Market failure in positive economics (microeconomics) is limited in implications without mixing the belief of the economist and their theory.
5. Microeconomics studies the determination of prices of goods and services therefore it is known as price theory.
6. While microeconomics and macroeconomics differ in their scope, they are interconnected and complementary.

A business economist is a professional who specializes in applying economic principles to the business world. They use their knowledge of economic theory, financial markets, and the interplay between businesses and the broader economy to help organizations improve their financial performance. This is studied in the field of collective action and public choice theory. « Optimal welfare » usually takes on a Paretian norm, which is a mathematical application of the Kaldor–Hicks method. This can diverge from the Utilitarian goal of maximizing utility because it does not consider the distribution of goods between people. Market failure in positive economics (microeconomics) is limited in implications without mixing the belief of the economist and their theory.

Microeconomics zooms in on the decisions made by individuals and businesses, while macroeconomics zooms out to look at the broader picture of how the economy functions as a whole. Individual investors may be better off focusing on microeconomics, but macroeconomics can’t be ignored altogether. Fundamental and value investors may disagree with technical investors about the proper role of economic analysis.

For instance, microeconomic analysis helps explain how changes in consumer behavior influence overall spending patterns, which, in turn, impact aggregate demand in the macroeconomy. Similarly, macroeconomic trends, such as inflation or changes in interest rates, influence the decisions of individual consumers and firms at the micro level. Understanding the interdependence of microeconomics and macroeconomics is essential for policymakers, economists, businesses, and individuals alike. It provides insights into how individual decisions aggregate to shape overall economic outcomes and how macroeconomic policies impact individual economic agents.

In microeconomics, it applies to price and output determination for a market with perfect competition, which includes the condition of no buyers or sellers large enough to have price-setting power. Microeconomics analyzes individual labor supply and demand decisions, wage negotiations, and employment contracts. These micro-level interactions collectively determine the overall labor market dynamics, which in turn influence macroeconomic variables such as the unemployment rate, labor force participation rate, and productivity levels.