What is Microeconomics?

Microeconomics is a sub-area of economics that focuses on the investigation and analysis of the behavior of individual economic subjects. The classic sub-areas of microeconomics include household theory, production theory and price theory. Decision problems and coordination processes between the economic subjects, the necessity of which arises from a production process based on the division of labor, are examined.

In this lesson you will get an overview of the importance of microeconomics in economics and its most important issues. We explain terms and tasks and at the end we provide you with some exercises that you can use to check your knowledge.

  • Synonyms: Microeconomics (science) | Micro theory | Microeconomic theory
  • English: Microeconomics

Why should you know microeconomics?

According to theinternetfaqs.com, microeconomics is one of the two major sub-areas of economics. It provides answers about the behavior and motivation of individual actors within an economy. Microeconomic studies also form the basis for macroeconomic models with the help of which key economic indicators such as B. National income or gross domestic product can be calculated.

Relationship between micro and macro economics

The task of microeconomics is to examine the behavior of the individual economic actors, including households and companies, for example. In contrast, the task area of macroeconomics includes macroeconomic developments within an economy and works with aggregated (summarized) quantities.

For example, the gross domestic product of an economy is calculated by summarizing the goods and services produced within a billing period. This already shows that macroeconomic models are based on microeconomic studies.

Central issues and areas of responsibility in microeconomics

Microeconomics is based on a simple model of the economic cycle in which households, companies and the state act as actors. If the individual behavior and the interaction of individual subjects in the structure of the market are examined, one speaks of a partial analysis. The simultaneous interaction of all players in the market is the subject of the total analysis.

The microeconomics is based on the three economic production factors:

  • Work,
  • floor and
  • Capital.

The focus is on the above-mentioned economic subjects and their behavior under certain conditions. Microeconomics is fundamentally based on a scarcity of resources, which leads to decision-making problems and certain ways of coordination. The conditions of the respective market are also included, depending on whether it is a monopoly, oligopoly or polypol. In the course of the investigations, the market equilibrium is always given high relevance.


Assumptions of microeconomics

To illustrate, microeconomics uses both general and abstract models. However, the underlying assumptions can vary widely, which often leads to their simplification. If these assumptions are too strict, it can happen that they no longer match the realities of practice.

The assumption of a transparent market in which all market participants have complete information is often assumed. So they had all the decision-making knowledge about the providers, properties and prices of goods, which is usually not the case in practice.

Furthermore , microeconomics assumes that all economic subjects always behave rationally and strive to maximize their benefits. In practice, however, it often appears that marketing and advertising induce consumers to buy products that are of little or no use to them.

Sub-areas of microeconomics

Microeconomics can be divided into three areas:

  • Household theory
  • Production theory
  • Price theory

Over the past few years, in addition to the approaches already mentioned, others have also been able to establish themselves in microeconomic theory. These include, for example, game theory, which deals with the chronological sequence of certain interactions between different market participants.

Game theory

Game theory analyzes their strategic behavior and investigates the question of why individual economic actors do not always behave rationally and act in the sense of maximizing benefits.

Household theory

The subject of household theory is the demand side of the market for products and services. Great attention is paid to the usefulness of the shopping basket that the customer buys. This benefit can be represented graphically with the help of indifference curves. Together with the available budget of the household, the purchase of a certain bundle of goods can be shown.

Production theory

Similarly, production theory deals with the supply side of the goods market. The relationship between input and output is determined using a fixed production function. In this way, companies carry out optimizations with regard to the production quantities and the resources required for this.

Price theory

The third sub-area is price theory. The focus here is on supply and demand, the interaction of which results in the price. The subject of the investigations is therefore pricing and the establishment of a stable market equilibrium.