Let us know today about Microeconomics. Microeconomics is a branch of economics that studies the behavior of individuals and companies in making decisions about the allocation of scarce resources and the interactions between these individuals and companies.
One of the goals of microeconomics is to analyze market mechanisms that establish relative prices between goods and services and allocate limited resources among alternative uses. Microeconomics refers to the conditions under which free markets lead to desirable allocations. It also analyzes market failure , where markets fail to deliver efficient results.
Whereas microeconomics focuses on firms and individuals, macroeconomics focuses on the sum total of economic activities, dealing with the issues of growth , inflation and unemployment , and with national policies dealing with these issues. [2] Microeconomics is also concerned with the effects of economic policies (such as changes in taxation levels) on microeconomic behavior and thus on the above aspects of the economy. [4] Particularly in view of Lucas’ critique , much of modern macroeconomic theories are built on microfoundation — that is,Based on basic assumptions about micro level behavior.
Concepts and Definitions
Let us now know about the definitions of microeconomics. The word microeconomics is a derivation of the Greek words μικρό (small, small) and μία (economy).
Microeconomic theory usually begins with the study of a single rational and utility maximizing individual. For economists, rationality means that an individual has stable preferences that are both absolute and transitive .
The technical assumption that preference relations are continuous is needed to ensure the existence of a utility function . Although microeconomic theory can continue without this assumption, it would make comparative statistics impossible because there is no guarantee that the resulting utility function will be differentiable .
Microeconomic theory proceeds by defining a competitive budget set that is a subset of the consumption set . It is at this point that economists make the technical assumption that preferences are locally unsaturated . Without the assumption of LNS (local unsaturation) there is no 100% guarantee but there will be a rational increase in individual utility . The Utility Maximization Problem (UMP) is developed with the necessary tools and assumptions .
The utility maximization problem is at the core of consumer theory . The utility maximization problem attempts to explain the action axiom by applying the rationality axioms to consumer preferences and then mathematically modeling and analyzing the results . The utility maximization problem serves not only as a mathematical foundation of consumer theory but also as a metaphysical explanation of it. That is, the utility maximization problem is used by economists to explain not only what or how individuals make choices, but also why individuals make choices.
The utility maximization problem is a finite optimization problem in which an individual tries to maximize utility under budget constraints . Economists use the extreme value theorem to guarantee that a solution to the utility maximization problem exists. That is, since the budget constraint is both limited and closed, a solution to the utility maximization problem exists. Economists call the solution to the utility maximization problem the Walrasian demand function or correspondence.
The utility maximization problem has so far been developed taking consumer taste (i.e. consumer utility) as primitive. However, an alternative way of developing microeconomic theory is to take consumer choice as a primitive. This model of microeconomic theory is known as the manifest preference theory.
The theory of supply and demand generally assumes that markets are perfectly competitive. This implies that there are many buyers and sellers in the market and none of them have the ability to significantly influence the prices of goods and services. In many real-life transactions, the assumption fails because some individual buyer or seller has the ability to influence prices. Often, a good model requires a sophisticated analysis to decipher the demand-supply equation. However, the theory works well in situations that meet these assumptions.
Mainstream economics does not recognize the preference that markets are preferable to other forms of social organization. In fact, much analysis is devoted to cases where market failures lead to resource allocation that is suboptimal and creates fatal losses. A classic example of sub-optimal resource allocation is that of the public good. In such cases, economists may try to find policies that avoid waste, either directly under government control, or indirectly by regulation that prompts market participants to act in a manner consistent with optimal welfare. Or by creating a “missing market” to enable efficient trading where none previously existed.
It is studied in the fields of collective action and public choice theory. The “optimal welfare” is usually based on a Paretian criterion, which is a mathematical application of the Kaldor–Hicks method. This can be distinguished from the utilitarian goal of maximizing utility because it does not consider the distribution of goods among people. Market failure in positive economics (microeconomics) is limited in implications without combining the confidence of the economist and his theory.
The demand for various goods by individuals is generally regarded as the result of a utility-maximizing process, each one trying to maximize his or her own utility under a budget constraint and a given consumption set.
History
Let us now know about Microeconomics History. Economists usually consider themselves to be microeconomists or macroeconomists. The possibility of a distinction between microeconomics and macroeconomics was introduced in 1933 by Norwegian economist Ragnar Frisk, a co-recipient of the first Nobel Memorial Prize in Economic Sciences in 1969. [5] [6] However, Frisch did not actually use the term “microeconomics”, instead drawing distinctions between “micro-dynamic” and “macro-dynamic” analysis in the same way as today”. How the terms “microeconomics” and “macroeconomics” are used. [5] [7] The first known use of the term “microeconomics” in a published article was in 1941 by Peter de Wolff, who coined the term “micro-dynamics”.[8]
Microeconomic theory
consumer demand theory
Consumer demand theory is concerned with the preferences for consumption of both goods and services for consumption expenditure; Ultimately, this relationship between preferences and consumption expenditure is used to link preferences to consumer demand curves. The link between personal preferences, consumption, and the demand curve is one of the most closely studied relationships in economics. It is a way of analyzing how consumers can achieve a balance between consumer preferences and expenditure by maximizing utility subject to budget constraints.
Production principle
Let us now know about the production theory of microeconomics. Production theory is the study of production, or the economic process of turning inputs into outputs. [9] Production uses resources to create a good or service that is suitable for use, gift-giving in a gift economy, or exchange in a market economy. This may include manufacturing, storage, shipping and packaging. Some economists broadly define production as all economic activity other than consumption. They treat every business activity as a production in some form other than the final purchase.
Cost of production theory of value
The cost of producing value theory states that the price of an item or condition is determined by the sum of the costs of the resources that went into producing it. Costs can include any factor of production (including labor, capital, or land) and taxation. Technology can be viewed as either fixed capital (such as an industrial plant) or circulating capital (such as intermediate goods).
In the mathematical model of cost of production, short-term total cost is equal to fixed cost plus total variable cost. Fixed cost refers to the cost that is incurred regardless of how much the firm produces. Variable cost is a function of the quantity of the commodity produced. The cost function can be used to characterize output through the duality theory in economics, mainly developed by Ronald Shepherd (1953, 1970) and other scholars (Sickles & Zelenyuk, 2019, ch.2).
Opportunity costs
Opportunity cost is closely related to the idea of time constraints. One can only do one thing at a time, which means that, essentially, he is always giving up on other things. The opportunity cost of any activity is the value of the next best alternative thing someone could have done instead. Opportunity cost depends only on the value of the next best alternative. It doesn’t matter whether one has five options or 5,000.
Opportunity costs can tell when not to do something as well as when to do something. For example, one might like waffles, but prefer chocolate even more. If someone only offers waffles, someone will take. But if a waffle or chocolate is given, one can take the chocolate. The opportunity cost of eating waffles is sacrificing the opportunity to eat chocolate. Since the cost of not eating chocolate outweighs the benefits of eating waffles, there is no point in choosing waffles. Of course, even if someone chooses chocolate, they still face the opportunity cost of giving up the waffles. But one is willing to do so because the opportunity cost of waffles is less than the benefits of chocolate. Opportunity costs are unavoidable constraints on behavior because one has to decide what is best and give up the next best option.
Value theory
Value theory is a field of economics that uses supply and demand frameworks to explain and predict human behavior. It is affiliated to the Chicago School of Economics. Price theory studies the competitive equilibrium in the market in order to derive testable hypotheses which can be rejected.
Value theory is not the same as microeconomics . Strategic behavior, such as interaction between sellers in a market where they are few, is an important part of microeconomics but is not emphasized in price theory. Price theorists focus on competition, believing that this is a fair description of most markets that leaves room for studying additional aspects of taste and technology. As a result, value theory uses less game theory than microeconomics.
Price theory focuses on how agents respond to prices, but its framework can be applied to a variety of socioeconomic issues that may not involve prices at first glance. Value theorists have influenced many other fields, including public choice theory and the development of law and economics. Value theory has been applied to issues that were previously considered outside the realm of economics such as criminal justice, marriage, and addiction.
Microeconomic model
Supply and demand
Supply and demand is an economic model of pricing in a perfectly competitive market. It concludes that in a perfectly competitive market with no externalities, per unit taxes, or price controls, the unit price for a particular good is the price at which the quantity demanded by consumers equals the quantity supplied by producers. it occurs. This price results in a stable economic equilibrium.
Prices and quantities are described as the most directly observable characteristics of goods produced and exchanged in a market economy. [10] Supply and demand theory is an organized theory to explain how prices coordinate the quantities produced and consumed. In microeconomics, it applies to price and output determination for a perfectly competitive market, which does not include any buyer or seller positions who have pricing power.
For a given market of a commodity, demand is the quantity that all buyers would be willing to buy for each unit price of the commodity. Demand is often represented by a table or graph showing the price and quantity demanded (as shown in the figure). Demand theory describes individual consumers as rationally choosing the most preferred quantity of each good, given income, prices, tastes, etc. A term for this is “constrained utility maximization” (with income and money as constraints on demand). Here, utility refers to the relation hypothesized for ranking each consumer’s individual commodity bundles as more or less preferred.
The law of demand states that, in general, in a given market, price and quantity demanded are inversely proportional. That is, the higher the price of a product, the less people are willing to buy (other things unchanged). As the price of a commodity falls, consumers move to a more expensive commodity (the substitution effect). In addition, a fall in the price increases the purchasing power (income effect). Other factors can change demand; For example, an increase in income will shift the demand curve for a normal commodity relative to the origin, as shown in the figure. All the determinants are taken primarily as the constant factors of demand and supply.
Supply is the relationship between the price of a commodity and the quantity available for sale at that price. It can be represented in the form of a table or graph relating to price and quantity supplied. Producers, for example business firms, are hypothesized to be profit maximisers, meaning they try to produce and supply the quantity of goods that will bring them the most profit. Supply is usually represented as a function related to price and quantity, if other factors are unchanged.
That is, the higher the price the commodity can be sold for, the more producers will supply it, as shown in the figure. Higher price makes it profitable to increase production. Just as on the demand side, supply conditions can change, such as a change in the price of a producer input or a technological improvement. The “law of supply” states that, in general, an increase in price causes an expansion in supply and a fall in price causes a contraction in supply. Here too, the determinants of supply, such as the price of the substitute, the cost of production, the technology applied and the various factors of the inputs of production, are assumed to be constant for a specific time period of the valuation of supply.
Market equilibrium occurs when the quantity supplied equals the quantity demanded, decreasing the intersection of supply and demand as in the figure above. At a price below equilibrium, there is a shortage of the quantity supplied compared to the quantity demanded. This price is positioned above the bid. At a price above equilibrium, there is a surplus of the quantity supplied compared to the quantity demanded. This pushes the price down. The supply and demand model predicts that for given supply and demand curves, price and quantity will stabilize at a price that makes the quantity supplied equal the quantity demanded. Similarly, demand and supply theory predicts a change in demand (as in data), or a new price-quantity combination in supply.
For a given quantity of a consumer good, the point on the demand curve indicates the price, or marginal utility, to consumers for that unit. It measures what the consumer would be willing to pay for that unit. [11] The corresponding point on the supply curve measures marginal cost, the increase in total cost to the supplier for the concerned unit of the commodity. In equilibrium the price is determined by supply and demand. In a perfectly competitive market, supply and demand equate marginal cost and marginal utility at equilibrium. [12]
On the supply side of the market, some factors of production are described as (relatively) variables in the short run, which affect the cost of changing production levels. Their utilization rates can be easily changed, as can electrical power, raw material inputs, and over-time and temporary work. Other inputs are relatively constant , such as plant and equipment and key personnel. In the long run, all inputs can be adjusted by management. These distinctions translate into differences in the elasticity (response) of the supply curve in the short and long run, and the corresponding difference in price-quantity changes from changes in the supply or demand side of the market.
Marginalistic theory, such as above, describes consumers as attempting to reach the most favored positions subject to a lack of income and wealth, while producers attempt to maximize profits subject to their own constraints, in which the goods produced. Including the price of demand, technology and inputs. , For the consumer, the point comes where a commodity’s marginal utility, net of value, approaches zero, leaving no net gain in further consumption. Equivalently, the producer compares the marginal revenue (similar to the price for the perfect competitor) with the marginal cost of a good, the marginal profit .with difference. At the point where the marginal profit reaches zero, the production of good stops further increases. For movement to market equilibrium and a change in equilibrium, price and quantity also change “on the margin”: more or less of something, not necessarily all or nothing.
Other applications of demand and supply include the distribution of income between factors of production, including labor and capital, through factor markets. In a competitive labor market, for example, the amount of labor employed and the price of labor (the wage rate) depend on the demand for labor (from employers for production) and the supply of labor (from potential workers). Labor economics examines the interaction of workers and employers through such markets in order to explain patterns and patterns of wage and other labor income, labor mobility, and (un)employment, productivity through human capital, and related public-policy issues. can be done. [13]
Demand and supply analysis is used solely to explain the behavior of competitive markets, but can be extended to any type of market as a standard of comparison. It can also be generalized to explain variables in the economy, for example, aggregate output (estimated as real GDP) and the general price level, as studied in macroeconomics. [14] Detecting the qualitative and quantitative effects of variables that change supply and demand, whether in the short run or in the long run, is a standard practice in applied economics. Economic theory may also specify conditions such as whether supply and demand through a market is an efficient mechanism for the allocation of resources. [15]
Market structure
Market structure refers to the characteristics of a market, including the number of firms in the market, the distribution of market shares among them, product uniformity among firms, how easy it is for firms to enter and exit the market, and the form of competition. . Market. [16] [17] A market structure may contain a variety of interacting market systems. While various forms of markets are a feature of capitalism and market socialism, proponents of state socialism often criticize markets and aim to replace or replace markets with varying degrees of government-directed economic planning.
Competition serves as a regulatory mechanism for market systems, with the government providing rules where the market cannot be expected to regulate itself. An example of this is in relation to building codes, which, if completely absent in a competitively regulated market system, can require many horrific injuries or deaths before companies can begin to improve structural safety, as consumers are not concerned at first. This may or may not happen or to start putting pressure on companies to be aware of security issues, and companies will be motivated to not provide proper security facilities as it will cut into their profits.
The concept of “market type” is different from the concept of “market structure”. Nevertheless, it is worth noting here that there are different types of markets.
Different market structures generate cost curves [18] depending on the type of structure present . Various curves are developed depending on the cost of production, most notably the graph contains marginal cost, average total cost, average variable cost, average fixed cost and marginal revenue, which are sometimes equal to demand, average revenue and price. it happens. price firm.
The right opponent
Perfect competition is a situation in which several smaller firms producing similar products in the same industry compete against each other. Perfect competition leads to firms producing the socially optimal level of output at the lowest possible cost per unit. Firms are “price takers” in perfect competition (they do not have enough market power to profitably increase the price of their goods or services). A good example would be a digital marketplace such as eBay, on which many different sellers sell similar products to many different buyers. In a perfectly competitive market, consumers have complete knowledge about the products being sold in this market.
Imperfect competition
Imperfect competition is a type of market structure that reflects some but not all of the characteristics of competitive markets.
Monopolistic competition
Monopolistic competition is a situation in which several firms with somewhat different products compete. Production costs can be met by perfectly competitive firms, but society benefits from product differentiation. Examples of industries with a market structure similar to monopolistic competition include the restaurant, cereal, clothing, footwear, and service industries in large cities.
Monopoly
A monopoly is a market structure in which a market or industry is dominated by a single supplier of a particular good or service. Since monopolies have no competition, they sell goods and services at higher prices and produce below the socially optimal production level. However, not all monopolies are a bad thing, especially in industries where multiple firms result in higher costs (i.e. natural monopolies) than profits. [19] [20]
- Natural Monopoly: A monopoly in an industry where one producer can produce at a lower cost than many smaller producers.
Oligopoly
An oligopoly is a market structure in which a market or industry is dominated by a small number of firms (oligarchs). Oligopoly can create incentives for firms to engage in collusion and form cartels that reduce competition leading to higher prices for consumers and lower overall market output. [21] Alternatively, elites may be highly competitive and engage in flamboyant advertising campaigns. [22]
- Monopoly: A special case of an oligopoly with only two firms. Game theory can explain the behavior in monopoly and oligopoly. [23]
Monopsy
A monopsony is a market where there is only one buyer and many sellers.
Bilateral monopoly
A bilateral monopoly is a market that includes both a monopoly (a single seller) and a monopoly (a single buyer).
Oligopsony
An oligopsony is a market where there are few buyers and many sellers.
Game theory
Game theory is a major method used in mathematical economics and business for modeling the competitive behavior of interacting agents. The term “game” here refers to the study of any strategic interaction between people. Applications include a wide array of economic facts and approaches, such as auctions, bargaining, merger and acquisition pricing, fair segmentation, duopolies, oligopolies, social network formation, agent-based computational economics, general equilibrium, mechanism design, and voting systems, and experimental in broad areas such as economics, applied economics, information economics, industrial organization and political economy.
Economics of information
Information economics is a branch of microeconomic theory that studies how information and information systems affect the economy and economic decisions. Information has special characteristics. It’s easy to make but hard to trust. It is easy to spread but difficult to control. It influences many decisions. These special characteristics (compared to other types of goods) complicate many normative economic theories. [24] The economics of information has recently become of great interest to many – possibly due to the rise of information-based companies within the technology industry. [6]From a game theory standpoint, we can loosen the common constraints that agents have complete information by examining the consequences of having incomplete information. This gives rise to many consequences that are applicable to real life situations. For example, if one loosens this assumption, it is possible to examine the actions of agents in situations of uncertainty. It is also possible to fully understand the effects – both positive and negative – of agents receiving or receiving information. [6]
Applicable
Applied microeconomics includes a range of specialized fields of study, many of which are based on methods from other fields.
- Economic history examines the development of the economy and economic institutions using methods and techniques from the fields of economics, history, geography, sociology, psychology, and political science.
- Education economics examines the organization of education provision and its implications for efficiency and equity, including the effects of education on productivity.
- Financial economics examines topics such as the composition of optimal portfolios, the rate of return on capital, econometric analysis of security returns, and corporate financial behavior.
- Health economics examines the organization of health care systems, including the health care workforce and the role of health insurance programs.
- Industrial organization examines topics such as entry and exit of firms, innovation and the role of trademarks. Labor economics examines wage, employment and labor market dynamics.
- Law and economics apply microeconomic principles to the selection and enforcement of competing legal systems and their relative competence.
- Political economy examines the role of political institutions in determining policy outcomes.
- Public economics examines the design of government tax and expenditure policies and the economic effects of these policies (eg, social insurance programs).
- Urban economics, which examines the challenges faced by cities, such as sprawl, air and water pollution, traffic congestion and poverty, is based on the fields of urban geography and sociology.
- Labor economics primarily examines labor markets, but also includes a greater range of public policy issues such as immigration, the minimum wage or inequality.
