In a nutshell, microeconomics provides insights into the workings of individual economic agents and how their decisions influence the allocation of resources in specific markets. For a given market of a commodity, demand is the relation of the quantity that all buyers would be prepared to purchase at each unit price of the good. Demand is often represented by a table or a graph showing price and quantity demanded (as 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 wealth as the constraints on demand).

1. The units of study in microeconomics are parts of the economy like households, firms, and industries.
2. Governments and central banks unleashed torrents of liquidity through fiscal and monetary stimulus to prop up their economies and stave off recession.
3. As the price of a commodity falls, consumers move toward it from relatively more expensive goods (the substitution effect).
4. Macroeconomics concentrates on phenomena like inflation, price levels, rate of economic growth, national income, Gross Domestic Product (GDP), and changes in unemployment.
5. Just as on the demand side, the position of the supply can shift, say from a change in the price of a productive input or a technical improvement.
6. A car company will have made similar microeconomic considerations in the production and supply of cars into the market.
7. It also explores how market failures, like externalities and public goods, can lead to inefficient outcomes.

Consider the response of central banks and governments to the pandemic-induced crash of spring 2020 for another example of the effect of macro factors on investment portfolios. Governments and central banks unleashed torrents of liquidity through fiscal and monetary stimulus to prop up their economies and stave off recession. This pushed most major equity markets to record highs in the second half of 2020 and throughout much of 2021. Yes, macroeconomic factors can have a significant influence on your investment portfolio. The Great Recession of 2008–09 and the accompanying market crash were caused by the bursting of the U.S. housing bubble and the subsequent near-collapse of financial institutions that were heavily invested in U.S. subprime mortgages. The foundation of microeconomics was ‘Wealth of Nation’ which was published by Adam Smith in 1776.

Does My Portfolio Performance Hinge on Both Microeconomic and Macroeconomic Factors?

This is why governments and their agencies rely on macroeconomics to formulate economic and fiscal policy. Investors who buy interest-rate-sensitive securities should keep a close eye on monetary and fiscal policy. This area focuses on how firms decide on the optimal combination of inputs to produce goods and services efficiently. It includes analyzing production functions, cost structures (fixed and variable costs), and economies of scale, which affect a firm’s decision-making regarding output and pricing. Microeconomics is the study of one particular unit rather than all the units combined. Thus, microeconomics consists of looking at the economy through a microscope, to see how the millions of cells in the economy play their part in the working of the whole economic organization.

Prompt 19: 5 behavioral economics concepts you can use to bolster your business school essays

By comprehending this relationship, policymakers can formulate more effective policies to address economic challenges, promote sustainable growth, and improve overall welfare. Similarly, businesses can better anticipate and respond to macroeconomic trends, while individuals can make informed decisions regarding their financial well-being. Generally, the subject matter of economics is broadly divided into two main branches. Microeconomic analysis and macroeconomic analysis are now considered two important approaches to economic analysis.

Market structure

Here as well, the determinants of supply, such as price of substitutes, cost of production, technology applied and various factors of inputs of production are all taken to be constant for a specific time period of evaluation of supply. The cost-of-production theory of value states that the price of an object or condition is determined by the sum of the cost of the resources that went into making it. The cost can comprise any of the factors of production (including labor, capital, or land) and taxation. Technology can be viewed either as a form of fixed capital (e.g. an industrial plant) or circulating capital (e.g. intermediate goods). Some economists define production broadly as all economic activity other than consumption.

Chapter 6: Concepts of Cost and Revenue

The link between personal preferences, consumption and the demand curve is one of the most closely studied relations in economics. It is a way of analyzing how consumers may achieve equilibrium between preferences and expenditures by maximizing utility subject to consumer budget constraints. Mainstream economics does not assume a priori 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 deadweight loss. A classic example of suboptimal resource allocation is that of a public good.

Quite often, a sophisticated analysis is required to understand the demand-supply equation of a good model. This scope area investigates how factors of production—labor, capital, land—are bought and sold in the market. It includes studying wage determination, labor supply and demand, and capital allocation, and how these factors influence production and income distribution. Microeconomics examines how individuals make choices about consumption based on preferences, budget constraints, and utility maximization. Concepts like marginal utility and the law of diminishing marginal utility are central to understanding consumer decisions.

1. The law of demand states that, in general, price and quantity demanded in a given market are inversely related.
2. 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.
3. It examines equilibrium conditions and assumes that all other factors remain constant.
4. Opportunity cost depends only on the value of the next-best alternative.
5. On the supply side of the market, some factors of production are described as (relatively) variable in the short run, which affects the cost of changing output levels.

All determinants are predominantly taken as constant factors of demand and supply. Strategic behavior, such as the interactions among sellers in a market where they are few, is a significant part of microeconomics but is not emphasized in price theory. Price theorists focus on competition believing it to be a reasonable description of most markets that leaves room to study additional aspects of tastes and technology. As a result, price theory tends to use less game theory than microeconomics does.

The Marshallian and Walrasian methods fall under the larger umbrella of neoclassical microeconomics. Neoclassical economics focuses on how consumers and producers make rational choices to maximize their economic well-being, subject to the constraints of how much income and resources they have available. Market equilibrium occurs where quantity supplied equals quantity demanded, the intersection of the supply and demand curves in the figure above. At a price below equilibrium, there is a shortage of quantity supplied compared to quantity demanded. At a price above equilibrium, there is a surplus of quantity supplied compared to quantity demanded. The model of supply and demand predicts that for given supply and demand curves, price and quantity will stabilize at the price that makes quantity supplied equal to quantity demanded.

A lot of microeconomic information can be gleaned from company financial statements. Microeconomics addresses situations where markets fail to allocate resources scope of micro economics efficiently, leading to externalities (positive or negative effects on third parties), public goods, and information asymmetries. It examines the role of government policies and interventions to correct these failures and promote economic welfare. These methods attempt to represent human behavior in functional mathematical language.