Microeconomics is the study of individuals, households and firms’ behavior in decision making and allocation of resources. It generally applies to markets of goods and services and deals with individual and economic issues. The branch of microeconomics that deals with household behaviour is called consumer theory. Consumer theory is built on the concept of utility: the economic measure of happiness, which increases as consumption of certain goods increases. What consumers want to consume is captured by their utility function, which measures the happiness derived from consuming a set of goods. Consumers, however, are also bound by a budget constraint, which limits the number or kinds of goods and services they can purchase. The consumers are modeled as utility maximizers: they will try to purchase the optimal number of goods that maximizes their utility, given their budget.
Microeconomics involves several key principles:
- Demand, Supply and Equilibrium: Prices are determined by the law of supply and demand. In a perfectly competitive market, suppliers offer the same price demanded by consumers. This creates economic equilibrium.
- Production Theory: This principle is the study of how goods and services are created or manufactured.
- Costs of Production: According to this theory, the price of goods or services is determined by the cost of the resources used during production.
- Labor Economics: This principle looks at workers and employers, and tries to understand patterns of wages, employment, and income.
- Macroeconomics
Macroeconomics is a branch of economics that depicts a substantial picture. It scrutinises itself with the economy at a massive scale, and several issues of an economy are considered. The issues confronted by an economy and the headway that it makes are measured and apprehended as a part and parcel of macroeconomics. Macroeconomics studies the association between various countries regarding how the policies of one nation have an upshot on the other. It circumscribes within its scope, analysing the success and failure of the government strategies.
Key factors of microeconomics are as follows:
- Demand, supply, and equilibrium
- Production theory
- Costs of production
- Labour economics
