Microeconomics (from Greek prefix micro- meaning "small" + "economics") is a branch

of economics that studies the behavior of how the individual modern household and firms
make decisions to allocate limited resources.[1] Typically, it applies to markets where
goods or services are being bought and sold. Microeconomics examines how these
decisions and behaviours affect the supply and demand for goods and services, which
determines prices, and how prices, in turn, determine the quantity supplied and quantity
demanded of goods and services.[2][3]

This is a contrast to macroeconomics, which involves the "sum total of economic activity,
dealing with the issues of growth, inflation, and unemployment.[2] Microeconomics also
deals with the effects of national economic policies (such as changing taxation levels) on
the aforementioned aspects of the economy.[4] Particularly in the wake of the Lucas
critique, much of modern macroeconomic theory has been built upon 'microfoundations'
— i.e. based upon basic assumptions about micro-level behavior.

One of the goals of microeconomics is to analyze market mechanisms that establish

relative prices amongst goods and services and allocation of limited resources amongst
many alternative uses. Microeconomics analyzes market failure, where markets fail to
produce efficient results, and describes the theoretical conditions needed for perfect
competition. Significant fields of study in microeconomics include general equilibrium,
markets under asymmetric information, choice under uncertainty and economic
applications of game theory. Also considered is the elasticity of products within the
market system.

Contents

• 1 Assumptions and definitions

• 2 Modes of operation
• 3 Opportunity cost
• 4 Applied microeconomics
• 5 References
• 6 Further reading

• 7 External links

Assumptions and definitions

The theory of supply and demand usually assumes that markets are perfectly competitive.
This implies that there are many buyers and sellers in the market and none of them has
the capacity to significantly influence prices of goods and services. In many real-life
transactions, the assumption fails because some individual buyers or sellers have the
ability to influence prices. Quite often a sophisticated analysis is required to understand
the demand-supply equation of a good model. However, the theory works well in
situations reflecting these assumptions.
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 so-called
market failures lead to resource allocation that is suboptimal by some standard (defense
spending is the classic example, profitable to all for use but not directly profitable for
anyone to finance). In such cases, economists may attempt to find policies that will avoid
waste directly by government control, indirectly by regulation that induces market
participants to act in a manner consistent with optimal welfare, or by creating "missing
markets" to enable efficient trading where none had previously existed.

This is studied in the field of collective action and public choice theory. It also must be
noted that "optimal welfare" usually takes on a Paretian norm, which in its mathematical
application of Kaldor–Hicks method. This can diverge from the Utilitarian goal of
maximising 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 his or her theory.

The demand for various commodities by individuals is generally thought of as the

outcome of a utility-maximizing process, with each individual trying to maximise their
own utility. The interpretation of this relationship between price and quantity demanded
of a given good assumes that, given all the other goods and constraints, the set of choices
which emerges is that one which makes the consumer happiest.

Modes of operation
It is assumed that all firms are following rational decision-making, and will produce at
the profit-maximizing output. Given this assumption, there are four categories in which a
firm's profit may be considered to be.

• A firm is said to be making an economic profit when its average total cost is less
than the price of each additional product at the profit-maximizing output. The
economic profit is equal to the quantity output multiplied by the difference
between the average total cost and the price.
• A firm is said to be making a normal profit when its economic profit equals zero.
This occurs where average total cost equals price at the profit-maximizing output.
• If the price is between average total cost and average variable cost at the profit-
maximizing output, then the firm is said to be in a loss-minimizing condition. The
firm should still continue to produce, however, since its loss would be larger if it
were to stop producing. By continuing production, the firm can offset its variable
cost and at least part of its fixed cost, but by stopping completely it would lose the
entirety of its fixed cost.
• If the price is below average variable cost at the profit-maximizing output, the
firm should go into shutdown. Losses are minimized by not producing at all, since
any production would not generate returns significant enough to offset any fixed
cost and part of the variable cost. By not producing, the firm loses only its fixed
cost. By losing this fixed cost the company faces a challenge. It must either exit
the market or remain in the market and risk a complete loss.
Opportunity cost
Main article: Opportunity cost

Opportunity cost of an activity (or goods) is equal to the best next alternative foregone.
Although opportunity cost can be hard to quantify, the effect of opportunity cost is
universal and very real on the individual level. In fact, this principle applies to all
decisions, not just economic ones. Since the work of the Austrian economist Friedrich
von Wieser, opportunity cost has been seen as the foundation of the marginal theory of
value[citation needed].

Opportunity cost is one way to measure the cost of something. Rather than merely
identifying and adding the costs of a project, one may also identify the next best
alternative way to spend the same amount of money. The forgone profit of this next best
alternative is the opportunity cost of the original choice. A common example is a farmer
that chooses to farm her or his land rather than rent it to neighbors, wherein the
opportunity cost is the forgone profit from renting. In this case, the farmer may expect to
generate more profit alone. Similarly, the opportunity cost of attending university is the
lost wages a student could have earned in the workforce, rather than the cost of tuition,
books, and other requisite items (whose sum makes up the total cost of attendance). The
opportunity cost of a vacation in the Bahamas might be the down payment for a house.

Note that opportunity cost is not the sum of the available alternatives, but rather the
benefit of the single, best alternative. Possible opportunity costs of a city's decision to
build a hospital on its vacant land are the loss of the land for a sporting center, or the
inability to use the land for a parking lot, or the money that could have been made from
selling the land, or the loss of any of the various other possible uses — but not all of
these in aggregate. The true opportunity cost would be the forgone profit of the most
lucrative of those listed.

One question that arises here is how to determine a money value for each alternative to
facilitate comparison and assess opportunity cost, which may be more or less difficult
depending on the things we are trying to compare. For example, many decisions involve
environmental impacts whose monetary value is difficult to assess because of scientific
uncertainty. Valuing a human life or the economic impact of an Arctic oil spill involves
making subjective choices with ethical implications.

It is imperative to understand that nothing is free. No matter what one chooses to do, he
or she is always giving something up in return. An example of opportunity cost is
deciding between going to a concert and doing homework. If one decides to go the
concert, then he or she is giving up valuable time to study, but if he or she chooses to do
homework then the cost is giving up the concert. Opportunity cost is vital in
understanding microeconomics and decisions that are made.

Applied microeconomics
Applied microeconomics includes a range of specialized areas of study, many of which
draw on methods from other fields. Applied work often uses little more than the basics of
price theory, supply and demand. Industrial organization examines topics such as the
entry and exit of firms, innovation, and the role of trademarks. Labor economics
examines wages, employment, and labor market dynamics. Public economics examines
the design of government tax and expenditure policies and economic effects of these
policies (e.g., social insurance programs). Political economy examines the role of
political institutions in determining policy outcomes. Health economics examines the
organization of health care systems, including the role of the health care workforce and
health insurance programs. Urban economics, which examines the challenges faced by
cities, such as sprawl, air and water pollution, traffic congestion, and poverty, draws on
the fields of urban geography and sociology. Financial economics examines topics such
as the structure of optimal portfolios, the rate of return to capital, econometric analysis of
security returns, and corporate financial behavior. Law and economics applies
microeconomic principles to the selection and enforcement of competing legal regimes
and their relative efficiencies. Economic history examines the evolution of the economy
and economic institutions, using methods and techniques from the fields of economics,
history, geography, sociology, psychology, and political science.

References
1. ^ Marchant, Mary A.; Snell, William M.. "Macroeconomic and
International Policy Terms". University of Kentucky.
http://www.ca.uky.edu/agc/pubs/aec/aec75/aec75.pdf. Retrieved 2007-05-04.
2. ^ a b "Economics Glossary". Monroe County Women's Disability Network.
http://www.mcwdn.org/ECONOMICS/EcoGlossary.html. Retrieved 2008-02-22.
3. ^ "Social Studies Standards Glossary". New Mexico Public Education
Department. Archived from the original on 2007-08-08.
http://web.archive.org/web/20070808200604/http://nmlites.org/standards/socialst
udies/glossary.html. Retrieved 2008-02-22.
4. ^ "Glossary". ECON100.
http://www.econ100.com/eu5e/open/glossary.html. Retrieved 2008-02-22.

Further reading
• Bade, Robin; Michael Parkin (2001). Foundations of Microeconomics. Addison
Wesley Paperback 1st Edition.
• Colander, David. Microeconomics. McGraw-Hill Paperback, 7th Edition: 2008.
• Dunne, Timothy, J. Bradford Jensen, and Mark J. Roberts (2009). Producer
Dynamics: New Evidence from Micro Data. University of Chicago Press.
ISBN 9780226172569.
• Eaton, B. Curtis; Eaton, Diane F.; and Douglas W. Allen. Microeconomics.
Prentice Hall, 5th Edition: 2002.
• Frank, Robert A.; Microeconomics and Behavior. McGraw-Hill/Irwin, 6th
Edition: 2006.
 • Friedman, Milton. Price Theory. Aldine Transaction: 1976
• Hagendorf, Klaus: Labour Values and the Theory of the Firm. Part I: The
Competitive Firm. Paris: EURODOS; 2009.
• Harberger, Arnold C., 2008. "Microeconomics," The Concise Encyclopedia of
Economics.
• Hicks, John R. Value and Capital. Clarendon Press. [1939] 1946, 2nd ed.
• Hirshleifer, Jack., Glazer, Amihai, and Hirshleifer, David, Price theory and
applications: Decisions, markets, and information. Cambridge University Press,
7th Edition: 2005.
• Jehle, Geoffrey A.; and Philip J. Reny. Advanced Microeconomic Theory.
Addison Wesley Paperback, 2nd Edition: 2000.
• Katz, Michael L.; and Harvey S. Rosen. Microeconomics. McGraw-Hill/Irwin,
3rd Edition: 1997.
• Kreps, David M. A Course in Microeconomic Theory. Princeton University Press:
1990
• Landsburg, Steven. Price Theory and Applications. South-Western College Pub,
5th Edition: 2001.
• Mankiw , N. Gregory. Principles of Microeconomics. South-Western Pub, 2nd
Edition: 2000.
• Mas-Colell, Andreu; Whinston, Michael D.; and Jerry R. Green. Microeconomic
Theory. Oxford University Press, US: 1995.
• McGuigan, James R.; Moyer, R. Charles; and Frederick H. Harris. Managerial
Economics: Applications, Strategy and Tactics. South-Western Educational
Publishing, 9th Edition: 2001.
• Nicholson, Walter. Microeconomic Theory: Basic Principles and Extensions.
South-Western College Pub, 8th Edition: 2001.
• Perloff, Jeffrey M. Microeconomics. Pearson - Addison Wesley, 4th Edition:
2007.
• Perloff, Jeffrey M. Microeconomics: Theory and Applications with Calculus.
Pearson - Addison Wesley, 1st Edition: 2007
• Pindyck, Robert S.; and Daniel L. Rubinfeld. Microeconomics. Prentice Hall, 7th
Edition: 2008.
• Ruffin, Roy J.; and Paul R. Gregory. Principles of Microeconomics. Addison
Wesley, 7th Edition: 2000.
• Varian, Hal R. (1987). "microeconomics," The New Palgrave: A Dictionary of
Economics, v. 3, pp. 461-63.
• Varian, Hal R. Intermediate Microeconomics. & Company, 7th Edition.
• Varian, Hal R. Microeconomic Analysis. W. W. Norton & Company, 3rd Edition.

External links
Wikibooks has a book on the topic of
Microeconomics

• Open Source Introduction to Microeconomics (see wiki article) by R. Preston

McAfee - California Institute of Technology
 • Amosweb.com homepage - online economics dictionary
• X-Lab: A Collaborative Micro-Economics and Social Sciences Research
Laboratory
• Micro Economics - the role of micro economics in supporting the social fabric of
macro economies
• Simulations in Microeconomics

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Translations:

Microeconomics
Top
Home > Library > Literature & Language > Translations

Dansk (Danish)
n. - mikroøkonomi

Nederlands (Dutch)
micro-economie

Français (French)
n. - microéconomie

Deutsch (German)
n. - Mikroökonomie
Ελληνική (Greek)
n. pl. - (οικον.) μικροοικονομική

Italiano (Italian)
microeconomia

Português (Portuguese)
n. pl. - microeconomia (f)

Русский (Russian)
экономика в терминах отдельных участков деятельности

Español (Spanish)
n. - microeconomía

Svenska (Swedish)
n. pl. - mikroekonomi

中文（简体）(Chinese (Simplified))
个体经济学, 微观经济学

中文（繁體）(Chinese (Traditional))
n. pl. - 個體經濟學, 微觀經濟學
n. - 個體經濟學, 微觀經濟學

한국어 (Korean)
n. pl. - 미시 경제학
n. - 미시 경제

日本語 (Japanese)
n. - ミクロ 経済学 , 微視的経済学

‫( العربيه‬Arabic)
‫)الجمع( القتصاديات الجزئيه‬

‫( עברית‬Hebrew)
n. - ‫ למשל היחס בין מחיר לעלות‬,‫ענף הכלכלה הדן בהיבטים מסוימים שלה‬

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