Microeconomics is the study of decision making by individuals, usually consumers or managers of firms. It is also the study of how the separate decisions of many individuals combine to determine the allocation of scarce resources.
Societies differ with respect to their relative centralization or decentralization of economic decision making.
The most common form of economic decentralization involves markets. Economists usually define markets by focusing on one product and place at a time.
Economists often assume that people are motivated by material self-interest. Self-interest leads to different choices in different societies, depending on the procedures used to allocate scarce resources.
In a market economy, people make decisions that affect resource allocation in three main ways: as consumers, as employees, and as owners of firms.
A positive economic statement concerns factual matters and is testable (the facts either confirm or contradict it). A normative economic statement involves value judgments and is not testable.
The scope of microeconomics is extremely broad, encompassing most of human decision making.
Tools of microeconomics
In studying human behavior, economists employ the scientific method.
Economists usually express their theories through mathematical models.
Models are simplified representations of the real world. As a result, they rely on assumptions that are not literally true.
A useful model captures the most important factors that contribute to an economic phenomenon, advances our understanding of it, and leads to reasonably accurate predictions.
Sources of economic data fall into three main categories: records, surveys, and experiments.
When controlling for multiple factors that contribute to a phenomenon isn't possible through laboratory or natural experiments, economists control for those factors statistically, using econometrics.
Economists sometimes disagree about both positive and normative matters. They have achieved a reasonable degree of consensus with respect to a number of positive issues through the accumulation of evidence. However, factual evidence cannot resolve normative disputes.
Themes of microeconomics
Major themes concerning decision making include the following: trade-offs are unavoidable; good choices are usually made on the margin; people respond to incentives; and prices provide incentives.
Major themes concerning markets include the following: trade can benefit everyone; the competitive market price reflects both value to consumers and cost to producers; compared to other methods of resource allocation, markets have advantages; and sometimes government policy can improve on free-market resource allocation.
Uses of microeconomics
Microeconomics offers a wide variety of principles that can help us make decisions.
Microeconomic tools are indispensable to the analysis and evaluation of public policy.
