Microeconomics is the study of decision making by individuals and businesses. Microeconomics includes the study of resource allocation, output decisions, and pricing by businesses; how businesses respond to COMPETITION; and the different types of competitive environments within which businesses operate. It also includes the behavior of individuals and households; their CONSUMPTION decisions; response to price changes; and the impact of changes in WEALTH and expectations on consumer decisions. In studying microeconomics, economists use a variety of concepts, including DEMAND and SUPPLY schedules, ELASTICITY OF DEMAND, marginal COSTS, fixed and variable costs, EQUILIBRIUM, marginal revenue, and PROFIT MAXIMIZATION. Demand schedules represent the law of demand, an inverse relationship between price and quantity demanded by consumers in a market in a period of time. Supply schedules represent the law of supply, a positive relationship between price and quantity supplied by producers in a market in a period of time. Elasticity of demand measures the sensitivity or responsiveness of quantity demanded to a price change. Marginal cost is the additional cost, or change in total cost, due to producing one more unit of output. Fixed COSTS are costs that do not change when output changes, while variable costs change as output increases or decreases. Marginal costs are variable costs. Equilibrium is the price at which quantity demanded equals quantity supplied in a market. It is often called the “market clearing” price. Marginal revenue is the change in total revenue from the production and sale of an additional unit of output. Profit maximization is the level of output at which a business realizes the greatest positive difference between total revenue and total cost. Profit maximization also occurs when marginal revenue equals marginal cost. Most microeconomic activity takes place in markets. MARKET STRUCTUREs vary from PERFECT COMPETITION to monopolies. Perfectly competitive markets are characterized by many knowledgeable buyers and sellers, operating independently, producing the same product with ease of entry. At the other extreme, a MONOPOLY is a market with one producer, BARRIERS TO ENTRY, and no close substitutes. Businesses in perfectly competitive markets have no market power and are referred to as “price takers,” while monopolists have full market power and are called “price makers.” Microeconomics includes the study of how businesses behave under varying market conditions. Most markets are characterized by either MONOPOLISTIC COMPETITION (many producers but differentiated products) or oligopolies (a few interdependent firms whose actions influence those of their competitors). Microeconomics also includes resource market behavior, in which individuals and households are the source of supply (labor, land, and CAPITAL) and businesses are the source of demand. Microeconomic analysis can be used to predict prices, output, profitability, and resource allocation. The impact of taxes, subsidies, barriers to entry, and social policies can also be predicted using microeconomics.
See also OLIGOPOLY.