The Active Center

What is Microeconomics?

Listen Later

The study of economics is divided into two major branches: microeconomics and macroeconomics. While macroeconomics looks at the "big picture" (national and global trends), microeconomics focuses on the smaller, individual parts of the economy.

Microeconomics Definition

Microeconomics is the branch of economics that studies the behavior of individuals and businesses. It analyzes how these entities make decisions based on the allocation of limited resources.

A central concept in this field is the circular flow of economic activity, which illustrates the interaction between households and businesses:

  • Money Flow: Revenue for businesses and income for households.
  • Product Flow: Goods and services received by households.
  • Resource Flow: Private resources sold to businesses to create products.
  • Expenditure Flow: Business costs and household expenses.
    • Core Microeconomic Topics
    1. Supply, Demand, and Equilibrium
    • Supply: The quantity of products or services businesses offer. There is a direct relationship with price: higher prices typically lead to increased supply.
    • Demand: The consumer's desire to purchase products. Demand typically decreases as prices increase.
    • Market Equilibrium: The state where the pressure for higher prices is balanced by the pressure for lower prices, causing the exchange rate between buyers and sellers to persist.
      • 2. Elasticity

      Elasticity measures how much supply or demand changes in response to price shifts.

      • Elastic: A large change in demand/supply relative to price.
      • Inelastic: A small or negligible change in demand/supply relative to price.
        • 3. Opportunity Cost

        This is the value of the "next best alternative" that is given up when a choice is made. It reminds us that the true cost of a decision isn't just money, but also the missed opportunity. As an example, you want to spend $20 to buy a book, but instead decide to go to a movie. The opportunity cost is the loss of being to buy the book. 

        4. Forms of Competition
        • Perfect Competition: Many buyers and sellers; highly efficient and beneficial for prices.
        • Monopoly: A market controlled by a single business, often leading to higher prices.
        • Oligopoly: A market controlled by a small group of firms (e.g., the gasoline industry).
          • Micro vs. Macro: Key Differences

          Feature

          Microeconomics

          Macroeconomics

          Focus

          Individuals and businesses

          The economic system as a whole

          Variables

          Individual income, specific product prices

          GDP, national income, inflation

          Drivers

          Local supply and demand

          National unemployment, interest rates

          Goal

          Resource distribution efficiency

          National stability and growth

          Real-World Applications

          Microeconomics is visible in daily life through various scenarios:

          • Pricing: A business calculating the optimal price for a new smartphone.
          • Consumer Choice: A shopper deciding between two different brands based on a $2 price difference.
          • Investment: A company buying new machinery to increase production efficiency.
          • Personal Finance: A family deciding how much of their increased income to save versus spend.
            • Summary

            Microeconomics illuminates the day-to-day interactions that drive our economy. By understanding how individual decisions regarding supply, demand, and opportunity cost are made, we can better predict how markets will react to changes in the world around them.

            ...more
            View all episodesView all episodes
            Download on the App Store
            The Active CenterBy David Sepe