Microeconomics Definition

Definition: Microeconomics is the study of the behavior of individual economic agents, like persons, households, and firms, in decision making and resources allocation among different alternative purposes.

How does a hotel determine how much to charge for its rooms? Why some people use public transport and others use their cars? Well, friend, that's microeconomics.

A primary difference between macroeconomics and microeconomics is that while microeconomics focuses on units like individuals and families, Macroeconomics, instead, studies the behavior of economic aggregates, like GDP the GPD and Inflation.

Microeconomists zooms in into individuals and firms.

Macroeconomic models can use microeconomic variables or submodels because some macroeconomic variables can be modeled using the behavior of microeconomic variables. For example, the aggregate consumption can be modeled using an aggregation of an individual consumption function that represents the average consumer.

Microeconomic models use mathematical functions to represent consumer behavior and preferences. For example, the utility function can represent individual preferences.

Economic models are powerful tools that allow us to isolate many causes of the behavior of economic agents, and focus in a particular case. This way, a general model of behavior can be deducted. For example, if the price of a soda can increase, there will be fewer people willing to buy cans of soda. But we are isolating some other factors, like the weather and the price of water.

Microeconomics analyzes:

- How is the price and the quantity sold of a product set?

- What effects do different institutional arrangements have in key microeconomic variables?

- What determines consumer behavior, like why do they choose one product instead of another and how much will be they willing to purchase.

- What determines business (or producer) behavior, like what products and how much will be they willing to produce, how much are they going to spend on research or if they are going to create artificial barriers to market entry.

- What effect on consumer and producer behavior do taxes and subsidies can have?

Big corporations like Google hire microeconomists to work on several fields. For example:

• Setting the optimal workflow for auctions.
• Forecasting consumer behavior.
• Ad effectiveness.
• Industrial organization: microeconomists can provide analysis on patents policy, antitrust, innovation policy, etc.

Microeconomic Variables