Microeconomics (the prefix “micr (o) -” meaning “small” + “economy”) is a branch of the economy that studies how households and firms make decisions to allocate their limited resources, usually in markets where products or services are bought and sold. Microeconomics examines how these decisions and behaviors affect the supply and demand of goods and services, which determines prices, and how prices, in turn, determine the supply and demand of goods and services.
Microeconomics is one of the two major branches in which economic theory is divided (the other is macroeconomics). It seeks the study of economic units (such as people, companies, workers, landowners, consumers, producers, etc.); that is, of any individual or entity that is related in any way to the functioning of the economy, individually, and not together.
This is a contrast to macroeconomics, which implies the “sum total of economic activity, addressing the problems of growth, inflation and unemployment, and national economic policies related to these issues.”
By studying these economic units, microeconomics analyzes and explains how and why these units make economic decisions. For example, microeconomics studies consumer demand very closely. It seeks to explain how consumers decide what they want to buy, why and how much they choose these things; it also aims to explain how the prices of things and the benefits that the different economic units obtain to have made that decision to buy.
One of the objectives of microeconomics is to analyze the market mechanisms that establish the relative prices between goods and services and the allocation of limited resources among many other uses. Microeconomics analyzes the different types of market that can exist in terms of the number of bidders and claimants (of perfect competition, oligopoly, duopoly and monopoly), market failures, where markets do not produce effective results, as well as the description of theoretical conditions necessary for perfect competition.
Another issue with which microeconomics has to do, besides the study of consumer demand, is the study of the supply of goods and services by economic units such as companies; that is, how the company internally allocates its resources, how companies decide how many workers or employees they want to hire, how these workers decide where and how much they work, how much they want to produce the companies and how they would change that decision in the face of a change in the price of their product or the price of other things they need to produce, etc.
Microeconomics focuses its object of analysis on goods, prices, markets and economic agents, and studies, analyzes and explains how and why each individual makes economic decisions to satisfy their own needs and interests.
In this sense, it bases his study on different theories: consumer, demand, producer, general equilibrium and financial asset markets.
Consumer theory studies and explains what factors are involved in consumer decisions: what to buy, how to decide to buy it, why, for what and in what quantity.
Demand theory, on the other hand, studies how the quantity and quality of products, goods and services available in the market will vary their prices according to the demand of the individual economic agents, taken together or separately.
The producer’s theory studies how the producer company acts and decides to increase its profits in the market, involving internal decisions such as the number of workers to be hired, their schedules, place of work and production standards, as well as the extent to which all of the above would vary with a change in the prices of the product on the market or in the materials used for its manufacture.
The theory of general equilibrium, on the other hand, is responsible for studying, analyzing and explaining the interaction between all theories of microeconomic dynamics.
The theory of active financial markets considers the different types of markets that may exist in relation to the number of bidders and claimants, be it monopoly, duopoly, oligopoly or perfect competition.
For microeconomics it is also important to study how economic units relate to each other to form other larger economic units (such as industries and markets), or how these smaller economic units behave and make decisions when they are involved in the largest economic units. It also studies how economic units are affected by factor
For microeconomics it is also important to study how economic units relate to each other to form other larger economic units (such as industries and markets), or how these smaller economic units behave and make decisions when they are involved in the largest economic units. It also studies how economic units are affected by factors external to them (government policy or the situation of the international economy, among others).
Among some of its fundamental objectives, microeconomics focuses on understanding the behavior of firms, households and individuals, and how it influences market mechanisms that set prices relative to products, goods and services. Thus, their findings are fundamental in the study of economic theory, since they serve as a basis for other areas, such as macroeconomics, to develop their theories, and thus, as a whole, to explain and answer the various facts and phenomena which constitute the dynamics of the economy.
In this way, microeconomics becomes a fundamental means of studying economic theory, since it provides study and knowledge about individual economic units, studies that serve as a basis for other areas, such as macroeconomics, to develop their theories and , thus, as a whole, the economy can explain facts and phenomena observed and make predictions about future events possible.
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