The Scope of Microeconomic Theory.
The prefix micro- in microeconomics comes from the Greek word mikros, meaning small. It contrasts with macroeconomics, the other branch of economic theory. Macroeconomics deals primarily with aggregates, such as the total amount of goods and services produced by society and the absolute level of prices, while microeconomics analyzes the behavior of “small” units: consumers, workers, savers, business managers,
firms, individual industries and markets, and so on. Microeconomics, however, is not limited to “small” issues. Instead, it reflects the fact that many “big” issues can best be understood by recognizing that they are composed of numerous smaller parts. Just as much of our knowledge of chemistry and physics is built on the study of molecules, atoms, and subatomic particles, much of our knowledge of economics is based on the
study of individual behavior. Individuals are the fundamental decisionmakers in any society. Their decisions, in
the aggregate, define a society’s economic environment. Consumers decide how much of various goods to purchase, workers decide what jobs to take, and business owners decide how many workers to hire and how much output to produce. Microeconomics encompasses the factors that influence these choices and the way these innumerable small decisions merge to determine the workings of the entire economy. Because prices have important effects on these individual decisions, microeconomics is frequently called price theory.
firms, individual industries and markets, and so on. Microeconomics, however, is not limited to “small” issues. Instead, it reflects the fact that many “big” issues can best be understood by recognizing that they are composed of numerous smaller parts. Just as much of our knowledge of chemistry and physics is built on the study of molecules, atoms, and subatomic particles, much of our knowledge of economics is based on the
study of individual behavior. Individuals are the fundamental decisionmakers in any society. Their decisions, in
the aggregate, define a society’s economic environment. Consumers decide how much of various goods to purchase, workers decide what jobs to take, and business owners decide how many workers to hire and how much output to produce. Microeconomics encompasses the factors that influence these choices and the way these innumerable small decisions merge to determine the workings of the entire economy. Because prices have important effects on these individual decisions, microeconomics is frequently called price theory.
Microeconomics is based on the belief that most behavior can be explained by assuming consumers have stable, well-defined preferences and they make rational market choices consistent with these preferences. This provides the foundation for building economic models.
A model is used to simplify reality from which conclusions are logically deduced about some system. A system is a group of units interacting to form a whole - For example, consumers and producers interact to form a market system.
Consider a model of consumer behavior with the following assumptions:
1. Consumer is rational and attempts to maximize satisfaction (utility)
2. Consumer has a fixed level of income
3. Commodities (goods and services) vary continuously, and utility consumer derives from them is measurable
4. Consumer has a given set of preferences for these commodities
5. Commodity prices are constant
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