|
Microeconomics is a branch of economics that studies the behavior of
individuals and firms in making decisions regarding the allocation of scarce
resources and the interactions among these individuals and firms. One goal of
microeconomics is to analyze the market mechanisms that establish relative
prices among goods and services and allocate limited resources among
alternative uses. Microeconomics shows conditions under which free markets lead
to desirable allocations. It also analyzes market failure, where markets fail
to produce efficient results. While microeconomics focuses on firms and
individuals, macroeconomics focuses on the sum total of economic activity,
dealing with the issues of growth, inflation, and unemployment and with
national policies relating to these issues. Microeconomics also deals with the
effects of economic policies (such as changing taxation levels) on
microeconomic behavior and thus on the aforementioned aspects of the economy.
Particularly in the wake of the Lucas critique, much of modern macroeconomic
theories has been built upon microfoundations—i.e. based upon basic
assumptions about micro-level behavior.
Assumptions and definitions:
Microeconomic theory typically begins with the study of a single rational and
utility maximizing individual. To economists, rationality means an individual
possesses stable preferences that are both complete and transitive. The
technical assumption that preference relations are continuous is needed to
ensure the existence of a utility function. Although microeconomic theory can
continue without this assumption, it would make comparative statics impossible
since there is no guarantee that the resulting utility function would be
differentiable.
Microeconomic theory progresses by defining a competitive budget set which is a
subset of the consumption set. It is at this point that economists make the
technical assumption that preferences are locally non-satiated. Without the
assumption of LNS (local non-satiation) there is no 100% guarantee but there
would be a rational rise in individual utility. With the necessary tools and
assumptions in place the utility maximization problem (UMP) is developed. The
utility maximization problem is the heart of consumer theory. The utility
maximization problem attempts to explain the action axiom by imposing
rationality axioms on consumer preferences and then mathematically modeling and
analyzing the consequences.
The utility maximization problem serves not only as the mathematical foundation
of consumer theory but as a metaphysical explanation of it as well. That is,
the utility maximization problem is used by economists to not only explain what
or how individuals make choices but why individuals make choices as well. The
utility maximization problem is a constrained optimization problem in which an
individual seeks to maximize utility subject to a budget constraint.
Economists use the extreme value theorem to guarantee that a solution to the
utility maximization problem exists. That is, since the budget constraint is
both bounded and closed, a solution to the utility maximization problem exists.
Economists call the solution to the utility maximization problem a Walrasian
demand function or correspondence. The utility maximization problem has so far
been developed by taking consumer tastes (i.e. consumer utility) as the
primitive. However, an alternative way to develop microeconomic theory is by
taking consumer choice as the primitive.
This model of microeconomic theory is referred to as revealed preference
theory. The supply and demand model describes how prices vary as a result of a
balance between product availability at each price (supply) and the desires of
those with purchasing power at each price (demand). The graph depicts a
right-shift in demand from D1 to D2 along with the consequent increase in price
and quantity required to reach a new market-clearing equilibrium point on the
supply curve (S). The theory of supply and demand usually assumes that markets
are perfectly competitive. This implies that there are many buyers and sellers
in the market and none of them have the capacity to significantly influence
prices of goods and services. In many real-life transactions, the assumption
fails because some individual buyers or sellers have the ability to influence
prices. Quite often, a sophisticated analysis is required to understand the
demand-supply equation of a good model. However, the theory works well in
situations meeting these assumptions.
Mainstream economics does not assume a priori that markets are preferable to
other forms of social organization. In fact, much analysis is devoted to cases
where market failures lead to resource allocation that is suboptimal and
creates deadweight loss. A classic example of suboptimal resource allocation is
that of a public good. In such cases, economists may attempt to find policies
that avoid waste, either directly by government control, indirectly by
regulation that induces market participants to act in a manner consistent with
optimal welfare, or by creating "missing markets" to enable efficient
trading where none had previously existed. This is studied in the field of
collective action and public choice theory. "Optimal welfare" usually
takes on a Paretian norm, which is a mathematical application of the
Kaldor–Hicks method. This can diverge from the Utilitarian goal of
maximizing utility because it does not consider the distribution of goods
between people. Market failure in positive economics (microeconomics) is
limited in implications without mixing the belief of the economist and their
theory. The demand for various commodities by individuals is generally thought
of as the outcome of a utility-maximizing process, with each individual trying
to maximize their own utility under a budget constraint and a given consumption
set.
History:
Main article: History of microeconomics:
Economists commonly consider themselves microeconomists or macroeconomists. The
difference between microeconomics and macroeconomics likely was introduced in
1933 by the Norwegian economist Ragnar Frisch, the co-recipient of the first
Nobel Memorial Prize in Economic Sciences in 1969. However, Frisch did not
actually use the word "microeconomics", instead drawing distinctions
between "micro-dynamic" and "macro-dynamic" analysis in a
way similar to how the words "microeconomics" and
"macroeconomics" are used today. The first known use of the term
"microeconomics" in a published article was from Pieter de Wolff in
1941, who broadened the term "micro-dynamics" into
"microeconomics".
Microeconomic theory:
Consumer demand theory:
Main article: Consumer choice:
Consumer demand theory relates preferences for the consumption of both goods
and services to the consumption expenditures; ultimately, this relationship
between preferences and consumption expenditures is used to relate preferences
to consumer demand curves. The link between personal preferences, consumption
and the demand curve is one of the most closely studied relations in economics.
It is a way of analyzing how consumers may achieve equilibrium between
preferences and expenditures by maximizing utility subject to consumer budget
constraints.
Production theory:
Main article: Production theory:
Production theory is the study of production, or the economic process of
converting inputs into outputs. Production uses resources to create a good or
service that is suitable for use, gift-giving in a gift economy, or exchange in
a market economy. This can include manufacturing, storing, shipping, and
packaging. Some economists define production broadly as all economic activity
other than consumption. They see every commercial activity other than the final
purchase as some form of production.
Cost-of-production theory of value:
Main article: Cost-of-production theory of value:
The cost-of-production theory of value states that the price of an object or
condition is determined by the sum of the cost of the resources that went into
making it. The cost can comprise any of the factors of production (including
labor, capital, or land) and taxation. Technology can be viewed either as a
form of fixed capital (e.g. an industrial plant) or circulating capital (e.g.
intermediate goods). In the mathematical model for the cost of production, the
short-run total cost is equal to fixed cost plus total variable cost. The fixed
cost refers to the cost that is incurred regardless of how much the firm
produces. The variable cost is a function of the quantity of an object being
produced. The cost function can be used to characterize production through the
duality theory in economics, developed mainly by Ronald Shephard (1953, 1970)
and other scholars (Sickles & Zelenyuk, 2019, ch.2).
Opportunity cost:
Main article: Opportunity cost:
Opportunity cost is closely related to the idea of time constraints. One can do
only one thing at a time, which means that, inevitably, one is always giving up
other things. The opportunity cost of any activity is the value of the
next-best alternative thing one may have done instead. Opportunity cost depends
only on the value of the next-best alternative. It doesn't matter whether one
has five alternatives or 5,000. Opportunity costs can tell when not to do
something as well as when to do something. For example, one may like waffles,
but like chocolate even more. If someone offers only waffles, one would take
it. But if offered waffles or chocolate, one would take the chocolate. The
opportunity cost of eating waffles is sacrificing the chance to eat chocolate.
Because the cost of not eating the chocolate is higher than the benefits of
eating the waffles, it makes no sense to choose waffles. Of course, if one
chooses chocolate, they are still faced with the opportunity cost of giving up
having waffles. But one is willing to do that because the waffle's opportunity
cost is lower than the benefits of the chocolate. Opportunity costs are
unavoidable constraints on behaviour because one has to decide what's best and
give up the next-best alternative.
Price Theory:
Main article: Price Theory:
Price theory is a field of economics that uses the supply and demand framework
to explain and predict human behavior. It is associated with the Chicago School
of Economics. Price theory studies competitive equilibrium in markets to yield
testable hypotheses that can be rejected. Price theory is not the same as
microeconomics. Strategic behavior, such as the interactions among sellers in a
market where they are few, is a significant part of microeconomics but is not
emphasized in price theory. Price theorists focus on competition believing it
to be a reasonable description of most markets that leaves room to study
additional aspects of tastes and technology. As a result, price theory tends to
use less game theory than microeconomics does. Price theory focuses on how
agents respond to prices, but its framework can be applied to a wide variety of
socioeconomic issues that might not seem to involve prices at first glance.
Price theorists have influenced several other fields including developing
public choice theory and law and economics. Price theory has been applied to
issues previously thought of as outside the purview of economics such as
criminal justice, marriage, and addiction.
Microeconomic models:
Supply and demand:
Main article: Supply and demand:
Supply and demand is an economic model of price determination in a perfectly
competitive market. It concludes that in a perfectly competitive market with no
externalities, per unit taxes, or price controls, the unit price for a
particular good is the price at which the quantity demanded by consumers equals
the quantity supplied by producers. This price results in a stable economic
equilibrium. .
Prices and quantities have been described as the most directly observable
attributes of goods produced and exchanged in a market economy. The theory of
supply and demand is an organizing principle for explaining how prices
coordinate the amounts produced and consumed. In microeconomics, it applies to
price and output determination for a market with perfect competition, which
includes the condition of no buyers or sellers large enough to have
price-setting power. For a given market of a commodity, demand is the relation
of the quantity that all buyers would be prepared to purchase at each unit
price of the good. Demand is often represented by a table or a graph showing
price and quantity demanded.
Demand theory describes individual consumers as rationally choosing the most
preferred quantity of each good, given income, prices, tastes, etc. A term for
this is "constrained utility maximization" (with income and wealth as
the constraints on demand). Here, utility refers to the hypothesized relation
of each individual consumer for ranking different commodity bundles as more or
less preferred. The law of demand states that, in general, price and quantity
demanded in a given market are inversely related. That is, the higher the price
of a product, the less of it people would be prepared to buy (other things
unchanged). As the price of a commodity falls, consumers move toward it from
relatively more expensive goods (the substitution effect). In addition,
purchasing power from the price decline increases ability to buy (the income
effect). Other factors can change demand; for example an increase in income
will shift the demand curve for a normal good outward relative to the origin,
as in the figure. All determinants are predominantly taken as constant factors
of demand and supply.
Supply is the relation between the price of a good and the quantity available
for sale at that price. It may be represented as a table or graph relating
price and quantity supplied. Producers, for example business firms, are
hypothesized to be profit maximizers, meaning that they attempt to produce and
supply the amount of goods that will bring them the highest profit. Supply is
typically represented as a function relating price and quantity, if other
factors are unchanged. That is, the higher the price at which the good can be
sold, the more of it producers will supply, as in the figure. The higher price
makes it profitable to increase production. Just as on the demand side, the
position of the supply can shift, say from a change in the price of a
productive input or a technical improvement. The "Law of Supply"
states that, in general, a rise in price leads to an expansion in supply and a
fall in price leads to a contraction in supply. Here as well, the determinants
of supply, such as price of substitutes, cost of production, technology applied
and various factors of inputs of production are all taken to be constant for a
specific time period of evaluation of supply. Market equilibrium occurs where
quantity supplied equals quantity demanded, the intersection of the supply and
demand curves in the figure above. At a price below equilibrium, there is a
shortage of quantity supplied compared to quantity demanded. This is posited to
bid the price up. At a price above equilibrium, there is a surplus of quantity
supplied compared to quantity demanded. This pushes the price down. The model
of supply and demand predicts that for given supply and demand curves, price
and quantity will stabilize at the price that makes quantity supplied equal to
quantity demanded. Similarly, demand-and-supply theory predicts a new
price-quantity combination from a shift in demand (as to the figure), or in
supply. For a given quantity of a consumer good, the point on the demand curve
indicates the value, or marginal utility, to consumers for that unit. It
measures what the consumer would be prepared to pay for that unit.
The corresponding point on the supply curve measures marginal cost, the
increase in total cost to the supplier for the corresponding unit of the good.
The price in equilibrium is determined by supply and demand. In a perfectly
competitive market, supply and demand equate marginal cost and marginal utility
at equilibrium. On the supply side of the market, some factors of production
are described as (relatively) variable in the short run, which affects the cost
of changing output levels. Their usage rates can be changed easily, such as
electrical power, raw-material inputs, and over-time and temp work. Other
inputs are relatively fixed, such as plant and equipment and key personnel. In
the long run, all inputs may be adjusted by management. These distinctions
translate to differences in the elasticity (responsiveness) of the supply curve
in the short and long runs and corresponding differences in the price-quantity
change from a shift on the supply or demand side of the market.
Marginalist theory, such as above, describes the consumers as attempting to
reach most-preferred positions, subject to income and wealth constraints while
producers attempt to maximize profits subject to their own constraints,
including demand for goods produced, technology, and the price of inputs. For
the consumer, that point comes where marginal utility of a good, net of price,
reaches zero, leaving no net gain from further consumption increases.
Analogously, the producer compares marginal revenue (identical to price for the
perfect competitor) against the marginal cost of a good, with marginal profit
the difference. At the point where marginal profit reaches zero, further
increases in production of the good stop. For movement to market equilibrium
and for changes in equilibrium, price and quantity also change "at the
margin": more-or-less of something, rather than necessarily
all-or-nothing. Other applications of demand and supply include the
distribution of income among the factors of production, including labour and
capital, through factor markets. In a competitive labour market for example the
quantity of labour employed and the price of labour (the wage rate) depends on
the demand for labour (from employers for production) and supply of labour
(from potential workers). Labour economics examines the interaction of workers
and employers through such markets to explain patterns and changes of wages and
other labour income, labour mobility, and (un)employment, productivity through
human capital, and related public-policy issues.
Demand-and-supply analysis is used to explain the behaviour of perfectly
competitive markets, but as a standard of comparison it can be extended to any
type of market. It can also be generalized to explain variables across the
economy, for example, total output (estimated as real GDP) and the general
price level, as studied in macroeconomics. Tracing the qualitative and
quantitative effects of variables that change supply and demand, whether in the
short or long run, is a standard exercise in applied economics. Economic theory
may also specify conditions such that supply and demand through the market is
an efficient mechanism for allocating resources.
|
|
| |
Market structure:
Main article: Market structure:
Market structure refers to features of a market, including the number of firms
in the market, the distribution of market shares between them, product
uniformity across firms, how easy it is for firms to enter and exit the market,
and forms of competition in the market. A market structure can have several
types of interacting market systems. Different forms of markets are a feature
of capitalism and market socialism, with advocates of state socialism often
criticizing markets and aiming to substitute or replace markets with varying
degrees of government-directed economic planning. Competition acts as a
regulatory mechanism for market systems, with government providing regulations
where the market cannot be expected to regulate itself. One example of this is
with regards to building codes, which if absent in a purely competition
regulated market system, might result in several horrific injuries or deaths to
be required before companies would begin improving structural safety, as
consumers may at first not be as concerned or aware of safety issues to begin
putting pressure on companies to provide them, and companies would be motivated
not to provide proper safety features due to how it would cut into their
profits. The concept of "market type" is different from the concept
of "market structure". Nevertheless, it is worth noting here that
there are a variety of types of markets. The different market structures
produce cost curves based on the type of structure present. The different
curves are developed based on the costs of production, specifically the graph
contains marginal cost, average total cost, average variable cost, average
fixed cost, and marginal revenue, which is sometimes equal to the demand,
average revenue, and price in a price-taking firm.
Perfect competition:
Main article: Perfect competition:
Perfect competition is a situation in which numerous small firms producing
identical products compete against each other in a given industry. Perfect
competition leads to firms producing the socially optimal output level at the
minimum possible cost per unit. Firms in perfect competition are "price
takers" (they do not have enough market power to profitably increase the
price of their goods or services). A good example would be that of digital
marketplaces, such as eBay, on which many different sellers sell similar
products to many different buyers. Consumers in a perfect competitive market
have perfect knowledge about the products that are being sold in this market.
Imperfect competition:
Main article: Imperfect competition:
Imperfect competition is a type of market structure showing some but not all
features of competitive markets. Monopolistic competition Main article:
Monopolistic competition Monopolistic competition is a situation in which many
firms with slightly different products compete. Production costs are above what
may be achieved by perfectly competitive firms, but society benefits from the
product differentiation. Examples of industries with market structures similar
to monopolistic competition include restaurants, cereal, clothing, shoes, and
service industries in large cities.
Monopoly:
Main article: Monopoly:
A monopoly is a market structure in which a market or industry is dominated by
a single supplier of a particular good or service. Because monopolies have no
competition, they tend to sell goods and services at a higher price and produce
below the socially optimal output level. However, not all monopolies are a bad
thing, especially in industries where multiple firms would result in more costs
than benefits (i.e. natural monopolies). Natural monopoly: A monopoly in an
industry where one producer can produce output at a lower cost than many small
producers.
Oligopoly:
Main article: Oligopoly:
An oligopoly is a market structure in which a market or industry is dominated
by a small number of firms (oligopolists). Oligopolies can create the incentive
for firms to engage in collusion and form cartels that reduce competition
leading to higher prices for consumers and less overall market output.
Alternatively, oligopolies can be fiercely competitive and engage in flamboyant
advertising campaigns.
Duopoly: A special case of an oligopoly, with only two firms. Game theory can
elucidate behavior in duopolies and oligopolies.
Monopsony:
Main article: Monopsony:
A monopsony is a market where there is only one buyer and many sellers.
Bilateral monopoly:
Main article: Bilateral monopoly:
A bilateral monopoly is a market consisting of both a monopoly (a single
seller) and a monopsony (a single buyer).
Oligopsony:
Main article: Oligopsony:
An oligopsony is a market where there are a few buyers and many sellers. Game
theory Main article: Game theory Game theory is a major method used in
mathematical economics and business for modeling competing behaviors of
interacting agents. The term "game" here implies the study of any
strategic interaction between people. Applications include a wide array of
economic phenomena and approaches, such as auctions, bargaining, mergers &
acquisitions pricing, fair division, duopolies, oligopolies, social network
formation, agent-based computational economics, general equilibrium, mechanism
design, and voting systems, and across such broad areas as experimental
economics, behavioral economics, information economics, industrial
organization, and political economy.
Economics of information:
Main article: Information economics:
Information economics is a branch of microeconomic theory that studies how
information and information systems affect an economy and economic decisions.
Information has special characteristics. It is easy to create but hard to
trust. It is easy to spread but hard to control. It influences many decisions.
These special characteristics (as compared with other types of goods)
complicate many standard economic theories. The economics of information has
recently become of great interest to many - possibly due to the rise of
information-based companies inside the technology industry. From a game theory
approach, we can loosen the usual constraints that agents have complete
information to further examine the consequences of having incomplete
information. This gives rise to many results which are applicable to real life
situations. For example, if one does loosen this assumption, then it is
possible to scrutinize the actions of agents in situations of uncertainty. It
is also possible to more fully understand the impacts – both positive and
negative – of agents seeking out or acquiring information.
Applied:
Applied microeconomics includes a range of specialized areas of study, many of
which draw on methods from other fields. Economic history examines the
evolution of the economy and economic institutions, using methods and
techniques from the fields of economics, history, geography, sociology,
psychology, and political science.
Education economics examines the organization of education provision and its
implication for efficiency and equity, including the effects of education on
productivity.
Financial economics examines topics such as the structure of optimal
portfolios, the rate of return to capital, econometric analysis of security
returns, and corporate financial behavior.
Health economics examines the organization of health care systems, including
the role of the health care workforce and health insurance programs.
Industrial organization examines topics such as the entry and exit of firms,
innovation, and the role of trademarks. Labor economics examines wages,
employment, and labor market dynamics.
Law and economics applies microeconomic principles to the selection and
enforcement of competing legal regimes and their relative efficiencies.
Political economy examines the role of political institutions in determining
policy outcomes. Public economics examines the design of government tax and
expenditure policies and economic effects of these policies (e.g., social
insurance programs).
Urban economics, which examines the challenges faced by cities, such as sprawl,
air and water pollution, traffic congestion, and poverty, draws on the fields
of urban geography and sociology.
Labor economics examines primarily labor markets, but comprises a large range
of public policy issues such as immigration, minimum wages, or inequality.
|
|
