What Is Microeconomics?

Like most definitions in economics, there are plenty of competing ideas and ways to explain the term microeconomics. As one of the two branches of the study of economics, an understanding of microeconomics and how it relates to the other branch, macroeconomics, is critical. Even so, should a student turn to the internet for answers, he or she would find a plethora of ways to address the simple question, "what is microeconomics?" Here is a sample of one such answer.

How a Dictionary Defines Microeconomics

The Economist's Dictionary of Economics defines microeconomics as "the study of economics at the level of individual consumers, groups of consumers, or firms" noting that "the general concern of microeconomics is the efficient allocation of scarce resources between alternative uses but more specifically it involves the determination of price through the optimizing behaviour of economic agents, with consumers maximizing utility and firms maximizing profit."

There is nothing false about this definition, and there exist many other authoritative definitions that are merely variations upon the same core concepts. But what this definition may be missing is an emphasis on the concept of choice.

A More General Definition of Microeconomics

Roughly speaking, microeconomics deals with economic decisions made at a low, or micro, level as opposed to macroeconomics which approaches economics from a macro level. From this standpoint, microeconomics is sometimes considered the starting point for the study macroeconomics as it takes a more "bottom-up" approach to analyzing and understanding the economy.

This piece of the microeconomics puzzle was captured by The Economist's definition in the phrase "individual consumers, groups of consumers, or firms." It would be easier to take a slightly simpler approach to defining microeconomics. Here is a better definition:

"Microeconomics is the analysis of the decisions made by individuals and groups, the factors that affect those decisions, and how those decisions affect others."

Microeconomic decisions by both small businesses and individuals are mainly motivated by cost and benefit considerations. Costs can be either in terms of financial costs such as average fixed costs and total variable costs or they can be in terms of opportunity costs, which consider alternatives foregone. Microeconomics then considers patterns of supply and demand as dictated by the aggregate of individual decisions and the factors that influence these cost-benefit relationships. At the heart of the study of microeconomics is the analysis of the market behaviors of individuals in order to better understand their decision-making process and how it impacts the cost of goods and services.

Common Microeconomics Questions

To accomplish this analysis, microeconomists consider questions like, "what determines how much a consumer will save?" and "how much should a firm produce, given the strategies their competitors are using?" and "why do people buy both insurance and lottery tickets?"

To understand the relationship between microeconomics and macroeconomics, contrast these questions with one that might be asked by a macroeconomists such as, "how does a change in interest rates influence national savings?