What Is Microeconomics?

Defining One Branch of the Study of Economics

Young man buying item
Young man buying item. Getty Images/Raphye Alexius

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.

What is Microeconomics: How Others Define 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.

What Is Microeconomics: How I Define Macroeconomics

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." As an economics professor and About.com economics expert, however, I would take a slightly simpler approach to defining microeconomics.

In fact, I would begin here:

"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?

More on Microeconomics

Economics at About.com has a number of useful resources on microeconomics:

The Microeconomics Resource Center has articles on a great deal of microeconomics topics, such as elasticity and opportunity costs.

Microeconomics Tips and Tricks has a number of useful links for students who are looking to ace their next microeconomics test or assignment. The page Resources for Microeconomics also contains a great deal of valuable microeconomics information.

What is Microeconomics: Where to Go From Here?

Now you have a basic understanding of microeconomics, it is time to expand your knowledge of economics. Here are 6 more answers entry-level FAQs to get you started:

  1. What is Money?
  2. What is the Business Cycle?
  3. What are Opportunity Costs?
  4. What does Economic Efficiency mean?
  5. What is the Current Account?
  1. What are Interest Rates?