What is Microeconomics? Simply put, Microeconomics is the study of economics on a small scale. Economist’s Dictionary of Economics defines Microeconomics a bit more detailed, “The study of economics at the level of individual consumers, groups of consumers, or firms… 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 behavior of economic agents, with consumers maximizing utility and firms maximizing profit.”
Basically, microeconomics deals with economics decisions made on a micro level. Microeconomic decisions come from both firms and individuals; these firms and individuals are motivated by cost and how it benefits the economy. The cost that is concerned about in microeconomics is that of financial costs (average fixed costs and total variable costs), and opportunity costs.
An example of microeconomics would be that of three different employees and how they each affect the company and the economy in different ways. Let’s break down the details, Sally, Josh, and Chris all work for the same company but all affect the company they work for and the economy through their recent choices given recent changes in the work place. Each employee was hired two years ago; they were hired at the same wage and at the same location. They typically work about 40 hours a week, and all are due for a raise.
Sally receives a 5 percent wage increase and is very excited and glad to go to work each day. She now wants to work an additional 10 hours per week for the company, so that she can make more each month. She will make more money because of her raise, but with her raise she got to thinking, why not work more hours and maximize on her wages due to the raise and increased hours. Josh receives the same raise; however, he decides to not work extra hours. He is very comfortable with his raise and with the hours he works each week. Nothing changes for Josh except for the fact he makes 5% more on his paycheck. Chris gets the same pay raise and this means he has a choice, work more and make a substantial amount more, work the same hours and have some extra money, or work less and take home the same amount as before. Christ decides to work fewer hours, given his employer allowed that flexibility. Chris cuts back his hours, enjoying his spare time, and now will make the same amount of money as he did prior to his raise. Each employee is happy with their raise and their new work situation.
Now this is the kicker, how does all of this affect a company? Which employee is most cost effective for the company? Do the cost savings of Chris’ reduced hour’s measure up to the profit made by Sally because of her increased hours. Why is Sally motivated to work more hours, but Chris would rather work fewer hours? How will this affect the company, the consumers, and the products that the company offers to its consumers? Microeconomics looks at these types of scenarios. The little changes each of us makes add up and affects the company we work for and our economy, big or small.
Efraim Landa of Effi Enterprises knows all too well, consumers purchase products and they get satisfaction from doing so, companies produce the products consumers desire to maximize their profits and gets satisfaction doing so. Through the method of purchasing products and creation of the products, one can explain why a consumer chooses one product over another, or why a business chooses to make furniture instead of cars. Microeconomics provides the base for nearly all economic theory.