# Microeconomics: Definition, Uses, and Concepts

> **Definition**
>
> Microeconomics is a social science that studies how individuals respond to changes in incentives, prices, resources, and/or methods of production.

## What Is Microeconomics?

Microeconomics is a field of study that focuses on what incentivizes the decisions that people and companies make and how resources are used and distributed. It provides a more detailed understanding of individuals, firms, and markets. This is accomplished by showing how and why different goods have different values and addressing how individuals and businesses conduct and benefit from efficient production and exchange. It also shows how individuals can coordinate and cooperate with others.

### Key Takeaways

*   Microeconomics deals with prices and production in single markets and the interaction between them.
*   Microeconomics differs from macroeconomics, which focuses on economy-wide aggregates.
*   Microeconomists form various models based on logic and observed human behavior, and they test the models against real-world observations.

![Microeconomics](https://www.investopedia.com/thmb/5PO0lISel7rnDv72LcNoLqgYCno=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/TermDefinitions_microeconomics-7d533d2308fa4a4d893819aa9d2ba85a.jpg)

*— Investopedia / Tara Anand*

## Understanding Microeconomics

Microeconomics studies what's likely to happen when individuals make choices in response to changes in incentives, prices, resources, or methods of production. These scenarios are also known as tendencies.

This branch of economics focuses on various factors that affect decision-making, such as [supply and demand](https://www.investopedia.com/terms/l/law-of-supply-demand.asp), failures in the market, and prices. Some of the most common theories addressed in the study of microeconomics include consumer theory and the theory of pricing.

Individuals are often grouped into microeconomic subgroups such as buyers, [sellers](https://www.investopedia.com/terms/s/seller.asp), and business owners. These groups create the supply and demand for resources, using money and interest rates as pricing mechanisms for coordination.

## Basic Concepts of Microeconomics

The study of microeconomics involves several key concepts, including but not limited to:

*   **Incentives and behaviors**: This addresses how people as individuals or groups react to the situations with which they're confronted.
*   **Utility theory**: Consumers will choose to purchase and consume a combination of goods that will maximize their happiness or “utility” subject to the constraint of how much income they have available to spend.
*   **Production theory**: This is the study of production or the process of converting inputs into outputs. Producers seek to choose a combination of inputs and methods of combining them that will minimize costs to maximize their profits.
*   **Price theory**: Utility and production theory interact to produce the theory of supply and demand, which determines prices in a competitive market. Price theory concludes that the price demanded by consumers is the same as that supplied by producers in a perfectly competitive market. This results in [economic equilibrium](https://www.investopedia.com/terms/m/microeconomic-pricing-model.asp).  
    

## Microeconomics vs. Macroeconomics

Microeconomics focuses on individual decision-makers and specific markets. Put simply, the field focuses on smaller factors that influence the decisions made by key stakeholders, such as consumers and businesses. It is considered to be a stepping stone to [macroeconomics](https://www.investopedia.com/terms/m/macroeconomics.asp).

Macroeconomics is the study of the economy as a whole. It studies how the economy behaves, performs, and functions by addressing different economic concepts like [gross domestic product (GDP)](https://www.investopedia.com/terms/g/gdp.asp), employment, and inflation. Macroeconomists can use the information they gather to make important decisions that affect the economy.

## The Uses of Microeconomics

Microeconomics can be applied in a positive or normative sense. Positive microeconomics describes economic behavior and explains what to expect if certain conditions change. For instance:

*   Economists theorize that consumers will buy fewer cars if a manufacturer raises its prices.
*   The price of copper tends to increase if a major copper mine collapses in South America because supply is restricted.

Positive microeconomics could help an investor see why Apple's ([AAPL](https://www.investopedia.com/markets/quote?tvwidgetsymbol=AAPL)) stock price may fall if consumers buy fewer iPhones. It could also explain why a higher [minimum wage](https://www.investopedia.com/terms/m/minimum_wage.asp) might force Wendy's ([WEN](https://www.investopedia.com/markets/quote?tvwidgetsymbol=wen)) to hire fewer workers.

These explanations, conclusions, and predictions of positive microeconomics can be applied normatively to prescribe what people, businesses, and governments should do to attain the most valuable or beneficial patterns of production, exchange, and consumption among market participants.

> **Important**
>
> This extension of the implications of microeconomics from "what is" to "what ought to be" or "what people ought to do" also requires at least the implicit application of some sort of ethical or moral theory or principles and some form of utilitarianism.

## Method of Microeconomics

The study of microeconomics has historically been performed according to [general equilibrium theory](https://www.investopedia.com/terms/g/general-equilibrium-theory.asp), developed by Léon Walras in "Elements of Pure Economics," and partial equilibrium theory, introduced by Alfred Marshall in "Principles of Economics." The Marshallian and Walrasian methods fall under the larger umbrella of [neoclassical](https://www.investopedia.com/terms/n/neoclassical.asp) microeconomics.

Neoclassical economics focuses on how consumers and producers make rational choices to maximize their economic well-being, subject to the constraints of how much income and resources they have available. These economists make simplifying assumptions about markets, such as perfect knowledge, infinite numbers of buyers and sellers, homogeneous goods, or static variable relationships to construct mathematical models of economic behavior.

These methods attempt to represent human behavior in functional mathematical language. This allows economists to develop mathematically testable models of individual markets. Neoclassicals believe in constructing measurable hypotheses about economic events and then using empirical evidence to determine which hypotheses work best.

They follow the “logical positivism” or “logical empiricism” branch of philosophy in this way. Microeconomics applies a range of research methods depending on the question being studied and the behaviors involved.  

## Where Is Microeconomics Used?

Microeconomics has a wide variety of uses. Policymakers may use microeconomics to understand how public economic policies affect decision-making by consumers and businesses, such as the effect of setting a minimum wage or subsidizing the production of certain commodities. Businesses may use microeconomics to analyze pricing or production choices. Individuals may use it to assess purchasing and spending decisions.

## What Is Utility in Microeconomics?

[Utility](https://www.investopedia.com/ask/answers/032615/what-concept-utility-microeconomics.asp) refers to the degree of satisfaction that an individual receives when making an economic decision. The concept is important because decision-makers are often assumed to seek maximum utility when making choices within a market.

## How Important Is Microeconomics in Our Daily Life?

Microeconomics is critical to daily life even in ways that may not be evident to those engaging in it. Take the case of someone who wants to buy a car. Microeconomic principles play a central role in individual decision-making. They may consider incentives (rebates or low interest rates) when assessing whether to purchase a vehicle and may select a make and model based on maximizing as they stick to their budget. A car company will have made similar microeconomic considerations in the production and supply of cars into the market.  

## The Bottom Line

Microeconomics is a field of social sciences focused on the decision-making of individuals and firms within economies. It studies what influences people and companies in their decisions, whether that's what they purchase or what to produce. Microeconomists formulate various models based on logic and observed human behavior. They test the models against real-world observations.

> **Article Sources**
>
> 1.  S.P.S. Chauhan, via Google Books. "[Microeconomics: Theory and Applications, Part 2](https://books.google.com/books?id=sPUcxAQ05t8C&printsec=frontcover#v=onepage&q&f=false)." Page 224.
>     
> 2.  Oregon State University. "[Intermediate Economics, Chapter 2, Utility](https://open.oregonstate.education/intermediatemicroeconomics/chapter/module-2/)."