The Basic Concepts of Microeconomics That Every Student Should Know
Microeconomics is considered a social science that majorly focusses on how human decisions affect the distribution and utilization of limited resources. Students studying this discipline acquire knowledge of how to make effective and productive decisions in business. In addition, they also get to understand why various goods have different values. In general, the field of microeconomics is vast and is more complete than macroeconomics.
Microeconomics gives insight on what you should expect when factors of production change or when certain decisions are made. It breaks down individual actors into subgroups like buyers, owners of business and sellers. The subject studies the explicit interaction of these individual actors with the demand and supply for resources by using interest rates and money as a mechanism of pricing for coordination.
How Microeconomics Is Used
On the contrary, microeconomics does not explain what happens in the market. Instead, it is a pure normative science that only tells you what to expect when certain factors change. For example, if Ford increases the prices of their cars, the theory of microeconomics says that Ford will have fewer customers than before. If you are an investor in the stock market and you want to buy shares in Apple Inc. then knowledge of microeconomics can help you understand why stock prices fall when fewer iPhones are bought by consumers.
Concepts Taught In Microeconomics
If you are pursuing a course in Microeconomics, you are likely going to encounter several key concepts including but not limited to the following.
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- Supply, demand, and equilibrium – This theory is used to set the prices in a competitive market. In economic equilibrium, the price demanded by consumers is the same one given by the producers.
- Theory of production: This is the study of how inputs are converted into outputs.
- The cost of production: it states that the cost of the resources used in making a product determines the price of goods and services.
- Labor: This theory explains the dynamics and functioning of the wage labor market. It tries to show the pattern of wages, income, and employment.