Microeconomics is the sub branch of economics that goes into the detail on the specifics of firms and households. It studies the decisions made at the household and individual level as well as those made by companies. What will mama mboga charge for three onions? How does the boda boda guy determine the price to charge you? Why will you buy a house first before a car? How much salary is Safaricom offering to graduate trainees? That’s microeconomics.
Many individualized decisions are made in the economy and these influence the overall economy. As economic agents, to understand how the economy works we must first understand how the whole economy operates. It is these unlimited decisions that influence the economy. However, economists will not take every data in the economy and consider every situation.
Instead, economists use models to understand the microeconomics of an economy. Most of the topics covered under microeconomics are such models. for example, supply and demand forces. Without models, it would be difficult to explain some situations in the economy. In other words, models remove the unnecessary noise to make it easy to zoom out and explain what happens in the whole economy.
The supply and demand model will make the economy all about selling and buying. But we all know that is not the case.
While models are very useful tools to explain the economy, they are not 100% effective because some accuracy is lost while trying to understand a specific concept in the economy. Studying human behaviour can unearth the possible effect that communities have on the economy. Thus, psychology and sociology are disciplines that can be used to obtain approximate explanations.
- Consumer and producer surplus
- Substitute goods
- Economies of scale
- Price elasticity of demand
- Cross elasticity of demand
- Income elasticity of demand
- Price elasticity of supply
- Market equilibrium
- Production possibility frontiers
- Positive and normative statements
- Opportunity cost
- Specialisation and division of labour
- Market failure
- Positive externalities – the benefit to a third party.
- Negative externalities – cost imposed on a third party.
- Merit goods – People underestimate the benefit of good, e.g. education
- Demerit goods – People underestimate costs of good, e.g. smoking
- Public Goods – Goods which are non-rival and non-excludable
- Information failure – lack of information
- Government failure
- Government intervention
- Carbon Tax
- Buffer stocks
- Carbon Trading
- Specific tax
- Behavioral economics – Examining the many factors influencing how agents make decisions
- Objectives of firms
- Diminishing returns
- Allocative Efficiency
- Productive Efficiency
- Dynamic Efficiency
- Pareto efficiency
- Labour markets
- Labour Market Imperfections
- Market structure
- Monopolistic competition
- Perfect competition
- Competition policy
- Contestable markets
- Price discrimination
- Pricing strategies
Other advanced topics in microeconomics
- Isoquant and isocosts
- Adverse selection explained
- Asymmetric information problem
- Expected Utility Theory
- Marginal utility theory
- Indifference curves and budget lines