Microeconomics

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Microeconomics is the branch of economics that deals with transactions between suppliers and consumers, acting individually or in groups. It is conventionally defined as being concerned with the allocation of scarce resources among alternative uses, but it is really about such down-to-earth matters as the way consumers' and suppliers' decisions affect the prices and the output of goods and services. Its practical importance arises from the influence of those decisions upon people's wellbeing. Although it may seem to about money-related matters, its scope is in fact much wider. It is about how all sorts of needs and preferences can be met by mutually advantageous transactions.

Microeconomics employs many terms that are part of everyday conversation, such as "supply and demand" and "welfare", but it often defines them more narrowly. If confusion is to be avoided, some attention has to be given to its terminology and its basic concepts before attempting to uderstand its prescriptions and policy implications.

The nature of economic activity

Economic activity consists essentially of exchanges that take advantage of the existence of inter-personal differences. If two people have different skills, for example, both can benefit from an arrangement under which each concentrates on what he does best and exchanges what he produces with the other - an arrangement known as the division of labour. At first sight it might seem that each would have to be better than the other at some at some useful activity. In fact that is not necessary. The law of comparative advantage proves that, even if one them had an absolute advantage in every type of activity, both would benefit if each person concentrated upon what he does best and exchanged the product with the other person. For example, a writer of best-sellers who was better at plumbing than any of the available plumbers should nevertheless stick to his writing and hire a plumber. What is true of skill differences is true also of other advantages, such as the possession of different tools or access to more fertile land. (And what is true of persons is true also of countries, making comparative advantage the driving force of international trade.)

In examining production and consumption as though they are separate activities it is important to remember that in reality they are interdependent, and that neither can survive without the other. (The fact that they are usually connected by monetary transactions is, strictly speaking, irrelevant. In microeconomic activity money serves only as convenient measuring-stick - unlike the more important part it plays in macroeconomics.) Microeconomics, like macroeconomics is the study of an interactive system which can yield misleading conclusions if any individual component is considered in isolation

Markets

(to includecompetition)

How it works out

(to includeeconomic efficiency)

Welfare consequences

(to include economic welfare)