Defining 'Scope of Micro'
Microeconomics focuses on individual actors within the economy, such as consumers, workers, and businesses. It studies market mechanisms that establish relative prices among goods and services and allocation of limited resources.
Micro vs Macro Divergence
Unlike macroeconomics, which analyzes the entire economy and issues like inflation or unemployment, microeconomics delves into the decisions of single entities and their interactions in markets.
Consumer Behavior Insights
Microeconomics unveils why individuals make purchasing choices, introducing concepts like 'utility', 'demand elasticity', and 'marginal' decision-making, which are crucial for understanding market dynamics.
Firm's Production Decisions
At a micro level, firms' production, pricing, and efficiency are scrutinized. The theory of the firm underpins market structures from perfect competition to monopolies.
Market Structure Complexity
Market structures vary widely. Some markets are perfectly competitive with many small firms, while others are controlled by monopolies or oligopolies, significantly affecting pricing and availability.
Externality and Market Failure
Microeconomics also addresses externalities - costs or benefits affecting bystanders. Positive or negative externalities can lead to market failures, where markets don't efficiently allocate resources.
Government Intervention Rationale
Microeconomic theory informs government policy. It helps in understanding when a market fails to produce a socially desirable outcome, thus providing a rationale for government intervention.