Modern microeconomics examines the purchasing behavior of individuals and firms, which affects supply and demand. It focuses on what influences individual buyers and sellers, and is applicable for start-ups and individual consumers. It can predict market failure and has weaknesses, including assumptions of rational markets and full employment.
Modern microeconomics is an examination of the purchasing behavior of individuals and separate firms that evolved out of the economic practice of price theory, which was a fundamental aspect of economic theories along with monetary policy in the early 1940s. motivates the buying behavior of individuals and firms, which directly affects supply and demand, and then these individual observations of behavior are aggregated to obtain a broader perspective of economic activity. Microeconomics, however, does not expand this analysis to include larger economic influences on a national or global scale, such as gross domestic product (GDP) analysis.
When modern microeconomics looks at markets, its main concern is what influences individual buyers and sellers, as this general behavior is what drives prices and output, or productivity, within markets. As it is a bottom-up approach to economic theory, its most applicable value is for start-ups and individual consumers who want to gain access to a specific market or buy goods or services at an optimal value for price. It is here that modern microeconomics is a direct descendant of price theory, which is a broad attempt to understand the intrinsic monetary value that human beings place on specific goods and services.
While the principles upon which modern microeconomics is based may seem simple, like calculating supply and demand figures at the local level and expanding them to a broader perspective, actually determining the human reasoning that goes into setting prices is difficult. to quantify. The Scottish pioneer of eighteenth-century economic theory, Adam Smith, noted this problem as early as 1776 with the Diamond Water Paradox. The Water with Diamonds Paradox asks the perplexing question of why humans place so little monetary value on water and such a high value on diamonds, when water is essential to life and, for the average human being, diamonds are virtually have no practical value.
Early price theory, therefore, recognized the fact that prices in a market are based on two different types of aggregate stock valuations of people in society. Goods have a value in use, as with water, or a value in exchange, which diamonds hold at a very tight and high level. The exchange value of a good is also largely based on the amount of work required to obtain it, which gives rare items that are difficult to obtain, even with intense work, a high individual value. Labor is the basis of price theory and modern microeconomics, as it determines the relative scarcity or abundance of all limited resources, and labor itself can be a limited resource that is included in the calculations.
After determining the set prices for individual purchases and the underlying causes of price levels, modern microeconomics must also try to understand the strength of the market to support a specific price. This is done by looking at the availability of general resources and labor and how efficiently they are allocated to production. The practice of modern microeconomics, therefore, has micro foundations that build data from the use of individual motivations, but it must also use broader product pricing factors to understand how efficient and stable a market is.
One of the core values of modern microeconomics is that it can predict market failure before macroeconomics or national economic policy sees it on the horizon. This is because modern microeconomics looks for underlying principles that balance supply and demand beyond the control of government forces. Where efficiency is not present in production, consumption or distribution, it is a strong indicator that prices and markets are subject to rapid change.
Some weaknesses of microeconomics, however, include the assumption that markets and competition are rational environments that seek a natural balance. Price fluctuation assumptions are also based on the idea of full employment and that major influences, such as trade barriers, have no direct impact at the local level. As of 2011, attempts to overcome these limitations involve the creation of increasingly complex computational models of microeconomic activity that fit the reality of price fluctuations as closely as possible.
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