Microeconomics studies how individuals and firms allocate limited resources and make rational decisions. Applied microeconomics uses these concepts to understand the behavior of producers and buyers, while macroeconomics deals with overall national wealth. The law of supply and demand is central to microeconomics, and mass markets are assumed to have sufficient income for subsistence and discretionary purchases. Despite sluggish economies, people continue to consume goods and services.
Microeconomics is derived from the Greek term “micro”, meaning “small” and economics, the discipline of the mother. It is the subspecialty of economics that strives to understand how individuals, households or consumers and firms or producers choose to allocate their limited resources and how they arrive at these decisions rationally. Applied microeconomics is simply the use of microeconomic concepts to understand the behavior of producers and buyers. Its large-scale counterpart, macroeconomics, is best known for dealing with the sum total of all economic activity in a country, therefore it is concerned with the overall wealth of a nation.
In applied microeconomics, the discipline strives to understand the behavior of firms and individual consumers as a model of economically motivated consumption on a larger scale. Ultimately, end-consumer priorities and desires determine what they will buy and, once they reach a critical mass, will influence what is produced and what resources are consumed. For example, if households and end consumers want hamburgers, restaurants make hamburgers and buy the raw materials to make them. In turn, farmers will be incentivized to raise livestock and use the necessary resources to meet demand.
The law of supply and demand is at the heart of applied microeconomics. All other factors held constant, an increase in price will reduce demand because some buyers will no longer be able to buy the product in question. If prices rise enough, more producers enter the market, excited by the prospect of higher revenue. In late 2011, for example, gold doubled in price in a matter of weeks, due in part to economic uncertainty on both sides of the Atlantic. This makes opening formerly dormant mines worthwhile, and even mining for the precious metal can resurface.
Applied microeconomic models rightly assume that mass markets have sufficient income for subsistence goods and even some discretionary purchases. At the end of 2011, however, the United States and the industrialized countries of the eurozone were plagued by sluggish economies for the fourth consecutive year. Governments were caught between the need to contain the continuing deficits of neo-socialism and the desire to be seen to be helping producers and consumers. This is not to say that microeconomics has failed policymakers. After all, people continued to eat, drink, play and travel, albeit perhaps more cautiously.
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