Microeconomic theory studies the interactions between individual buyers and sellers in decision-making processes, with a focus on maximizing utility or profit. It assumes a market economy and opportunity cost is a core concept. The theory can be applied to running a business and is used to study more realistic systems beyond simplified models.
Microeconomic theory is a subfield of economics that seeks to examine the interactions between individual buyers and sellers throughout the decision-making processes of consumers and businesses. This contrasts with macroeconomic theory, which instead focuses on the general trends and behaviors that characterize entire economic systems. One of the fundamental ideas of microeconomic theory is that both consumers and firms have limited resources which they must decide how to allocate in order to maximize utility, happiness or profit. Many business people study microeconomic theory because a number of ideas can be directly applied to running a business. Such theory can help business owners decide how much of a particular product or service to offer and how much money to charge, for example.
The study of microeconomic theory is usually conducted under the assumption of a market economy or an economy based on competitive supply and demand. In a completely simplified model of a microeconomic system, the more sellers offer a particular product, the more buyers want that product, and neither buyers nor sellers can substantially influence the prices of related goods and services. Microeconomics students tend to examine why, in such an idealized system, consumers favor one seller over another, and how various factors affect the supply and demand for a given product or service.
Opportunity cost is widely regarded as a core concept in this theory. Any allocation of time or other resources comes with an opportunity cost or something that is given up so that something else can be gained. For example, buying one product brings the opportunity cost of another product that one wants but can no longer afford. Similarly, working for an hour may secure a certain amount of money that can be spent on products or services, but costs the worker other tasks that he or she could have completed at the time.
While most of the models used to teach and study microeconomic theory are highly simplified and entirely market-oriented, many economists use the theory to study more realistic systems. For example, they may consider taxes and a variety of welfare systems when examining supply and demand within a given market. They could also look at qualities beyond real goods and services that influence economic systems, such as technological advances, other forms of innovation, and labor markets. Specialized areas of microeconomic theory examine the specific microeconomic terrain of cities, governments, legal systems, and other groups or places that have unique microeconomic systems.
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