Microeconomics

Microeconomics studies the decisions of individuals, households, and firms as they interact in markets for goods, services, and factors of production. It analyzes how prices and resource constraints influence choices and how these choices allocate scarce resources across competing uses.

Key theories include consumer theory, which analyzes preferences, utility, and budget constraints, and producer theory, which examines costs, production functions, and profit maximization. The interaction of supply and demand in markets determines prices and quantities and, under reasonable assumptions, guides resources toward efficient use.

Marginal analysis and elasticity are central tools. Economists study how small changes in prices, incomes, or other factors alter quantities demanded or supplied, using concepts such as marginal cost, marginal revenue, and price elasticity of demand.

Markets vary in structure. In perfect competition, many buyers and sellers lead to price-taking behavior; in monopoly, oligopoly, or monopolistic competition, market power affects outcomes. In competitive markets, under suitable conditions, markets tend toward Pareto efficiency with positive consumer and producer surplus.

Market failures arise when markets do not allocate resources efficiently, due to externalities, public goods, information asymmetries, or imperfect competition. Welfare economics studies efficiency and distributional effects, providing a framework for evaluating policy interventions.

Policy relevance: governments use taxes, subsidies, price controls, regulation, and public provision to correct inefficiencies, stabilize markets, or influence distribution. Microeconomics also relies on empirical methods to estimate demand and supply, test theories, and assess policy implications.