What is Microeconomics?

Next video:
Loading the player...

Microeconomics is considered the starting point of Macroeconomics, and deals with individual and small business economic decisions. 

These individual decisions, in aggregate, affect the demand and supply of goods and services throughout the entire economy.

One of the most commonly analyzed topics in microeconomics is the model of supply, demand and equilibrium. Under this model, the producers and consumers of a good determine how its price and quantity is traded between them.  In a free market, the price of goods will vary until it hits an equilibrium point, which is defined as the point at which the total quantity of goods demanded equals the quantity of goods supplied. 

Using the model of supply and demand, economists are able to understand how individuals will price their goods and allocate their limited resources in the most efficient way.

To illustrate this, take the example of Lisa's Clothing Incorporated. Lisa's clothing is about to launch a new jacket in Northville, USA. This jacket helps their local customers stay warm in very low temperatures, and every single person in Northville wants one.

Lisa's wants to sell 10,000 jackets at $1,000 USD each, but no one in Northville is willing to pay that price. This creates an excess supply of jackets in Northville, since the supply is greater than the demand.

The locals of Northville would be happy paying $100 USD for the jacket, and would therefore buy all 10,000 jackets at this price. However, Lisa's thinks this price is too low for such an amazing jacket, so they're only willing to sell 10 jackets for $100. 10 jackets is not a large enough supply for the people of Northville, and they sell out almost instantly. The 10 low priced jackets create excess demand, as there is now more demand for $100 jackets than there is an actual supply of them. 

Lisa's clothing then decides to increase the price above $100, until they find the maximum price they can charge while still being able to sell as many jackets as possible. In this case, 5,000 jackets at $500 each is that sweet spot - known as the equilibrium point.


Related Articles
  1. Economics

    Perfect Competition

    Perfect competition is an economic idea that does not exist in the real world but can be used as a standard to measure the efficiency and effectiveness of real world markets.
  2. Economics

    Mixed Economic System

    Many of today's democracies operate under what is known as a mixed economic system, which combines aspects of capitalism and socialism.
  3. Professionals

    Free On Board

    Free On Board is a legal term referencing the passing of title and liability between buyers and sellers of goods.
  4. Options & Futures

    How to Trade Futures Contracts

    Futures is short for Futures Contracts, which are contracts between a buyer and seller of an asset who agree to exchange goods and money at a future date, but at a price and quantity determined ...
  5. Savings

    Money Market Accounts vs. Savings Accounts

    An interest-bearing account that pays a higher interest rate than a savings account and gives the account holder limited check-writing ability.
  6. Investing

    Who are Venture Capitalists?

    Venture capital investment firms can provide the seed money for high-risk, start-up companies. People called venture capitalists run these firms, and make the investment decisions.
  7. Economics

    Nominal vs. Real GDP

    GDP stands for gross domestic product and is the measure of the total economic output of the goods and services of a country.
  8. Bonds & Fixed Income

    Supply, Demand And Interest Rates: How They Relate

    A recent report from the Fed reveals a disconnect in global bond supply and demand, which partially explains why interest rates have fallen so far in 2014.
  9. Professionals

    Microeconomics Vs. Macroeconomics

    Economics is divided into two broad categories: micro and macro. Find out what the difference is between them and where they overlap.
  10. Economics

    A Practical Look At Microeconomics

    Learn how individual decision-making turns the gears of our economy.

You May Also Like

Hot Definitions
  1. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  2. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  3. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  4. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  5. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  6. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
Trading Center