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. Professionals

    Sample Questions 1 - 5

    Sample Questions 1 - 5
  2. Economics

    Economics Basics: Supply and Demand

    Investopedia explains: The Law of Demand, The Law of Supply, Supply and Demand Relationship, Equilibrium, Disequilibrium, and Shifts vs. Movement
  3. Professionals

    Supply and Demand

    Supply and Demand
  4. Professionals

    Supply and Demand

    Supply and Demand. Focuses on price movements caused by shifts in the demand or supply curve.
  5. Economics

    Introduction To Supply And Demand

    Find out all about supply and demand and how it relates to your daily purchases.
  6. Term

    What Is Equilibrium?

    Equilibrium is a state of balanced supply and demand.
  7. Savings

    5. Finders Keepers

    You've heard it a million times - you should save more money. If you're having a tough time doing it, check out these 5 simple "tricks" to saving more money.
  8. Economics

    Economics Basics: Conclusion

    Recap of the key learnings from Investopedia's economics tutorial .
  9. Savings

    How Microeconomics Affects Everyday Life

    Microeconomics is the study of how individuals and businesses make decisions to maximize satisfaction. Microeconomic principles can describe many everyday experiences. We use renting a New York ...
  10. Professionals

    Microeconomics

    CFA Level 1: Section 3 Microeconomics

You May Also Like

Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center