Guide to Microeconomics

Microeconomics is the subfield of economics that studies how economic decisions are made on the level of individual people or firms, as well as phenomena affecting those decisions.

Frequently Asked Questions
  • What Is the difference between microeconomics and macroeconomics?

    Microeconomics focuses on economic decisions made by individuals and single firms. Macroeconomics focuses on economic decisions and phenomena on a regional, national, or global scale.

  • Which factors determine the elasticity of demand of a good?

    While numerous factors can affect demand elasticity, there are two common ones. The first is availability of substitute goods. If there are easily available substitutes for a good, then demand will be very elastic, as consumers will just switch to the substitutes rather than pay more. Demand will be more or less elastic depending on whether consumers can go without a good. A luxury good may be something that consumers can forgo if prices increase, but essentials like medical care or food are required for a person to live.

  • What is the difference between the income effect and the substitution effect?

    The income effect is when a person changes their purchasing patterns based on how much money they make. For example, a person may buy a luxury sports car if their income goes up, rather than a family sedan. The substitution effect is when a person substitutes one god for another when the price of that good changes. For example, if one brand of snack food goes up in price, a person may purchase another brand.

  • What's the difference between diminishing marginal returns and returns to scale?

    Returns to scale describe how much production of a good or service increases for a particular increase in fixed inputs, such as machinery, usually in the long term. Diminishing marginal returns is when variable inputs, such as raw materials, are changed and you get an increasingly small increase in production.

  • What are some examples of the Law of Demand?

    One example of the law of demand is how a store may sell more items when they go on sale, because the decrease in price increases demand. Another example is how when the price of gas goes up, people will drive less to buy less gas, as demand goes down as price increases.

Key Terms

Explore Guide to Microeconomics

Midsection Businessmen Analyzing Charts on Laptop in Office
Indifference Curves in Economics: What Do They Explain?
Inferior Good: Definition, Examples, and Role of Consumer Behavior
What Is the Law of Demand in Economics, and How Does It Work?
Reflection of stock market graph in window
Long Run: Definition, How It Works, and Example
Market Price: Definition, Meaning, How To Determine, and Example
Substitute
Barriers to Entry: Understanding What Limits Competition
Young people work in modern office.
Law of Diminishing Marginal Productivity
Hotdog and Hamburger on an American flag napkin and toothpick
Marginal Rate of Substitution (MRS)
Rent Seeking
Internal vs. External Economies of Scale: What’s the Difference?
Disequilibrium: Definition in the Market, Reasons, and Example
Businessperson Covering Stacked Coins On Weighing Scale
External Economies of Scale: Definition and Examples
What Are Imperfect Markets? Definition, Types, and Consequences
Two happy shoppers comparing purchases in shopping bags
Marginal Utilities: Definition, Types, Examples, and History
Price Leadership: Definition, How It Works, and Types
Short Run: Definition in Economics, Examples, and How It Works
Theory of the Firm: What It Is and How It Works in Economics
Checking the quality of products and packaging
What Is Theory of Price? Definition In Economics and Example
euro coins sinking in water
Diminishing Marginal Returns vs. Returns to Scale: What's the Difference?
Giffen Good Definition: History With Examples
Choices
Marginal Rate of Transformation (MRT): Definition and Calculation
Minimum Efficient Scale (MES): Definition With Graph
Price Sensitivity: What It Is, How Prices Affect Buying Behavior
Accounting
Switching Costs: Definition, Types, and Common Examples
Person writing on whiteboard the word economics
Distinguishing Demand Function From Utility Function
Demand Shock: Definition, Causes, Impact, and Examples
What Is the Race to the Bottom?
Old automation machine
Ratchet Effect
Collusion
What Is a Supply Shock and What Causes It?
Factory workers doing metal work
Nonfarm Payroll: Definition, How It Works, and Why It's Important
Compound Net Annual Rate – CNAR Definition
What to Know About Economic Value Added (EVA)
Sales Price Variance
Business Planning
Style Matters In Financial Modeling
Supply
Income Effect vs. Substitution Effect: What's the Difference?
Close-Up Of Coins On Weight Scale
Understanding Economies of Scope vs. Economies of Scale
Blackout Period: Definition, Purpose, Examples
H-1B Visa to Green Card Backlog: Why Tech Companies Demand Change
Perfect vs. Imperfect Competition: What's the Difference?
Economic Equilibrium
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Utility in Economics Explained: Types and Measurement
Consumer Surplus vs. Economic Surplus: What's the Difference?
Producer Surplus: Definition, Formula, and Example
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What Is the Income Effect? Its Meaning and Example
Caught
4 Famous Inventory Frauds You've Never Heard of
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Normal (aka Necessary) Good in Economics: Definition, Examples
A reflection of a building in the glass of a building where people walk through it in casual clothes
Supply Curve
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Diseconomies of Scale Definition: Causes and Types Explained
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What Is Inelastic? Definition, Calculation, and Examples of Goods
Demand Curves: What Are They, Types, and Example
Microeconomics Definition, Uses, and Concepts
What Are Economies of Scale?
Comparing a Dominant Strategy Solution vs. Nash Equilibrium Solution
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How Microeconomics Affects Everyday Life: Renting an Apartment
Tragedy of the Commons: What It Means in Economics
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What Is Productivity and How to Measure It Explained
What Are Some Examples of the Law of Demand?