Microeconomics is the branch of economics that studies how individuals, households, and firms make decisions and how their interactions determine the allocation of scarce resources. Its subjects include consumption, production, prices, competition, incentives, and economic welfare. Unlike macroeconomics, which examines aggregate phenomena such as national output and inflation, microeconomics focuses on particular decision-makers and markets. “Micro” refers to the level of analysis, not necessarily geographical scale: a worldwide commodity market can be studied microeconomically. (imf.org)
Scope and development
Microeconomic analysis encompasses consumer demand, firms’ production decisions, market organization, and the effects of institutions and public policy. Partial-equilibrium analysis examines a particular market while treating relevant conditions elsewhere as given. General-equilibrium analysis considers multiple interconnected markets simultaneously, recognizing that a change in one market may affect prices, incomes, and resource allocation in others. Microeconomic models also provide foundations for many macroeconomic explanations of consumption, investment, and employment. (imf.org)
The distinction between microeconomics and macroeconomics became established as aggregate economic analysis developed into a separate field during the twentieth century, particularly following the Great Depression. Earlier economic thought had already examined exchange, production, and the coordination of individual decisions. The subsequent separation did not make the two fields independent: their explanations frequently overlap, especially when individual choices are aggregated into economy-wide outcomes. (imf.org)
Choice, preferences, and constraints
A central framework describes choice through preferences and constraints. Consumers select among feasible combinations of goods, services, leisure, and future consumption, subject to limits such as income and available time. Utility represents the ranking of alternatives; it need not be a directly measurable quantity of happiness. Indifference curves describe combinations regarded as equally desirable, while budget constraints identify affordable combinations. Opportunity cost measures the value of the best alternative forgone when a choice is made. (core-econ.org)
Models often examine marginal decisions: whether an additional unit of an activity provides benefits exceeding its additional cost. A change in price can alter both relative incentives and purchasing power, conventionally distinguished as substitution and income effects. The same constrained-choice framework can analyze working hours, saving, and decisions involving trade-offs between present and future benefits. Its predictions depend on the preferences and constraints specified, rather than on an assumption that every person makes identical choices. (core-econ.org)
Demand, supply, and prices
Supply and demand describe the quantities buyers and sellers are willing to exchange at different prices, holding other relevant conditions constant. In a competitive model, market equilibrium occurs where quantity demanded equals quantity supplied. Changes in income, preferences, production technology, or input costs can shift the curves. A change in the good’s own price instead produces a movement along a given curve. (live.ocw.mit.edu)
Price elasticity measures responsiveness in percentage terms, allowing comparisons across goods and markets. Comparative statics compares equilibria before and after a change in an underlying condition. These tools help explain why identical shocks produce different effects in different markets. They also illuminate tax incidence: in the standard competitive model, the economic burden of a tax depends on relative demand and supply responsiveness, not simply on which party formally pays it. (live.ocw.mit.edu)
Firms and market structure
The theory of the firm examines how inputs and technology determine output and costs. Marginal cost is the additional cost of producing another unit. Economies of scale occur when long-run average cost falls as output expands. Profit-maximizing models compare additional revenue with additional cost, while distinguishing short-run constraints from long-run adjustment. (live.ocw.mit.edu)
Under perfect competition, individual firms take market prices as given. A monopoly faces market demand and can influence price through its output choice. More generally, market power allows firms to influence the terms of exchange. Oligopoly involves a small number of significant sellers whose decisions may depend on anticipated responses from rivals. Different structures therefore require different models of pricing, entry, and competitive behavior. (imf.org)
Strategy and information
Game theory analyzes situations in which one participant’s outcome depends on others’ decisions. It supplies models of bargaining, competition, cooperation, and strategic interaction. Mechanism design asks how rules can be constructed to generate particular outcomes when participants pursue their own objectives, including circumstances in which information is privately held. (ocw.mit.edu)
Information asymmetry arises when participants possess different relevant information. Adverse selection concerns hidden characteristics affecting participation or exchange; moral hazard concerns actions that another party cannot adequately observe or verify. These problems help explain why employment, lending, and insurance contracts differ from simple transactions with fully observable quality and performance. (core-econ.org)
Welfare and market failure
Welfare economics evaluates allocations and their effects on participants. Pareto efficiency means that no feasible change can improve someone’s position without worsening another’s. Efficiency does not establish whether an allocation is equitable. Consumer surplus measures willingness to pay above actual expenditure, while producer surplus measures receipts above the relevant supply costs. Deadweight loss represents forgone gains from exchange relative to an appropriate efficiency benchmark. (live.ocw.mit.edu)
Market failure occurs when market outcomes are inefficient. Causes include limited competition, incomplete contracts, and an externality, whereby decisions affect others without those effects being fully reflected in the transaction. A public good is non-rival and non-excludable, creating difficulties for financing through individual purchases. Policy analysis compares potential remedies with their informational requirements, implementation costs, and distributional consequences rather than assuming intervention automatically improves outcomes. (core-econ.org)
Empirical methods
Empirical microeconomics uses econometrics to estimate relationships, test models, and evaluate policy effects. Data may describe individuals, households, firms, or transactions. Researchers distinguish statistical association from causal explanations and examine whether estimated relationships identify the effects claimed. Evidence can assess predictions about consumption, labor supply, production, and responses to incentives; results remain conditional on data quality, model specification, and the validity of the identifying assumptions. (imf.org)