Overview
Microeconomics zooms in. Instead of looking at the whole economy (GDP), it looks at how you decide to buy coffee vs. tea, or how a company decides how many cars to build.
Core Idea
Marginal Analysis: Decisions are made at the margin. You don’t ask “Should I eat food?” You ask “Should I eat one more slice of pizza?” You stop when the marginal benefit equals the marginal cost.
Formal Definition (if applicable)
Opportunity Cost: The value of the next-best alternative foregone. The cost of going to college isn’t just tuition; it’s also the wages you didn’t earn by working instead.
Intuition
Life is a series of trade-offs. Resources (time, money) are scarce. Microeconomics provides a framework for making the best possible choices given those constraints.
Examples
- Monopoly: One seller controls the market (e.g., local utility company).
- Oligopoly: A few sellers dominate (e.g., Coke and Pepsi).
- Externalities: When a transaction affects a third party (e.g., pollution).
Common Misconceptions
- “Economics is just about money.” (It’s about choice and incentives. You can use microeconomics to study dating, crime, or voting.)
- “People are always rational.” (Behavioral economics shows we often make irrational choices.)
Related Concepts
- Utility: A measure of satisfaction or happiness.
- Production Possibility Frontier: A curve showing the maximum output combinations of two goods.
- Public Goods: Goods that are non-excludable and non-rivalrous (e.g., national defense).
Applications
- Pricing Strategy: Price discrimination (charging different prices to different people, like airline tickets).
- Regulation: Breaking up monopolies (antitrust).
- Environmental Policy: Carbon taxes to internalize externalities.
Criticism / Limitations
Models often rely on simplifying assumptions (like “Homo economicus”) that don’t perfectly reflect complex human behavior.
Further Reading
- Varian, Intermediate Microeconomics
- Levitt & Dubner, Freakonomics