The study of the decision-making processes of consumers
and producers and their interaction in markets.
Since the 1930s, economists have contrasted microeconomics with macroeconomics. The latter focuses on the
economy as a whole and the determination of aggregates including the price level, unemployment rate, and gross domestic product. Microeconomics is concerned primarily with
determining the price of a good, the quantity of the good
bought and sold, and the effect of the transaction on the wellbeing of consumer and producer. Microeconomic theory assumes that individuals act as rational maximizers—that they
weigh costs against benefits in making decisions and that they
implicitly or explicitly attempt to achieve the highest level of
well-being possible in any given situation. Consumers generally maximize utility, whereas firms try to maximize profits.
The discipline of microeconomics took its modern form in
the late 1800s with the realization that rational maximizers
weigh marginal costs against marginal benefits and with the
understanding that supply (the quantity producers plan to
sell at each price) and demand (the quantity consumers are
willing to buy at each price) interact—like two blades of a
scissors—to determine price and quantity. Microeconomic
theory analyzes product markets ranging from perfect competition (in which there is no interference from government)
to monopoly to input markets (markets for natural resources, labor, and capital) with attention to the conditions in
which markets will achieve economic efficiency and those in
which markets fail to achieve efficiency. In recent decades microeconomics has dominated the social sciences, applying the
paradigm of rational maximization to fields ranging from
public choice (the decision-making of government itself) to
criminal behavior.
During the twentieth century, policymakers increasingly
called on microeconomists to assess and construct government policies. Microeconomic arguments and evidence have
played important roles in the post–World War II move toward free trade, deregulation of industries such as the airline
industry in the late 1970s and 1980s, and debates over the
minimum wage, as well as in overhauling the welfare system,
formulating antitrust rules, using marketable pollution permits designed to entice manufacturers to work harder for a
cleaner environment, and a wide range of other policies.
—Robert Whaples
References
Perloff, Jeffrey. Microeconomics. Reading, MA: AddisonWesley, 1999.