Fundamentals of Microeconomics

Foundations of Microeconomics

What are the fundamentals of Microeconomics? First, we need to define Microeconomics, a general branch of economic theory that analyzes the individual behavior of economic agents within an economy. The other general extension of economic theory is macroeconomics, which focuses on analyzing economic aggregates. In your Bachelor’s and Master’s programs, you will come across some basic and advanced topics on microeconomics. I will give you an introductory entry to microeconomics for your learning process.

Microeconomic Analysis of Economic Agents

The field of microeconomics delves into the behavior and choices of economic agents in an economy, considering the surrounding environmental conditions. Economists strive to gain insight into consumptionproduction, and decision-making related to resource allocation, as well as the underlying factors that influence the selection of available alternatives, e.g., opportunity costs, strategy, social interaction, risk, mobility, and resource restrictions. In the microeconomics field, students learn many theories that seek to explain the optimal decision-making of economic agents under the environmental conditions they face. 

In Microeconomics, students learn how different coordination mechanisms affect the outcomes of decisions of economic agents, e.g., how optimal is a collective monopoly compared to competition between firms in a specific market, or how does market completeness affect market equilibrium in a competitive market? Many academic works cover these and many other specific examples of research microeconomic issues.

Behavioral Types Economic Agents

In general, students learn how to describe the behavior of the following economic agents: Private Households, Firms, and the Government (or collective Household).

Behavior of Private Households

Private Households are economic agents who make personal consumption, income, wealth, and leisure decisions. In Microeconomics, we call this field the theory of household. In microeconomics, a private household is a self-interested and rational individual (Homo Economicus) making decisions based on their preferences and considering environmental restrictions. A private household can be a single person, a family, or a couple making personal decisions.

Behavior of Firms

Firms are economic agents who make production, revenue, cost, and resource allocation decisions. This field of microeconomics is also known as the theory of the firm. To get more insight, read the academic work of R. H. Coase (1937), The Nature of the Firm. In general, firms bundle the resources from private households and the Government and coordinate the production of goods and services to be made available for consumption in an economy. Local and multinational firms compete in different sectors of the economy to efficiently coordinate their activities and maximize social welfare under given environmental conditions.

Behavior of Government

Government or the collective household is an economic agent that makes collective political decisions about allocating, producing, consuming, and redistributing public goods within its jurisdiction, e.g., supranational, federal, national, regional, and local level. Decisions made by the Government are collective and political because there is always a process of political representation of interest involved, ranging from a democratic approach to an autocratic process. Two relatively independent branches of Government in Economics, the fiscal Government and the monetary Government (or central bank), are differentiated in Macroeconomics.

In Microeconomics, we are more interested in explaining the behavior of fiscal Government via taxation and public good provision. In finance, some Microeconomic models are valuable extensions of the theory of finance, monetary economics, and macroeconomics, where the central bank’s behavior is fundamental.

Coordination Mechanisms and Social Interactions of Economic Agents

As a branch of economics, microeconomics lays the foundations of all economic analysis by systematically combining different building blocks to create a behavior model of involved economic agents in a predetermined economic environment, e.g., markets are analyzed by explaining the social interaction of a minimum of two economic agents, one sitting on the demand side and the other on the supply side of the market and negotiating an optimal deal using the price-mechanism under given rules from the Government (e.g., competition laws). The goal in the example is to arrive at an optimal market equilibrium. Therefore, a market is a place for coordinating allocation problems between suppliers and those on the demand side.

Other modes of economic coordination of activities involve social networks via social interactions and the Government via political interest. Private Households coordinate their activities within their family ties, friendships, and social groups, while firms coordinate their activities via cooperation within industries and sectors. Even Governments implement social interactions with other governments at the international level, e.g., The European Union, United Nations, and World Trade Organization. 

Since Government buddles collective decision-making, it has the highest level of influence via political powers and the ability to coarse other economic agents (firms and private households) to behave in a particular manner, e.g., the mobility of persons between countries is regulated by migration laws or treaties such as the those between EU member states. These and many different sub-topics of Microeconomics help explain public policy and choice in real-life situations and show potential conflict between individual options and collective decisions.

Summary: Fundamentals of Microeconomics

In this article, we cover the fundamentals of Microeconomics and explain the general nature of microeconomics. Microeconomics is a branch of economic theory that analyzes the individual behavior of economic agents within an economy, while macroeconomics focuses on analyzing economic aggregates.

Bachelor’s and Master’s programs cover basic and advanced topics in microeconomics. Microeconomics studies the behavior and choices of economic agents in an economy, considering environmental conditions and factors that influence decision-making. Students learn theories that explain optimal decision-making and how coordination mechanisms affect outcomes. Academic works cover specific examples of microeconomic research issues.

Private households make decisions about personal consumption, while firms coordinate the production of goods and services. The government is responsible for political decisions regarding the allocation, production, consumption, and redistribution of public goods through fiscal and monetary policies.
Microeconomics studies the behavior of economic agents in different markets to achieve optimal market equilibrium. It also explores the role of social networks and the government in economic coordination. It helps understand public policy and highlights the potential conflict between individual options and collective decisions.

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Literature for Further Research

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