What Is Applied Microeconomics?

Microeconomics is derived from the Greek term “micro,” meaning “small,” and economics, the mother discipline. It is the subspecialty of economics that strives to understand how individuals, households or consumers, and companies or producers choose to allocate their limited resources and how they arrive at those decisions in rational fashion. Applied microeconomics is quite simply the use of microeconomic concepts to understand the behavior of producers and buyers. The larger-scale counterpart, macroeconomics, is best known for dealing with the sum total of all economic activity in a country, hence concerning itself with the overall wealth of a nation.

In applied microeconomics, the discipline strives to understand the behavior of firms and individual consumers as a blueprint of economically motivated consumption on a larger scale. Ultimately, the priorities and wants of end consumers determine what they will buy and, on reaching a critical mass, influence what will be produced and what resources will be consumed. For example, if households and end consumers want hamburgers, then restaurants will make hamburgers and purchase the raw materials to make them. In turn, the farmers will be encouraged to raise cattle and will use the resources needed to fill the demand.

The supply and demand law is the heart of applied microeconomics. All other factors held constant, an increase in price will drive demand down because some buyers will no longer be able to afford the product in question. If prices go up enough, more producers enter the market, enthused as they are by the prospect of greater revenue. In late 2011, for instance, gold doubled in price in a matter of weeks, owing partly to economic uncertainty on both sides of the Atlantic. This makes it worthwhile to open up previously dormant mines, and even panning for the precious metal could experience resurgence.

Applied microeconomic models assume, quite rightly, that mass markets have enough income for subsistence goods and even some discretionary purchases. In late 2011, however, the United States and the industrialized nations of the Euro zone were bedeviled by sluggish economies for the fourth year running. Governments were caught between needing to rein in the continuous deficits of neo-socialism and the desire to be seen aiding both producers and consumers. This is not to say that microeconomics failed the policy-makers. After all, people continued to eat, drink, play, and travel, if perhaps more cautiously.