What Is Involved in the Study of Microeconomics?

The study of microeconomics involves the study of basic economic principles as they apply to individuals and firms. This is in direct contrast to macroeconomic principles, which apply to and affect the economy as a whole. Some of the factors included in the study of microeconomics are the principles of demand and supply and their connection to individuals and firms, the principle of opportunity cost, consumer choice, and the effect of government policies.

One factor in the study of microeconomics is the principle of demand and supply. Under normal circumstances the market has both buyers and sellers, which will create perfect competition and not cause any significant increases or decreases in the costs of products and services. Economic students will learn that this is not always the case, because some categories of buyers or sellers often have the ability to manipulate the prices of goods to their own ends. For instance, the price of diamonds is set by a few key players in the industry who own large equities in some of the world’s largest diamond mines. They manipulate the price of diamonds by maintaining a strict control over the quantity of diamonds in the market at a given time. The purpose of limiting the amount of diamonds in the market is so as to create the illusion of scarcity and rarity, which allows them to take advantage and set high prices for the diamonds.

Part of the study of microeconomics is the theory of opportunity cost, which is the cost of something that is given up in order to gain the next best advantage. Opportunity cost is simply a way of assigning a value to something. For instance, a man may go to they grocery store to buy a carton of eggs that cost $2 US Dollars (USD), but he instead decides to buy a bottle of orange juice which cost $4 (USD). The opportunity cost for buying the bottle of orange juice is two carton of eggs.

The effect of governmental policies include factors like the effect of quotas, taxes and subsidies on the behavior of consumers and firms. Taxes can affect the manner in which consumers expend goods, such as how high taxes are imposed on cigarettes to discourage people from smoking. The efficacy of such high taxes can be determined by assessing the demand for the product before and after the imposition of the high taxes. Import quotas may affect the amount of a commodity, which may be imported into a country, leading to a situation where the quantity of the affected commodity is controlled. Such a situation could create an artificial scarcity of the good, causing importers to increase the price of the products.