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What Is Microeconomic Analysis?

Jim B.
Jim B.

Microeconomic analysis is the study of how the actions of individual people and business firms affect the economy. This is in contrast to macroeconomics, which focuses instead on the economy of an entire nation as a whole. Individuals, in terms of how they make decisions on consumption depending on the money they earn and the price of the products they consume, are at the heart of microeconomic analysis. In addition, the way that individual firms set production levels and than set prices for the goods that they produce are also analyzed by those interested in microeconomics.

There are two different methods used by economic experts to dissect economic factors. One way is to take the economy of an entire nation and analyze the way that factors like inflation, interest rates, and employment levels sway the economic conditions at large. The other is to take the individuals that make up an economy, both the people who consume and the businesses that produce, and see how they react to different economic stimuli. This type of study is known as microeconomic analysis.

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At the heart of microeconomic analysis is the law of supply and demand. This law, which can also be found in macroeconomic analysis, basically states that these two factors will often move in inverse proportion to one another. As the public demand for a product rises, the supply will dwindle. Once the supply rises in response to this, demand will lessen. At what point equilibrium is reached between supply and demand is of great concern to those focused on microeconomics.

How supply and demand relates to price levels also is a major factor in microeconomic analysis. There are some products which will generate demand even when their price levels rise. If the firms that make such products push prices too high, consumers may react and find other alternatives. This concept is known as the elasticity of demand, and it is crucial to macroeconomics.

Businesses are also a big part of a thorough microeconomic analysis. Analysts study how businesses manage costs incurred in the process of hiring labor and procuring resources. It is also important for businesses to set price levels where they are able to maximize profits. Firms must also decide when they need to alter the fixed inputs, such as factories or salary structures, they have for production. When this occurs, it is said that the short run, in economic terms, becomes the long run, and how prices and costs adjust in this period is another important part of microeconomics.

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