Microeconomics is the branch of economics that “analyzes the market behavior of individual consumers and firms in an attempt to understand the decision-making process of firms and households.” Specifically, microeconomics focuses on the interactions between individual buyers and individual sellers. Economists who are interested in microeconomics also analyze the factors that influence buyers, and those that influence sellers. There are a few important terms that any beginner should familiarize himself or herself with when studying microeconomics. At Data Recognition Corporation | CTB, we want our students to feel comfortable with these terms and microeconomics in general. Why? Because microeconomics is a high emphasis topic on the TASC Test Assessing Secondary Completion™.
Supply and Demand
One of the most important aspects of microeconomics is the pattern of supply and demand. These patterns relate to, and determine, the price and output of individual markets. To be more specific, supply is the behavior of a seller. The smallest unit of supply is the individual business (or “firm”), which operates independent of other business and makes its own decisions about what to sell. This is largely dependent on how much can be sold, in terms of expense. Demand, then, is the buying behavior of a household. Economists interested in microeconomics want to explain three things:
- Why do people buy what they buy?
- How much are people willing to pay?
- How much do people want to buy?
They are able to consider these broad topics by looking at a specific household. They consider each household a small-scale decision-making unit. Individuals within the unit must consider factors that influence the unit when making choices about what to buy, and how much to buy. The combined aspects of supply and demand create our market economy.
Supply and demand act together to determine market equilibrium. Whenever supply shifts, it is reflected in the price and quantities consumed. This happens whenever demand changes as well. These shifts happen often, but they are never identical and each can greatly impact the equilibrium of the market. Economists map these changes in the form of curves. Elasticity refers to the relative responsiveness of a supply or demand curve in relation to price. If a curve has more elasticity, then that means it has undergone more change in price. Therefore, goods with elastic demand are goods that are not very important to consumers or goods that can be easily substituted with other options. Goods with little elasticity are necessities.
It is common knowledge that some people make more than other people. This income limits an individual’s choices, and his or her consumption patterns. Because some people make more, this means they are able to afford more of what they would like to have. Richer individuals have a range of options for spending their money. Others, especially those who have less income, have more limited choices. This inequality of means is studied by economists using measures of income distribution. Economists look at many different factors when studying income distribution, including: the amount of income earned by certain population groups; the difference between actual and equal income distributions; and income mobility.
A monopoly is a business that serves as the only supplier of a specific good or goods in a market. In a pure monopoly, there is not a close substitute to the output good (it is lacking elasticity), and there is no threat of competition. Monopolies have traditionally been considered dangerous because their position as the only supplier in their market allows these businesses to demand whatever they want from consumers. Pure monopolies rarely exist. This is partially because whenever a monopoly takes advantage of its position in the market, a competitor typically arises and the two businesses regulate themselves. Additionally, the United States anti-trust laws prevent monopolies from arising in our country. These laws were primarily put in place in the early 1900s. They were passed into law to benefit consumers and promote fair competition. More often in the U.S., the market consists of duopolies (two firms that produce homogeneous and indistinguishable goods, in a market in which they are the only two such firms) or oligopolies (a small collection of firms who dominate a market).