What Is Microeconomic Theory?

Daniel Liden

Microeconomic theory is a subfield of economics that seeks to examine the interactions between individual buyers and sellers through the decision-making processes of consumers and businesses. This contrasts with macroeconomic theory, which is focused instead on the broad trends and behaviors that characterize entire economic systems. One of the fundamental ideas of microeconomic theory is that both consumers and businesses have limited resources that they must decide how to allocate in order to maximize utility, happiness, or profit. Many businessmen study microeconomic theory because a number of the ideas can be applied directly to operating a business. Such theory can help business owners decide how much of a given product or service to offer and how much money to charge for it, for instance.

Microeconomics deal with individuals, businesses and the relationships between them.
Microeconomics deal with individuals, businesses and the relationships between them.

The study of microeconomic theory is usually conducted under the assumption of a market economy, or an economy based on competition-driven supply and demand. In a completely simplified model of a microeconomic system, multiple sellers offer a given product, multiple buyers want such a product, and neither the buyers nor the sellers can substantially affect the prices of the relevant goods and services. Those who study microeconomics tend to examine why, in such an idealized system, consumers favor one seller over another and how various factors affect the supply and demand of a given product or service.

Microeconomics is concerned with how consumers research and make decisions on their purchases.
Microeconomics is concerned with how consumers research and make decisions on their purchases.

Opportunity cost is widely regarded as a foundational concept in this theory. Any allocation of time or other resources incurs an opportunity cost, or something that is given up so that something else can be gained. For instance, purchasing one product incurs the opportunity cost of another product that one wants but can no longer afford. Likewise, working for an hour may grant one some amount of money that can be spent on products or services, but costs the worker the other activities that he could have completed in that time.

Though most models used to teach and study microeconomic theory are highly simplified and entirely market driven, many economists do use the theory to study more realistic systems. They may, for instance, take taxes and a variety of welfare systems into consideration when examining supply and demand within a given market. They might also examine qualities aside from actual goods and services that affect economic systems, such as technological advancements, other forms of innovation, and job markets. Specialized areas of microeconomic theory examine the specific microeconomic terrain of cities, governments, legal systems, and other groups or locations that have unique microeconomic systems.

You might also Like

Discussion Comments


@Soulfox -- Good call. Macroeconomics is great at identifying large trends that impact the overall economy, but they don't necessarily mean much to individuals.

Here's an example. Let's say that both home sales and prices are up, so you figure that the time is right to sell your house. That may or may not be true because the fact that homes sales are on the rise is the type of trend that those who study macroeconomics love to study, but does that mean your house will sell in a hurry?

Maybe and maybe not. You'd probably be better off trying to answer that question on a macroeconomic level. What factors impact the economy where you live? What are homes sales trends in your area? Are houses like yours appealing to people in your area? What is a competitive price for your home?

Those are all questions best answered by a more focused, individual view of your home and your community. Macroeconomics is great for spotting big trends, but a micro analysis is often more helpful for individuals.


Oddly, macroeconomics gets all the attention while microeconomics tend to get ignored. Perhaps studying broad, economic trends is more appealing than looking at how individual people and businesses function in the overall economy.

That's too bad because I suspect that microeconomics is more relevant for individuals trying to figure out where they fit in the economy.

Post your comments
Forgot password?