Navigation
An overview of how individuals and small businesses make decisions in the economy.
Have you ever wondered why a bag of chips costs 60.00? Every time you choose how to spend your allowance, you are acting as a scientist in the world of Microeconomics!
Economics is the study of how people use limited resources to satisfy unlimited wants. Microeconomics is a specific branch that looks at the economy through a microscope. Instead of looking at whole countries, it focuses on the 'small' parts: individuals, households, and firms (businesses). It explores how these players make decisions. For example, if the price of your favorite soda goes up by , microeconomics helps us predict if you will keep buying it or switch to water. It assumes that everyone tries to make the best choice possible with the money they have, a concept often represented by the budget constraint: , where is your total income.
Quick Check
If a scientist is studying how a single family decides to save money for a vacation, are they studying Microeconomics or Macroeconomics?
Answer
Microeconomics, because it focuses on an individual household's decision.
In microeconomics, we group everyone into two categories. First, we have Households. These are individuals or families who act as consumers. They buy goods (like clothes) and services (like tutoring). Second, we have Firms. These are businesses that act as producers. They use resources like labor and tools to create products. This creates a cycle: Households give their labor to Firms in exchange for wages, and then use those wages to buy the products Firms make. We can represent the total cost for a firm as , where is Total Cost, is Fixed Costs (like rent), and is Variable Costs (like ingredients).
Let's look at a simple microeconomic setup: 1. The Household: You want a cold drink on a hot day. You are the consumer. 2. The Firm: Your neighbor, Maya, sets up a stand. She is the producer. 3. The Decision: Maya spends on lemons and sugar. She decides to sell each cup for . You decide if the 'utility' (happiness) of the drink is worth your .
Because resources like time, money, and materials are scarce (limited), every society and business must answer three basic economic questions: 1. What to produce? (Should we make fidget spinners or board games?) 2. How to produce? (Should we use expensive robots or hire twenty people to build it by hand?) 3. For whom to produce? (Is this product for wealthy collectors or for everyday students?)
How a firm answers these questions determines their success and who gets to enjoy the goods in a market.
A bakery is deciding how to run their business: 1. What: They choose to make organic cupcakes. 2. How: They decide to use solar-powered ovens instead of gas ovens to save the environment. 3. For whom: They price cupcakes at each, targeting customers who care about organic food and have extra spending money.
Quick Check
If a toy company decides to use recycled plastic instead of new plastic, which of the three economic questions are they answering?
Answer
The 'How to produce' question.
Imagine you are a firm developing a new mobile game. You must balance your costs () against your potential revenue (). 1. What: A strategy game with complex graphics. 2. How: You can hire 2 expert coders for or 10 beginners for . You choose the experts to ensure quality. 3. For whom: You decide to make the game free but show ads to everyone, rather than charging to a few people. This answers 'for whom' by making it accessible to everyone with a phone.
Which of the following is a 'Microeconomic' topic?
In the economic cycle, what is the primary role of a 'Firm'?
The question 'Should we use machines or manual labor?' is an example of the 'For whom to produce' economic question.
Review Tomorrow
In 24 hours, try to list the three basic economic questions from memory and give one example of a 'Household' making a choice.
Practice Activity
The next time you are at a store, look at a product and try to guess how the company answered the three questions: What is it? How was it made? Who is supposed to buy it?