Definition of Microeconomics: Scope, Theory and Differences with Macroeconomics

Microeconomics: Definition, Scope, Theory and Differences with Macroeconomics – Microeconomics or also known as microeconomics is economics that studies demand and supply curves which then helps to understand the relationship between changes in wages, appropriate employment patterns and understanding variable costs in the production of goods and services. Check out a more complete explanation of Microeconomics below:

A. Definition of Microeconomics

Several aspects of microeconomic analysis include market models, industry, benefit analysis, demand theory, cost and supply analysis, elasticity, production theory and price theory. In addition, microeconomics also plays a role in making company policies regarding resource management such as price management.

The existence of policies within the company can also make the company more strategic and innovative. Microeconomics plays a very important role in predicting and designing a company’s strategy in the future. Microeconomics will make it easier for a company to understand consumer behavior, wants and needs.

The book entitled Theory of Microeconomics Edition 3 from Muh Abdul Halim will help Readers understand more deeply about microeconomics itself. If Readers is interested, click “buy a book” below.

B. Definition of Microeconomics According to Experts

Here are some definitions of microeconomics according to experts:

1. Mary A Marchant and William M Snell

Microeconomics is the study of individuals, households and companies making decisions in the economic process.

2. David A. Moss

Microeconomics as a step for analyzing a decision made by an individual or group starting from the factors to consideration of costs and benefits.

3. Adam Smith

Seeing the existence of various rational considerations in making decisions that are chosen by economic actors.

4. NG Mankiw

In his book he writes, the notion of microeconomics is a science that discusses the role of individual economic actors , how households and companies make decisions, and how they interact in certain markets.

5. Sadono Sukirno

In the book Microeconomics Theory of Introduction, Sadono Sukirno states that the notion of microeconomics is a branch of economics that studies consumer and corporate behavior and determination. Microeconomics itself functions to analyze how all these decisions and behaviors affect the supply and also the demand for goods and services that will determine prices, determine the supply and demand for goods and services further.

6. David Ricardo

According to David Ricardo, the notion of microeconomics is a condition in which economic actors already have information about the ins and outs of a market. That way the macro economy is a determining factor of the global economic market.

7.Marshal and Piqou

According to Marshal and Piqou, the notion of microeconomics is a high level of mobility in the market so that these economic actors can immediately adapt or adjust to changes in the market.

C. Scope of Microeconomics

Microeconomics itself has a broad scope as discussed in the Microeconomics book by Dr. H. Bachrudin Sjaroni, Se., MM Noveria S, SE., MM Edi Djunaedi, SE., MM.

The scope of microeconomics itself studies about matters surrounding consumer and market behavior in the individual or corporate sector. Consumers and producers themselves are individuals in every household, organization, community and company. Know what the scope of microeconomics is, here are some of them:

1. Interaction in the Goods Market

The market is a meeting place between demand and supply. The market is also a place where sellers and buyers can meet to be able to make buying and selling transactions.

2. Seller and Consumer Behavior

Both have a rational nature, where the seller wants maximum profit, and the buyer wants optimal satisfaction in terms of product quality and price. In analyzing the behavior between sellers and buyers, there are 3 assumptions that can be considered, namely economic activity between sellers and buyers occurs in an open and rational manner.

3. Interaction in Factor Markets of Production

From the seller’s point of view, having products that meet human needs also requires factors of production by buying them, while consumers need money to fulfill their needs.

4. Use Value Theory

Studying how an item generates use or satisfaction for consumers who buy or use the product.

5. Market structure theory

Explain market classification based on the number of companies, characteristics or types of products and the convenience of companies or producers to enter and leave a market.

The market structure will be declared as a non-competitive market structure when there are companies that do not have the power and ability to influence the quantity of goods and prices in the market.

Conversely, if the company has the power or ability to influence the amount of goods in circulation or the prices of goods on the market, then the market structure is said to be a competitive market structure.

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6. Price Elasticity

Studying how the prices of goods and services are formed in the market. This price is influenced by how many requests.

7. Industry

Study how the flow of circulation of goods and services can be formed. It also Analyzes production, producer, consumer, and distribution goods in terms of rational possibilities in economic decision making.

8. Input Markets

Study how producers can obtain production materials at minimum cost but produce goods or services that have high selling value.

D. Microeconomic Theory

Microeconomic studies aim to analyze the failure of an economic decision, bring up rational analysis and produce theoretical analysis results that enable perfect competition markets.

This behavior is useful in analyzing the effect on demand and supply of goods and services, pricing, and determining the amount of supply and subsequent demand.

Microeconomic Theory – Mathematical Analysis written by Prof. Jogjyanto HM, Akt., MBA., Ph.D. this can help Readers understand various theories that exist in microeconomics.

Analysis from microeconomic studies allows for the emergence of rational explanations for an economic decision, which can be used as a consideration in overcoming a failure in making previous economic decisions. Microeconomic or microeconomic analysis is further divided into four, including:

1. Price Theory

Analysis is carried out on the process of price formation, factors that can affect changes in demand and supply, the relationship between demand and supply prices, market forms and the concept of elasticity of demand and supply.

The price theory itself explains the equilibrium price between sellers and buyers where both of them carry out a bidding process until an agreement is reached at a certain price level.

2. Production Theory

Production theory is also used as a basis for analyzing the level and cost required of a production process.

The analysis is carried out on all matters related to the cost of production of goods and services. The combination of these factors must then be chosen by the producer to get the maximum profit.

3. Distribution Theory

Distribution theory is carried out with the aim of analyzing labor wages, profits and the amount of interest that must be paid to the owners of capital. Distribution theory as the activity of distributing products from producers to final consumers through several distribution channels.

This theory takes into account the time of ordering, product durability, and the distance between producers and consumers. Distribution itself is not only about getting a product from producers to consumers, but also about product promotion and packaging.

4. Consumption Theory

Consumption theory is a theory that refers to the behavior of various consumers in the context of meeting their needs. The market demand curve is derived from the individual consumer demand curve. The decrease in this curve itself is obtained through a consumption theory approach.

Subjects that can be studied in this consumption theory in general are the concept of utility, the relationship between the use of goods and the quantity of goods, consumer behavior, conditions for achieving maximum satisfaction or utility, marginal utility and indifference curves.

E. Examples of Microeconomic Policies

Microeconomics is also useful in making predictions, with microeconomics, companies can then develop strategies or predictions going forward.

Microeconomics can help companies predict what might happen in the market, for example product trends, with microeconomics will also help understand consumer behavior and consumer needs.

With microeconomics it will also help to know Product Turnover. The following are some concrete examples of microeconomic policies:

1. Lowest Price Policy

The lowest price policy is applied when the quantity supplied is greater than the quantity demanded, causing a buildup of products and not all people will buy the product, so the product is then sold at the cheapest possible price. Here the government plays a role in setting a minimum price limit for products so that producers are protected. Concrete examples on:

  • Analysis of Demand and Supply of Red Chili in North Sumatra Province
  • Analysis of Consumer Satisfaction on Service Quality and Product Prices at Supermarkets Using the Importance Performance Analysis (IPA) Method
  • Analysis of Production Factors Affecting Robusta Coffee Production in Sumowono District, Semarang Regency
  • Analysis of Business Income of Palm Sugar Craftsmen in Tulo’a Village, North Bulango District, Bone Bolango Regency
  • Marketing Analysis of Merang Mushrooms Independent Institution Rooting the Community (Lm3) Agrina in Tanjong Paya, Peusangan District, Bireuen Regency
  • Analysis of Calculation of Cost of Production Using the Full Costing Method as a Basis for Calculation of Selling Prices (Case Study on Kertina’s Home Industry)
  • Analysis of the Market Structure of the Rubber Industry and Rubber Goods in 2009

2. High Price Policy

The highest price policy is set when market conditions experience price uncertainty, namely price spikes become very high. This policy can then occur because the number of offers is low so that the number of requests increases.

In this situation, the stock of goods is very lacking, so consumers want to buy these products and then resell them at high prices. For example, fuel prices are increasing, but fuel stocks are becoming scarce and difficult to obtain, the government’s role is to set the maximum price because consumer demand is soaring.

F. Examples of Microeconomic Activities

Basically, to understand microeconomics further, we need to know examples of microeconomic activities, namely:

1. Request

Demand is the amount of goods and services demanded by buyers and they are able to buy at a certain time and price level. When the price of goods and services continues to increase, the demand for goods and services will decrease. However, when the price of goods and services decreases, the demand will increase.

2. Offer

Offer can be interpreted if there are goods and services sold to the seller or producer at a certain price and within a certain time. In this case, the offer is made by the manufacturer. In addition, the theory of supply in the applicable economy is that the higher the price of goods and services, the greater the quantity of goods and services supplied, and the opposite applies.

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3. Price

The next microeconomic example is price which has a function as a measuring tool for goods and services. In determining the price, it will usually be determined based on production costs, the demand curve, and economic conditions. 

4. Market

The market is a place that consists of sellers and buyers who meet each other to carry out economic transactions. However, the understanding of the market does not have to be buying and selling transactions that are carried out in one place, but can also be done online  .

5. Fees

In this case, costs can be interpreted as an effort made by producers, be they individuals or companies, so that they can get benefits and profits from the economic activities that have been carried out. Therefore, costs will affect price changes which are usually caused by rising raw material prices.

6. Consumer and Producer Behavior

Consumer and producer behavior can be interpreted as an activity carried out to select, search, buy, and use goods and services. Goods and services purchased are usually used to meet the needs of everyday life.

G. How Micro and Macro Economics Affect the Running of Business

1. The Law of Supply and Demand

A Business gains by trying to understand the behavior patterns of its consumers. He observes the interaction between producers and buyers (consumers). The things that affect the demand itself include the price of goods, consumer income, the level of demand and consumer interest.

2. Start-ups

Startups are new companies that are in the research and development stage to find the right market segmentation. When starting a business, industrial research is a very important thing to do. Market interest analysis aims to provide and develop products and services that suit the needs of the intended target market.

For Readers who want to learn how to manage a business and the economics of a business, a book entitled Successfully Managing Micro, Small and Medium Enterprise Finances by Aries Haru Prasetyo will be able to help.

 

3. Economic Cycle

A high level of demand will trigger an increase in prices, which will then affect the smaller amount of the budget issued. Then when the number of offers exceeds the number of requests, this will contribute to the prosperity of the community.

The economic cycle itself is a wave of ups and downs of an economic activity consisting of four elements: an upturn or commonly known as an upturn or expansion, a peak or culmination point, a downward movement or commonly known as a downturn or recession, and a lowest point or nadir.

4. Cost of Goods and Services

In microeconomic theory, companies try to increase their efficiency in production based on the highest level of income, taking into account various additional costs but only minimal.

For example, when production is increased, the need for labor will also increase, this will then increase wage costs and potential changes in selling prices. In microeconomics, labor costs are usually the highest cost of a business.

In the book Microeconomic Analysis on Indonesian Criminal Law by Prof. Dr. Romli Atmasasmita, SH, LL.M. This discussion discusses how microeconomics is used to analyze Indonesian criminal law, which not only affects defendants, but also companies, assets, and employees who are laid off and many more.

 

5. Pricing Decisions

In microeconomics there are ‘equilibrium prices’ or prices that are formed at the meeting point of the supply and demand curves. The price of these products and services will then have an impact on the number of consumers.

For example, setting a price above the average does not mean greater profits, because fewer people will buy the product, so the price of the product must be in accordance with the consumer’s budget according to the predetermined target market.

H. Objectives of Microeconomics

Basically, the main goal of microeconomics is to make it easier for a company to understand consumer needs. Even so, microeconomics also has other goals, namely:

  1. To conduct an analysis of the price of a product to be traded. Not only product prices, but can also be applied to service prices.
  2. To analyze if there is a market failure. In other words, products that are marketed and then fail can be evaluated to be even better, so that they are able to compete with competitors.

I. Differences in Micro and Macroeconomics

Differences between micro and macroeconomics can be seen through the definition, scope and variables, unit of analysis, and purpose of analysis.

Understanding

Microeconomics as a branch of economics studies various economic variables in a small scope, such as companies and households, it studies starting from smaller economic variables (consumption, investment, and savings).

Macroeconomics is a branch of economics that discusses the economy as a whole, starting from behavior, decision-making processes, and performance.

Scope

The scope studied by microeconomics is consumers and producers. While in macroeconomics we will study various economic variables as a whole. This variable will have a broad impact on employment opportunities, the inflation rate, national income, economic growth, and the international balance of payments.

The foundation of macroeconomic theory is Keynesian theory. The scope of macroeconomic theory is the efforts of society and government to manage factors of production efficiently. In addition to definitions, variables, and scope, things that can explain the differences between micro and macroeconomics are the units and objectives of analysis of each type of economy.

Units of Analysis

The unit of analysis of microeconomics is the discussion of individual economic activities (for example: demand and supply, consumer behavior, producer behavior, markets, revenues, costs and profits or losses from companies), while the unit of analysis of macroeconomics is the discussion of activities the economy as a whole (example: national income, economic growth , inflation, unemployment, investment and economic policy).

Purpose of Analysis

Then the purpose of the analysis of microeconomics is to focus more on the analysis of how to allocate resources so that the right combination can be achieved, while the purpose of the analysis of macroeconomics is to focus more on the analysis of the effect of economic activity on the economy as a whole.

This is information about Microeconomics: Definition, Scope, Theory and Differences with Macroeconomics. Hope it is useful!