Introduction to Microeconomics: Definition, Theory, Purpose and Scope

Microeconomic Theory – Is Sinaumed’s looking for references on microeconomic theory? That’s right, sometimes there are still many people who cannot distinguish between micro and macro economics. Even though this theoretical study will often be encountered by Sinaumed’s when studying economics. In order to get to know and understand more about the study of the theory, here is a specific explanation of microeconomic theory, starting from the definition, objectives, scope, problems, and examples of practice: 

Definition of Microeconomics

The definition of microeconomics is a study of economics specifically to study the behavior of consumers and a company and determine market prices and the quantity of inputs, goods and services to be traded. Microeconomics is also referred to as microeconomics which can directly influence decision making regarding the supply and demand for goods or services. 

So, the definition of microeconomics is having the main goal for companies, namely analyzing the market and how the mechanism is to form relative prices for products or services. Microeconomic theory also studies demand and supply curves so that it helps understand the relationship between changes in wages, the right pattern of work, and understanding what cost variables are in the production of certain goods and services. 

 Aspects in analyzing microeconomics include: cost and benefit analysis, demand and supply theory, elasticity, market models, industry, production theory, and price theory. This aspect of analysis can play a role in helping to analyze market failures and theoretically describe conditions in a perfectly competitive market. To understand the broader meaning of microeconomics, the following is the definition of microeconomics based on the opinions of experts:

1. According to Mary A Marchant and William M Snell

Microeconomics is the study of individuals, households and a firm in making decisions within a larger economic process. 

2. According to David A. Moss

Microeconomics is a step of analysis of a decision made by an individual or group, starting from the factors to the form of consideration of costs and benefits. 

3. According to Adam Smith

Microeconomics is a rational consideration in making decisions made by business people. 

4. According to NG Mankiw 

Microeconomics is a study of science that discusses the role of individual economic actors in household and corporate matters to make decisions and how they interact in the market. 

5. According to Sadono Sukirno in his book entitled Introduction to Microeconomics

Microeconomics is a branch of economics that studies the behavior of consumers, companies and their inventors. This microeconomic theory serves to analyze how all forms of decisions and their behavior then affect the supply and demand for goods or services. The convenience of this can determine the price, supply, and demand for these goods or services. 

6. According to David Ricardo

Microeconomics is a condition where economic actors already have information about the ins and outs of a particular market. Thus, microeconomics is becoming a determining factor in the global economic market. 

7. According to Marshal and Pigou

Microeconomics is a form of high mobility in the market, so that economic actors can immediately adapt and adjust to changes in the market. 

Microeconomics Goals

In practice, microeconomics has the following main objectives in economics:

  1. Can perform analysis on the mechanisms that form the relative price of products, both in the form of goods and services and their applications from limited sources among the many alternative uses
  2. Can carry out market failure analysis, namely when the market fails to produce efficient results and explain various theoretical and strategic situations that require a market with a form of perfect competition

Scope of Microeconomics

1. Interaction in the Goods Market

In this economic concept there must be interaction in the goods market. The market is a place that becomes a meeting between supply and demand transactions. This place then becomes a meeting between sellers and buyers to make real buying and selling transactions. 

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2. Seller and Consumer Behavior

Sellers and consumers have a rational nature, where sellers want maximum profits, while consumers or buyers need optimal satisfaction, both in terms of quality and price of goods and services. The behavior of sellers and buyers can be analyzed using assumptions and it is necessary to pay attention to their economic activities which are carried out rationally and openly. 

3. Factor Market Interaction of Production 

The scope of microeconomics also involves market interaction with factors of production, where sellers have products to meet the needs of factors of production which they do by becoming buyers too. Meanwhile, buyers or consumers then need money to be able to continue to meet their needs and satisfaction. 

4. Use Value Theory

Use value in microeconomic theory is a way to study how an item can generate benefits or satisfaction for buyers or consumers who use the goods or services. 

5. Market Structure Theory

The theory of market structure is to explain the form of market classification based on a number of existing companies, characteristics, and types of products. This theory also discusses aspects of convenience for companies or producers to enter and exit a market scheme. A market structure that is generally non-competitive will occur if the company does not have the power and ability to influence the quantity of certain goods and their prices. 

Meanwhile, if the company has the power or ability to influence the quantity of certain goods and prices, then the market structure becomes a competitive market structure.  

6. Price Elasticity

Price elasticity is a useful form of analysis for studying how the prices of certain goods or services are formed in a market. Price formation is influenced by the large number of requests in the market. 

7. Industry 

In microeconomic theory it also discusses how the flow of product circulation, both goods and services, can be formed in the market. This theory will then analyze production, producer, consumer, and distribution goods in terms of what makes it possible or rational to make the right economic decisions. 

8. Input Markets

The scope of the input market learns about how producers obtain production materials at the minimum possible cost and can produce goods or services that have a higher selling value. This means that in this scope it discusses the product process itself from the start which does not yet have as high a value as when it reaches the consumer or buyer. 

Microeconomic Theory

1. Price Theory

In theory, prices are usually carried out in the price formation process, factors that can affect changes in demand and supply in the market. In addition, it also examines the relationship between demand and supply prices, as well as the shape of the market and the concept of elasticity of demand and supply.

Price theory also discusses the balance that occurs between sellers and buyers, where both of them will carry out a bidding process until an agreement is reached at a certain price. 

2. Production Theory

Production theory is used as a basis for analyzing the levels and costs required for a particular production process.

This analysis is then carried out on all matters related to the cost of producing goods and services in the market. The combination of factors that occur in microeconomics needs to be determined by producers in order to get maximum profits. 

3. Distribution Theory

Distribution theory aims to analyze labor wages, profits, and the amount of interest that must be paid to owners of capital. This theory becomes the activity of distributing products from producers to final consumers through distribution channels.

Generally, this theory in microeconomics is used as a material for consideration of ordering time, product durability, and the distance between producers and consumers. Distribution is not only a matter of distributing a product from producers to consumers, but also forms of business promotion and packaging of products or forms of services. 

4. Consumption Theory 

This theory refers to consumer religious behavior in the context of fulfilling a need. Consumption theory will also discuss the occurrence of a market demand curve which is considered as a derivative of the individual customer demand curve. In addition, it also discusses the occurrence of a decrease in the curve that can use this theoretical approach. 

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Microeconomics Problems

In microeconomics, economic actors can certainly face problems or obstacles that are economic in nature or related to the economy. The application of microeconomic theory is what can make the best choice from various alternative choices that suit the needs and conditions of the problem at hand. This can happen because there are activities of producing or consuming goods and services. 

In this situation economic actors need to make decisions with the aim that available resources can be used efficiently. In addition, this choice can also create better welfare for economic actors and even more broadly. The following are economic problems that can occur in the scheme of microeconomic theory:  

1. The Problem of Scarcity

The problem of scarcity can occur because of an imbalance between people’s needs and the available factors of production. Factors of production that can be used to produce these goods are limited. That is why people find it difficult to obtain all the goods they want. In the end, people make the decision to choose other options so that they can still meet their needs. 

2. Community Needs

In microeconomics there must be problems related to community needs because basically community needs are a form of need and desire to consume goods or services. Generally, these are goods or services imported from abroad. Even so, it remains the most produced domestically. In microeconomic theory, it shows that people’s desire to obtain goods and services can be divided into two forms, as follows:

  • Desire followed by the ability to buy or called effective demand
  • A desire that is not followed by the ability to buy

Example of Microeconomics

In practice, microeconomics can be seen when producers and consumers carry out rational economic activities. The following is an example of the occurrence of microeconomics that applies in Indonesia:

1. Request

Demand is an example of microeconomics that shows the amount of goods and services demanded and the ability to buy for consumers at a certain price level and time. When there is demand when the price of goods or services is higher, the amount of demand for goods or services will decrease. Conversely, if the price of goods or services decreases, the higher the demand of buyers for goods or services. 

2. Offer

In addition to demand, there is supply which is also an example of microeconomics which shows the amount of goods or services available for sale or offered to consumers at a certain price level and period of time. Actors who make offers are producers, where the higher the price, the higher the quantity supplied. Conversely, if the price decreases, the quantity of goods or goods offered will also decrease.  

3. Consumer and producer behavior

The behavior of consumers and producers is also an example in microeconomics which shows the activities and processes carried out by economic actors in selecting, searching, buying, evaluating, and using goods or services for certain needs. 

4. Price

Price is of course part of microeconomics because it has a relationship with the value of goods. Price is an element of the marketing mix that shows a profit. The price function in microeconomic theory is a measuring tool that shows the value of a good or service. So when the price is determined it is influenced by economic conditions, demand and supply curves, as well as costs which can continue to change. 

5. Inside Charge

Internal costs are sacrifices that are used by companies or individuals to get more benefits from the various economic activities they carry out. These internal costs can affect price changes, for example high raw material costs cause an increase in the price of the product itself. These costs are also commonly referred to as costs because they are incurred for output according to the target to be achieved. 

6. Market

The market is the place where buying and selling activities occur, namely bringing them together to obtain a sale and purchase agreement. The market is then not only interpreted as a physical form, but can take a broader form, such as a marketplace or buying and selling activities online using the internet. 

When talking about microeconomic theory, it cannot be separated from macroeconomics. Both have a fundamental difference, namely the scope that includes it. If microeconomics has an effort to find factors that contribute to decisions and their possible impact on the general market, then macroeconomics discusses the holistic study of the structure, performance, behavior, and processes of economic policy-making at the national level. 

So, that’s an explanation of the introduction to microeconomics , starting from the definition, goals, scope, problems, and examples. Can Sinaumed’s understand it? Most people may still have difficulty distinguishing between micro and macro economics. The two economic theories both discuss the same economic objects, such as producers, consumers, prices, impacts, and so on.