What is Microeconomics?
Microeconomics is the study of how households and businesses make choices, how they interact in markets, and how the government attempts to influence their choices. It provides a foundational understanding of how specific markets work, which is essential for analyzing individual companies and industries.
The Law of Supply and Demand
The most fundamental concept in microeconomics is the law of supply and demand.
- Demand: The quantity of a good or service that consumers are willing and able to buy at a given price. Generally, as the price of a good falls, the quantity demanded increases.
- Supply: The quantity of a good or service that producers are willing and able to sell at a given price. Generally, as the price of a good rises, the quantity supplied increases.
The interaction of supply and demand determines the equilibrium price—the price at which the quantity supplied equals the quantity demanded.
Elasticity
Elasticity measures how sensitive the quantity demanded or supplied is to a change in price. For example, the demand for luxury goods is often highly elastic, meaning a small price change can lead to a large change in the quantity demanded. In contrast, the demand for necessities like medicine is typically inelastic, as consumers will buy them regardless of price changes. Understanding elasticity is crucial for a company's pricing strategy.
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