Micro Economics..

Micro economics – The term comes from Greek prefix mikro- meaning "small" and economics which is a branch of economics that studies the behavior of individual households and firms in making decisions on the allocation of limited resources. Microeconomics examines how these decisions and behaviors affect the supply and demand for goods and services, which determines prices, and how prices, in turn, determine the quantity supplied and quantity demanded of goods and services.

This is in distinction to macroeconomics, which involves the "sum total of economic activity, dealing with the issues of growth, inflation, and unemployment." Microeconomics also deals with the effects of national economic policies like changing taxation levels on the aforementioned aspects of the economy. Particularly in the wake of the Lucas critique, much of modern macroeconomic theory has been built upon 'microfoundations'—i.e. based upon basic assumptions about micro-level behavior.

One of the goals of microeconomics is to analyze market mechanisms that establish relative prices amongst goods and services and allocation of limited resources amongst many alternative uses. Microeconomics analyzes market failure, where markets fail to produce efficient results, and describes the theoretical conditions needed for perfect competition. Significant fields of study in microeconomics include general equilibrium, markets under asymmetric information, choice under uncertainty and economic applications of game theory. Also considered is the elasticity of products within the market system.

Modes of operation

Ø A firm is said to be making an economic profit when its average total cost is less than the price of each additional product at the profit-maximizing output. The economic profit is equal to the quantity output multiplied by the difference between the average total cost and the price.

Ø A firm is said to be making a normal profit when its economic profit equals zero. This occurs where average total cost equals price at the profit-maximizing output.

Ø If the price is between average total cost and average variable cost at the profit-maximizing output, then the firm is said to be in a loss-minimizing condition. The firm should still continue to produce, however, since its loss would be larger if it were to stop producing. By continuing production, the firm can offset its variable cost and at least part of its fixed cost, but by stopping completely it would lose the entirety of its fixed cost.

Applied microeconomics

Ø Applied microeconomics includes a range of specialized areas of study, many of which draw on methods from other fields.

Ø Labor economics examines wages, employment, and labor market dynamics.

Ø Financial economics examines topics such as the structure of optimal portfolios, the rate of return to capital, econometric analysis of security returns, and corporate financial behavior.

Ø Public economics examines the design of government tax and expenditure policies and economic effects of these policies e.g., social insurance programs.

Ø Political economy examines the role of political institutions in determining policy outcomes.

Ø Health economics examines the organization of health care systems, including the role of the health care workforce and health insurance programs.

Ø Urban economics, which examines the challenges faced by cities, such as sprawl, air and water pollution, traffic congestion, and poverty, draws on the fields of urban geography and sociology.

Ø Law and economics applies microeconomic principles to the selection and enforcement of competing legal regimes and their relative efficiencies.

Ø Economic history examines the evolution of the economy and economic institutions, using methods and techniques from the fields of economics, history, geography, sociology, psychology, and political science.

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