Microeconomics

MICROECONOMICS STUDIES economic phenomena at a microlevel, that is, at the individual level. A systematic study of choice-making behavior of consumers and producers (individuals, households, firms, and government), allocation of resources (land, labor, and capital) between goods and services that are produced and consumed, and determination of their prices make up the central theme of microeconomics.

Individuals and households as consumers make choices among various goods and services they want to consume. The study of consumer behavior comprises the theory of consumer behavior, theory of consumption, and theory of demand. Individuals and individual firms make their choice about what to produce and how to produce, that is, the techniques to be used.

The study of a producer's behavior constitutes the theory of production or the theory of supply, including the cost theory. The theory of demand and theory of supply together form the theory of price determination, or theory of price. The study of the behavior of factor owners (labor and capital owners) is the theory of distribution or the theory of factor price determination. An extension of distribution theory is the study of what kind of allocation of productive resources between goods and consumer goods and services makes the distribution more efficient. This aspect is studied under the economics of welfare. One of the main tasks [Page 713]of microeconomics is “to provide a system of generalization,” or microeconomic theories that can be used to predict economic phenomena at the microlevel. This makes microeconomics a positive science.

The word positive does not mean that theoretical statements are positively true; it means that a theory has a great possibility to occur if conditions are fulfilled. Microeconomics, as a normative science, involves value judgments of “what is good” and “what is bad” for society. These values are drawn from the moral, ethical, social, and political aspirations of the society. Since microeconomics prescribes methods to correct undesirable economic events, it is also called a prescriptive science. Microeconomics is both a positive and a normative science. However, it is important to note that microeconomics is fundamentally a positive science. It acquires its normative character from the application of microeconomic theories to examine the economic phenomena from their social desirability point of view, to show the need for public policy action, and to evaluate the policy actions of the government.