What is ‘microeconomics’?

Microeconomics zooms in on the specific decisions people and organisations make. How does a restaurant decide how much to charge for a bowl of soup? How do you decide between the soup and the steak? That’s microeconomics.

If the economy is just the end result of each of our daily actions, then a good place to start studying it is with individual decision making. As individuals we make loads of personal decisions every day - economists call us economic agents. Businesses, households, churches or charities could be economic agents too. Microeconomists take these decisions as their starting point, and then use concepts like supply and demand to understand how all these tiny parts piece together into the larger picture of the economy.

Rather than taking a magnifying glass out into the actual economy to see what’s really going on, microeconomists sometimes build models that can be used to analyze a variety of situations. Models are powerful tools that let economists tune out the noise and the complexity of the world and focus on what they really want to know. Supply and demand models reduce the world to simple decisions of buying and selling. By cutting out every other part of life and just looking at a single market transaction, supply and demand analysis makes it easier to see relationships that would otherwise be hidden.

Some accuracy is obviously lost in models, because much of the real world has to be ignored for a model to be simple enough to be of any use. Economists are constantly debating the usefulness of particular microeconomic models. Some economists support the method of making broad assumptions about human behavior and then logically following out the results of these assumptions to approximate the economy. Others are trying different approaches, like building behavioral models that incorporate insights from disciplines like psychology and sociology to achieve more accurate, albeit less simple, results.