Microeconomics: Definition, History and Focus of Study

Why is there a country that can be called a developed country, aka a rich country, while on the other hand there is a country called a poor country? Why does each country have different economic governance arrangements? We can learn these things in the study of macroeconomics and microeconomics.

This time, we will discuss the concepts of microeconomics and macroeconomics, including matters relating to fiscal policy, monetary policy, inflation and deflation. These economic concepts are important to learn to get an idea of ​​how economic governance in a country, both at the macro and micro level.

This time, we will specifically study the study of microeconomics, from its history to its concept. Regarding the differences in microeconomics and macroeconomics, we will discuss in the next article at the bottom of the explanation of macroeconomics .

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Microeconomic History

The history of microeconomics begins with the early development of modern economics. The modern economy itself only began to develop when Adam Smith (1723-1790) launched his thoughts in a book called ” An Inquiry into the Nature and Causes of Wealth of Nations ” or later known as ” the Wealth of Nations” in 1776.

Since that momentum, the analysis of economics began to be carried out using scientific foundations, without Moral and Theological Theories. The scientific bases used include economic phenomena such as rising prices of goods and unemployment that indicate a disturbance in the balance of the economic system.

In essence, the community believes that all economic problems will be overcome if the economy is returned to a state of equilibrium. To direct the economy to equilibrium, no effort needs to be made.

Because, like the universe that has been running regularly, the economic system also has the ability to restore itself ( Self Adjustment ) because of the power of regulators called Invisible Hands or invisible hands. The invisible hand referred to here is the market mechanism.

The market has an economic resource allocation mechanism that runs on the basis of the interaction of demand and supply forces . It is this interaction that can become an efficient resource allocation tool, if the Government DOES NOT PARTICIPATE in the economy.

This is as explained in Say’s Law which was sparked by the French Economist, Jean Baptiste Say (1767-1832), that ” Supply creates it’s own demand “. This law confirms that the goods and services produced must be absorbed by demand until a market balance is finally achieved. The market, without having to be regulated, is able to be an efficient resource allocation tool through the exchange process ( Exchange Economics ).

Micro Economy Figure

The development of microeconomics did not escape the contribution of economists. There are several economists who widely discuss and devote their thoughts to this microeconomic theory, such as Leon Walras from Austria, Vilfredo Pareto from Italy, and Edward Hastings Chamberlin from England.

Basic Assumptions for Microeconomics

This modern economic study has led to the emergence of microeconomics because the focus of economic discussion tends to be on the behavior of individuals and not the state. When conclusions are drawn, the thoughts of Classical economists include:

  1. Efficient resource allocation can be achieved when individuals in the economy have achieved efficiency.
  2. An indicator of efficiency has occurred is if each individual has been in balance.
  3. Efficiency and balance can be analogous to two faces of a coin, which means that efficiency cannot be achieved without a balance. Likewise there is no inefficient balance, because both of these can be achieved together only through market mechanisms.

From this, it can be concluded that these Classical Economists emphasized the focus of their studies on market mechanisms based on assumptions on Microeconomics. The basic assumptions are like:

  1. market structure which is considered as a form of perfect competition,
  2. the information is symmetrical and perfect,
  3. inputs and outputs are homogeneous,
  4. economic agents are rational and each aims to maximize their use or profit.

Definition of Microeconomics

From the various explanations above, conclusions can be drawn from the notion of microeconomics as the study of how households and companies make decisions and interact in markets (Mankiw, 2006).

Another notion of microeconomics is economics whose approach to economic quantities uses quantities on a group or individual basis. Such as consumption balance analysis and so on. Microeconomic analysis is also often referred to as market price analysis or price theory (Ahman & Rohmana, 2009: 18).

Focus of Microeconomic Studies

After knowing the history, basic assumptions and understanding of microeconomics, we can draw conclusions about the focus of microeconomic studies, which include:

  1. how individuals realize efficiency in the use of resources
  2. how individuals achieve maximum satisfaction

In essence, microeconomics deals a lot about how individuals use their resources in order to achieve optimum levels of satisfaction. In this theory, it is assumed that each individual who makes the optimum consumption or production combination, then he along with other individuals will be able to create a balance on a macro scale with the assumption of ceteris paribus (fixed state).

In addition, microeconomic theory also talks a lot about the issue of prices. That is why, microeconomics is often also referred to as Price Theory (price theory). Microeconomic theory has learned a lot about prices, such as in terms of price movements, how prices are determined and all the consequences of these changes and pricing. The price referred to here applies not only to output prices, but also to input prices.

Benefits of Microeconomic Studies

Studying and understanding the concept of microeconomics will provide many benefits for us. One of the benefits is individually that we can make savings (efficiency) in the use of natural resources, including when natural resources are limited. In addition, we can also understand ways to achieve maximum satisfaction in the use of limited natural resources.

by Abdullah Sam
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