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Definition of Microeconomics:

Microeconomics is the study of how the choices of individuals, households, and businesses affect the entire economy.

Detailed Explanation:

Microeconomics examines how consumers and businesses reach an agreement on what to purchase and what to produce. Economics is the study of society's allocation of scarce resources. Microeconomics considers the behaviors of individuals and companies, and how all of us manage our scarce resources. Price is the primary factor that influences buying and selling choices. Microeconomics uses the law of supply and demand to examine pricing decisions. How much will a consumer purchase at a given price? What can a business do to increase the demand for its product? When does a business benefit from increasing the price of the good or service it sells? When is a company hurt by raising its price?

Microeconomics also analyzes how businesses reach production decisions. What are the factors of production, and how do they influence a business's decision on what and how much to produce? When should a business substitute capital for labor? When would it make sense for a business to close? What are the relationships between a company's fixed and variable costs? Industries have different market structures which affect their influence on the economy. How can a company in some industries dominate its competition? For example, a monopoly has a greater ability to increase its price than a farmer selling wheat. Microeconomics examines the various market structures and their characteristics.

Dig Deeper With These Free Lessons:

Economics – Managing Our Scarce Resources
Opportunity Cost – The Cost Of Every Decision
Circular Flow Model – We Depend On Each Other
Supply – The Producer’s Perspective
Demand – The Consumer’s Perspective
Supply and Demand – Producers and Consumers Reach Agreement

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