Microeconomics
Also written Micro economics · Basic principles of microeconomics
The study of economics at the level of individuals and firms — what people choose to buy at prevailing prices, and how firms set inputs, outputs, prices and output levels in response.
In plain language
Microeconomics looks at the small units of an economy. One buyer. One seller. One firm.
Its starting belief is simple: prices and production levels are driven by what consumers want. If enough people want something, the price rises, more of it gets made, and resources move towards making it.
So microeconomics studies how people decide, and how those decisions add up into the supply and demand for a good — and then into its price.
It also studies the firm itself. That part has its own name in the workbook: the theory of the firm.
How it works
Where it sits. The workbook opens chapter 5 by noting that although there are several branches of economic study, microeconomics and macroeconomics are the most well known: microeconomics is "the study of economics on a smaller (micro), firm level," and macroeconomics is the study of economics "on a larger (macro), broader scale."
The definition. Section 5.1: microeconomics "is the study of the behaviour of individuals and their decisions on what to buy and consume based on prevalent prices which in turn signals where the economy will direct its productive activities."
Its philosophy, in the workbook's own words. "The philosophy of Microeconomics is that prices and production levels of goods and services in an economy are driven by consumer demand." So microeconomics focuses on the drivers of decision making, and on how individuals' decisions affect overall supply and demand and, through that, prices.
The firm. Microeconomics "also deals with the theory of the firm." Extending the idea from individuals to companies, it looks at how firms adopt different strategies to increase profits, and at the decision-making process on inputs, outputs, prices, production levels, profits and losses of individual firms.
The 2 uses the workbook lists. First, microeconomics deals with understanding consumers, producers, resource markets and humans under various assumptions of market structures. Second, it explains how the prices of products and services are determined, how individuals and firms behave in response to those prices, and how goods and services are distributed among participants.
On figures. Section 5.1 contains no figure at all — no elasticity value, no price, no threshold. It is a definitional section, and it is examined as one.
A worked example
Illustrative. A café chain in Pune sells 1,200 cups of coffee a day at Rs 180 a cup. It raises the price to Rs 220, a 22% increase, and daily volume falls to 900 cups.
| Before | After | |
|---|---|---|
| Price per cup | Rs 180 | Rs 220 |
| Cups a day | 1,200 | 900 |
| Daily revenue | Rs 2,16,000 | Rs 1,98,000 |
Revenue fell by Rs 18,000 a day even though the price went up. Customers responded to the price, and that response is the microeconomic fact the chain now has to work with.
What the firm does next is the theory-of-the-firm half of the subject. It can cut the price back, hold it and accept lower volume, or hold it and cut costs — a decision about inputs, output and price of exactly the kind the workbook lists. And if 300 cups a day of demand has moved to a rival across the road, that is the consumer demand signal redirecting productive activity, which is the workbook's stated philosophy of microeconomics in one street.
Why NISM asks about it
Chapter 5.1 (Basic Principles of Microeconomics) opens the economic analysis chapter and is paired with 5.2 on macroeconomics. Together they are short, definitional and reliably examined.
The question is almost always a discrimination question: given a described piece of analysis, is it micro or macro? A firm's pricing decision, one household's consumption choice, how a market structure sets price — all micro. Anything aggregate is macro. A second question asks which branch contains the theory of the firm, and the answer is microeconomics.
Common exam traps
- Microeconomics covers firms as well as individuals. "Micro" refers to the level of the unit being studied, not to the size of the company. A large firm's pricing decision is still microeconomics.
- The theory of the firm belongs to microeconomics, and the workbook says so expressly.
- Consumer demand drives prices and production levels in the workbook's framing of micro — not government policy, which is the macro side.
- Microeconomics is about distribution among participants too, not only price formation. That is the second of the 2 uses the workbook lists.
- Do not read "micro" as "unimportant." The workbook's point is that individual decisions are what signal where the whole economy directs its productive activity.
Where this is taught
Free preparation for NISM Series XVRelated terms
- Fundamental analysisEstimating what a share is worth from the profits and cash flows the business will generate, then buying only when the market price sits below that estimate.
- MacroeconomicsThe study of the economy as a whole — the aggregate supply and demand factors such as GDP, unemployment, inflation, savings and investment, and the public policies that move them.
- Pricing powerA company's ability to set and raise its own prices — passing on cost increases and growing margins — without losing customers to competitors.
- Product differentiationMaking a product distinct from competitors' through features, quality or functionality, so customers see genuine reasons to prefer it beyond price alone.
- Theory of the firmThe microeconomics of how a firm decides its inputs, outputs, prices, production levels, profits and losses — extending individual decision-making up to the level of a business.