Microeconomics and the Importance of Decisions - dummies

Microeconomics and the Importance of Decisions

By Lynne Pepall, Peter Antonioni, Manzur Rashid

One word that’s central to microeconomics is decision. Microeconomics is ultimately about making decisions: whether to buy a house, how much ice cream to make, what price to sell a bicycle at, or whether to offer a product to this or that market, and so on.

This is one reason why economists center their models on choice. After all, when you don’t have options to choose from, you can’t make a decision. Deciding to make something or to buy something is the starting point for microeconomics.

To a microeconomist, decisions aren’t right or wrong. Instead, they’re one of the following:

  • Optimal: Getting the best of what you want, given what’s available.

  • Sub-optimal: Getting less than the best.

Of course, a model of decisions needs two sides:

  • Consumers base their decisions on the value they get from choosing one option as opposed to another.

  • Companies base their decisions on a measure of monetary benefit — revenue against costs.

Microeconomists look at these decisions in several ways. Sometimes, you use a framework for making the best decision given some kind of constraint — budget, time, or whatever else constrains you — to show you how microeconomists look at individuals and companies separately. The famous supply and demand model shows you how different types of markets lead to different results. And game theory looks at how individuals or companies (or even other entities, such as governments) strategically interact with each other.