Microeconomics ("Microeconomics" is the free translation of the Greek "μικρο", the original meaning is "small"), also known as individual economics, small economics, is a branch of modern economics. A discipline that mainly takes a single economic unit (a single producer, a single consumer, a single market economic activity) as the research object.

Microeconomics is an economic theory that studies the economic behavior of individual economic units in society and how the individual values ??of the corresponding economic variables are determined; analyzes the economic behavior of individual economic units, and on this basis, studies modern The operation of the market mechanism in Western economic society and its role in the allocation of economic resources, and proposes microeconomic policies to correct market failures; it is concerned with the exchange process between individuals and organizations in society, and the basic issue it studies is the allocation of resources Decision, the basic theory is the theory of determining relative prices through supply and demand. Therefore, the main scope of microeconomics includes consumer choice, manufacturer supply and income distribution.

Research content editor

Microeconomics covers a wide range of contents, including: equilibrium price theory, consumer behavior theory, producer behavior theory (including production theory, cost theory and market equilibrium theory), distribution theory, general equilibrium theory and welfare economics, market failure and microeconomic policy.

Research direction of microeconomics: Microeconomics studies the economic behavior of individuals in the market, that is, the economic behavior of a single family, a single manufacturer and a single market, as well as the corresponding economic variables.

It starts from the basic concept of resource scarcity and believes that the behavioral norms of all individuals are to use limited resources to obtain maximum gains, and thus examines the conditions for individuals to obtain maximum gains. In the commodity and labor market, households as consumers make choices based on the different prices of various commodities and try to use their limited income to obtain the maximum utility or satisfaction from the quantities of various commodities purchased. Households' actions in choosing commodities will inevitably affect the prices of commodities, and changes in market prices are signals for manufacturers to determine which commodities to produce. Manufacturers are suppliers of various goods and services. The purpose of manufacturers is to produce the maximum amount of products with the minimum production cost and obtain maximum profits. The manufacturer's decision will in turn affect the prices in the production factor market, thereby affecting the family's income. The choices of households and manufacturers are expressed through the relationship between supply and demand in the market and coordinated through price changes.

Therefore, the task of microeconomics is to study the market mechanism and its role, the determination of equilibrium prices, and to examine how the market mechanism obtains the conditions and methods for optimal allocation of resources by regulating individual behavior. Microeconomics is the economics about market mechanisms. It takes price as the center of analysis, so it is also called price theory. Microeconomics also examines the theoretical basis of how the government takes intervention actions and measures when the market mechanism fails. Microeconomics is gradually established based on Marshall's equilibrium price theory, absorbing the monopolistic competition theory of American economist Chamberlain and British economist Robinson and other theories. After Keynesian macroeconomics became popular, this traditional theory that focused on studying individual economic behavior was called microeconomics. Microeconomics and macroeconomics are just different research objects, and there is no fundamental difference in their positions, views and methods. Both use equilibrium analysis and marginal analysis. In terms of theoretical systems, they complement and depend on each other, and together constitute the theoretical system of modern Western economics.

The basic assumptions of microeconomics: market clearing, that is, there are no obstacles to the flow of resources; complete rationality, that is, consumers and manufacturers are self-interested economic persons who consciously maximize their interests. Acting on the principle of maximization as the goal, but also knowing how to achieve maximization; complete information means that consumers and manufacturers can obtain all kinds of market information for free and quickly.

Generation and Development Editor

The historical origins of microeconomics can be traced back to Adam Smith's "The Wealth of Nations" and Alfred Marshall's "Principles of Economics". After the 1930s, Robinson in the United Kingdom and Chamberlain in the United States proposed the manufacturer's equilibrium theory based on Marshall's equilibrium price theory. Marking the final establishment of the microeconomics system, its system mainly includes: equilibrium price theory, consumer economics, productivity economics, manufacturer equilibrium theory and welfare economics, etc.

The development of microeconomics has generally gone through four stages so far:

The first stage: from the mid-17th century to the mid-19th century, it is the early microeconomics stage, or It is said to be the embryonic stage of microeconomics.

The second stage: from the late 19th century to the early 20th century, it was the stage of neoclassical economics and the foundation stage of microeconomics.

The third stage: from the 1930s to the 1960s, is the completion stage of microeconomics.

The fourth stage: from the 1960s to the present, is the stage of further development, expansion and evolution of microeconomics.

Throughout the development process and all theories of microeconomics, analysis has always centered on the core issue of price, so microeconomics is also called "price theory and its applications" on many occasions.

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Theoretical Development Editor

New Consumption Theory

The traditional construction of consumer behavior in Western microeconomics is based on the maximization of consumer utility. based on the assumption of transformation. The development of consumption theory research stems from the reflection on this premise.

1. Revealed preference theory.

The theory of revealed preference was first proposed by Samuelson, and was gradually developed into a system after being supplemented by H.S. Houthakker, M.K. Richer and others. . It arises from the undetectability of utility in traditional demand theory. In the traditional micro-demand theory, consumers' choice behavior to achieve utility-maximizing commodity combinations is easy to analyze only when the consumer's utility function is known and has good properties. But this is not the case in real life, because utility or preference cannot be directly observed. What can be directly observed is only the consumer's choice behavior. If a certain relationship between choice behavior and preferences can be found, and in other words, if consumers' "choices" can reveal "preferences," then demand theory and preference theory can be based on observable consumer behavior. This provides the possibility to test the consistency of consumer behavior with the maximization axiom. This is the basic idea of ??revealed preference theory.

2. Choice issues under risk conditions.

In a market where there are a lot of risks, how to effectively choose a combination of asset symptoms to avoid risks becomes very important. Therefore, the study of insurance markets, securities markets, futures contracts and other issues has become a micro-level A very active branch of economic theory. Especially since the 1960s and 1970s, with the development of cognitive psychology and other branches of psychology, people have begun to test the rationality hypothesis and expected utility theory of classical economics. The results found that: under certain conditions, the rationality axiom hypothesis Established, and under vague or uncertain conditions, people's behavior often violates axiomatic assumptions. Therefore, when making decisions under uncertain conditions, it is necessary to examine people's complex mentality. In this case, wait-and-see theory, regret theory and fuzzy model have emerged. Specifically when it comes to asset-symbol combination decisions in the market, risky asset theory (derivative securities), agency theory, asset portfolio selection theory, capital asset pricing model, and arbitrage pricing theory have emerged. Corresponding to this theory is the inter-temporal choice theory that explains consumers' different choices of consumption and savings under different conditions. Dynamic inter-temporal choice theory has been widely used in modern economics.

3. The theory that consumption is also family production.

Becker believes that the family is similar to a small factory, which combines "commodities, raw materials and labor... to produce some other useful goods." According to this broader view, consumers in neoclassical microeconomics are both household consumers and household producers, a role with dual identities. It is believed that the production and consumption of goods (in Becker's model, children are sometimes regarded as consuming goods) take time. Time is an opportunity cost that must be calculated together with the market price of any good or the act of making economic decisions. Just as raising a child requires inputs such as human resources, capital, and time, the production and consumption of any final goods or services can be viewed as a combination of various inputs required to obtain an output. For example, the final product obtained by a person in his family production (in the new microeconomic theory represented by Becker, consumption is regarded as family production), such as "healthy body", requires many "market goods" (those items purchased directly by consumers in the market) and time investment. Sports equipment, various health foods, medical services, and the time spent exercising and consuming these items are all inputs that go into producing this final good. Individuals or families transform these inputs into outputs (including children's growth, comfortable family life, healthy body, spiritual happiness, etc.), that is, the family's production or consumption process embodies a production function.

Just as general production enterprises must consider the opportunity costs of the application of production factors to optimize production, the optimization of household production must also consider the opportunity costs of the application of various factors. For example, watching a play, reading a book, or eating a good meal (all of which can be considered input factors in household production) all require time, so the complete price of these activities must include the time spent on these activities. opportunity cost. This opportunity cost can be measured based on an individual's market wage. For example, suppose someone earns $10 from working for an hour, and he either spends an hour eating at a restaurant or 15 minutes eating fast food. Let’s also assume that both dining options cost $6. Although the two meals require equal monetary expenditure, the full price of their consumption is significantly different. The full price of a fast food meal is $8.50 ($6 plus $2.50 of forgone income), while the full price of a restaurant meal is $16 ($6 plus $10 of forgone income). The final determinant of an individual's choice will be the amount of utility (i.e., the value of the product produced by the household) for each dollar spent (full cost) on each meal. The value of other household production, such as having children, doing various housework, maintenance activities, etc., can also be expressed using the concept of opportunity cost.

Similarly, when the cost of time is treated equally with the cost of market goods, new insights are injected into the traditional choice between work and leisure, which becomes the choice between work, leisure and family production, and, According to the concepts of quality and quantity, new perspectives on household consumption types can be established.

New manufacturer theory

Neoclassical manufacturer theory studies an atomic manufacturer, that is, it regards the manufacturer as an economic individual with a tendency to maximize profits. In other words, it regards the manufacturer as an economic individual with a tendency to maximize profits. As a "black box", the smallest unit of analysis, all problems are abstracted in the production function. But reality is far from theory, and the formation of modern enterprise theory is the result of reflection on this assumption.

1. The nature of the enterprise. The essence of this question is to analyze the reason for the existence of the enterprise. The first person to propose and explain it was Coase. From the perspective of transaction cost analysis, Coase proposed that the existence of enterprises is to reduce the cost of market transactions, that is, the internalization of market costs. In addition to Coase, Williamson (1975), Klein (1978), Grossman and Hart (1986), Tirole et al. respectively studied asset specificity, incomplete contracts and vertical Integration and other perspectives explain the essence of the enterprise.

2. Maximization model and delegation-agency problem. The principal-agent problem originates from the reflection and analysis of the maximizing behavior of corporate managers. In an enterprise, the separation of ownership and management rights is an issue that must be studied. Under normal circumstances, corporate managers have exclusive decision-making power based on their specific information and power advantages, and their actions have a huge impact on the company. Therefore, in modern enterprises, there are differences in interests and goals between investors or principals and managers or agents. Principal-agent theory was developed to solve the problem of managers' deviation from the goal of maximizing investors' profits. The significance of this theory is that the enterprise is no longer the smallest unit of economic analysis.

3. Internal organizational efficiency and non-maximizing firm theory. How to stimulate the enthusiasm and creativity of employees and effectively organize various resources to make the enterprise operate effectively is the core issue of the enterprise form. The team theory of Alchian and Demsetz (1972) successfully explained this problem. From a management perspective, the neoclassical "rational economic man" is the foothold of its management, that is, the "profit maximization incentive" of management. But in reality, this kind of management thinking is not always tried and true. In response to this situation, H. A. Simon's hypothesis of personal limited rationality and pursuit of satisfactory utility, and H. Leibenstein proposed the "X-non-efficiency theory", thus forming a theory of non-maximizing manufacturer behavior. Its significance lies in analyzing and studying resource allocation and utilization efficiency issues from a "micro-micro" perspective, becoming an important supplement to the "maximization theory".

Rewriting of game theory

Neoclassical economics market analysis has two important assumptions:

1. Individual decision-making is based on given conditions of price parameters and income. The best choice without affecting others or relying on others;

2. The market information is sufficient and cost-free.

These two premise assumptions keep microeconomic analysis in the wonderful realm of perfect general equilibrium deterministic analysis. But this is not the case in real life. The economy as a whole not only affects each other, but also the ability of individuals to obtain information is limited and information also has a cost. It is in this context that game theory, information economics and uncertainty analysis emerge. "Game Theory and Economic Behavior" co-published by Von Neuman and Morgenstern in 1944 marked the official founding of "economic game theory". By 1994, three masters of "game theory", Nash, Selten and Harshony, were awarded the Nobel Prize in Economics [2]. During this period, a full half century has passed, and game theory has been greatly enriched and developed. The theories of "zero-sum game and non-zero-sum game", "prisoner's dilemma and Nash equilibrium", "subgame refined Nash equilibrium" and "Bayes-Nash equilibrium and refined Bayes-Nash equilibrium" have made game theory in modern times Its status in economic analysis is increasing day by day. In a sense, it can be said that the widespread application of game theory has rewritten microeconomics.

Game theory has reshaped the monopoly theory of microeconomics. The neglect of externality issues is a fatal flaw of classical economics, so the study of externality issues has greatly promoted the development of microeconomics. From Cournot, Bertrand to Chamberlain, economists gradually realized that most market competition in reality needs to be explained by oligopoly theory. Although oligopoly competition is ubiquitous in reality, before the introduction of game theory, all economists could do was revisit Cournot's research results a century and a half ago. Only in the traditional industrial organization theory represented by Bain, the oligopoly market is taken as the focus and empirical research is conducted in the framework of "structure-behavior-performance". But when economists mastered Nash equilibrium and more knowledge of game theory, Cournot research was continued. They not only confirmed that Cournot and Bertrand equilibria are both Nash equilibria, but also developed a variety of analysis techniques based on these two models, such as sunk costs, incomplete information models, individual rationality and collective rationality, and the anonymous theorem. etc., which brings the market analysis of modern economics to a new level.

Information economics has become mainstream

In economic society, everyone makes decisions based on the information he has. But asymmetric information environments are the norm. The so-called asymmetric information environment refers to that some people have information that others do not have. Information economics studies the optimal decision-making of individual actors under asymmetric information. It mainly studies two aspects. One is economic analysis under incomplete information, with the core being "information cost" and optimal information search; the other is under asymmetric information. economic analysis.

The difficulty in information economics lies in the uncertainty of the objects in the principal-agent relationship, that is, the principal cannot know for sure what type of person he is dealing with when dealing with multiple agents. The same is true for people. In the late 1960s, game theorist Hassani proposed a game technology for dealing with incomplete information, and extended the concept of Nash equilibrium in complete information games to incomplete information games, defining Bayesian Nash equilibrium [ 3]. On this basis, incomplete information games (especially asymmetric information games) have made great progress, and information economics has also developed rapidly. The analysis method of asymmetric information games has completely changed the entire landscape of microeconomics. Issues such as moral hazard and adverse selection dealt with in the design research of economic mechanisms are all changes brought about by this analysis method. It can be said that careful micro-analysis has penetrated into the complex economic system we live in - from the effectiveness of the market to the supply of public products, from various related issues of the modern enterprise system to the government's role in the economy. function, etc. Information economics has become the mainstream of today's economic analysis.