Microeconomics in a Nutshell

Until the so-called Keynesian revolution of the late 1930s and 1940s, the two main parts of economic theory were typically labeled “monetary theory” and “price theory.” Today, the corresponding dichotomy is between “macroeconomics” and “microeconomics.” The motivating force for the change came from the macro side, with modern macroeconomics being far more explicit than old-fashioned monetary theory about fluctuations in income and employment (as well as the price level). In contrast, no revolution separates today’s microeconomics from old-fashioned price theory; one evolved from the other naturally and without significant controversy.
The strength of microeconomics comes from the simplicity of its underlying structure and its close touch with the real world. In a nutshell, microeconomics has to do with supply and demand, and with the way they interact in various markets. Microeconomic analysis moves easily and painlessly from one topic to another and lies at the center of most of the recognized subfields of economics. Labor economics, for example, is built largely on the analysis of the supply and demand for labor of different types. The field of industrial organization deals with the different mechanisms (monopoly, cartels, different types of competitive behavior) by which goods and services are sold. International economics worries about the demand and supply of individual traded commodities, as well as of a country’s exports and imports taken as a whole, and the consequent demand for and supply of foreign exchange. Agricultural economics deals with the demand and supply of agricultural products and of farmland, farm labor, and the other factors of production involved in agriculture.

Public finance (see public choice) looks at how the government enters the scene. Traditionally, its focus was on taxes, which automatically introduce “wedges” (differences between the price the buyer pays and the price the seller receives) and cause inefficiency. More recently,