What is microeconomics?

What is microeconomics really about?

Conventional economics usually puts markets at the centre of the answer. It assumes that individuals make rational choices and that markets, operating through prices, allocate resources efficiently. But that account leaves out much of what actually shapes economic life.

None of us makes economic decisions in isolation. Families, communities, businesses and governments all influence the choices available to us. Governments also create the laws and institutions that make markets possible in the first place. Property rights, contracts and money do not simply appear naturally. Markets are social institutions created within society.

Power matters too. Wealth changes the choices people can make, while large companies can exercise considerable market power. And many things that are economically important, including unpaid care and voluntary work, never appear in market transactions at all.

Markets can also fail to account for environmental damage and other costs imposed on society. That is why prices and values are not the same thing.

In this episode of Understanding Economics, I explain why microeconomics needs to look beyond markets. It should ask how society allocates resources, who has power, who bears the costs, who receives the benefits, and how we can organise the economy so that everyone has the opportunity to live well and thrive.