There are many factors to consider when describing how microeconomics applies to nearly all facets of our lives. However, the basis of it all, is supply and demand. They are the central components of microeconomics. Supply, which is directly proportional to price, refers to how firms decide which and how many goods or services they will supply and what combination of factors of production they should employ in supplying them. Demand, which is inversely proportional to price, refers to how individuals or households form their demands for different goods and services. Together, supply and demand are the process of interaction through which relative prices are determined. It is a process of mutual adjustment and accommodation. Changes in relative prices create incentives to change behavior: to use less and provide less when prices have fallen. As prices rise, people consume less of that product, and manufacturers produce more of it.
Microeconomics builds on certain simplifying assumptions concerning the behavior of consumers and producers. The theory of consumers’ demand assumes that consumers are rational, and want to make the decision that will give them the greatest satisfaction. The optimal choice for the consumer, is that choice among the available options that will enable him or her to maximize utility. The options available to the consumer are determined by their purchasing power, and the prices of goods and services available. In order for a consumer to acquire purchasing power, an individual must sell his or her labor. One basic choice an individual must make, is between income and leisure. An individual’s optimal decision is the one where marginal utility of income and leisure equals the price of labor- the wage.
Scarcity is another component of microeconomics that has a high impact on our lives and the choices we make. It is the relationship between supply and demand. A good becomes scarce when people cannot obtain as much of it as they would like without being required to sacrifice something else of value. Scarce goods must be rationed. When a good becomes more scarce, but prices are prevented from rising, a shortage develops: The quantity demanded is greater than the quantity supplied. Therefore, we must make a choice because the goods available are too few to satisfy individual’s desires. Microeconomics as a whole, deals with scarcity resources. It is concerned with the allocation of scarce means among competing ends. Supply and demand, is the cornerstone on which microeconomics is based. Therefore, it will always affect our lives and influence our choices.