Editing Microeconomics (section)

== Microeconomic theory ==

=== Consumer demand theory ===
{{main|Consumer choice}}

Consumer demand theory relates [[Preference (economics)|preferences]] for the consumption of both [[good (economics)|goods]] and services to the consumption expenditures; ultimately, this relationship between preferences and consumption expenditures is used to relate preferences to [[supply and demand|consumer demand curves]]. The link between personal preferences, consumption and the [[demand curve]] is one of the most closely studied relations in economics. It is a way of analyzing how consumers may achieve [[equilibrium (economics)|equilibrium]] between preferences and expenditures by maximizing [[utility]] subject to consumer [[budget constraint]]s.

=== Production theory ===
{{main|Production theory}}

Production theory is the study of production, or the economic process of converting inputs into outputs.<ref>[https://assets.cambridge.org/97811070/36161/frontmatter/9781107036161_frontmatter.pdf  Sickles, R., & Zelenyuk, V. (2019). Measurement of Productivity and Efficiency: Theory and Practice. Cambridge: Cambridge University Press]. {{doi|10.1017/9781139565981}}</ref> [[Production (economics)|Production]] uses [[resource]]s to create a [[good (economics)|good]] or [[service (economics)|service]] that is suitable for use, [[gift]]-giving in a [[gift economy]], or [[trade|exchange]] in a [[market economy]]. This can include [[manufacturing]], storing, [[shipping]], and [[packaging]]. Some economists define production broadly as all economic activity other than [[Consumption (economics)|consumption]]. They see every commercial activity other than the final purchase as some form of production.

=== Cost-of-production theory of value ===
{{main|Cost-of-production theory of value}}

The cost-of-production theory of value states that the price of an object or condition is determined by the sum of the cost of the resources that went into making it. The cost can comprise any of the [[factors of production]] (including [[Wage labour|labor]], [[capital (economics)|capital]], or [[land (economics)|land]]) and taxation. [[Technology]] can be viewed either as a form of [[fixed capital]] (e.g. an [[physical plant|industrial plant]]) or [[circulating capital]] (e.g. [[intermediate goods]]).

In the mathematical model for the cost of production, the short-run total cost is equal to [[fixed cost]] plus total [[variable cost]]. The fixed cost refers to the cost that is incurred regardless of how much the firm produces. The variable cost is a function of the quantity of an object being produced. The cost function can be used to characterize production through the duality theory in economics, developed mainly by [[Ronald Shephard]] (1953, 1970) and other scholars (Sickles & Zelenyuk, 2019, ch. 2).

=== Fixed and variable costs ===
* [[Fixed cost]] (FC) – This cost does not change with output. It includes business expenses such as rent, salaries and utility bills.
* [[Variable cost]] (VC) – This cost changes as output changes. This includes raw materials, delivery costs and production supplies. 

Over a short time period (few months), most costs are fixed costs as the firm will have to pay for salaries, contracted shipment and materials used to produce various goods. Over a longer time period (2-3 years), costs can become variable. Firms can decide to reduce output, purchase fewer materials and even sell some machinery. Over 10 years, most costs become variable as workers can be laid off or new machinery can be bought to replace the old machinery <ref>{{cite web |title=Principles of Microeconomics (Curtis and Irvine) |url=https://socialsci.libretexts.org/Bookshelves/Economics/Principles_of_Microeconomics_(Curtis_and_Irvine) |website=Social Sci LibreTexts |language=en |date=5 July 2021}}</ref>

[[Sunk cost]]s – This is a fixed cost that has already been incurred and cannot be recovered. An example of this can be in R&D development like in the pharmaceutical industry. Hundreds of millions of dollars are spent to achieve new drug breakthroughs but this is challenging as its increasingly harder to find new breakthroughs and meet tighter regulation standards. Thus many projects are written off leading to losses of millions of dollars <ref>{{cite book |last1=Pindyck |first1=Robert S. |title=Microeconomics |date=2018 |location=Harlow, UK |isbn=978-1292213378 |edition=9th}}</ref>

=== Opportunity cost ===
{{Main|Opportunity cost}}

Opportunity cost is closely related to the idea of time constraints. One can do only one thing at a time, which means that, inevitably, one is always giving up other things. The opportunity cost of any activity is the value of the next-best alternative thing one may have done instead. Opportunity cost depends only on the value of the next-best alternative. It does not matter whether one has five alternatives or 5,000.

Opportunity costs can tell when ''not'' to do something as well as when to do something. For example, one may like waffles, but like chocolate even more. If someone offers only waffles, one would take it. But if offered waffles or chocolate, one would take the chocolate. The opportunity cost of eating waffles is sacrificing the chance to eat chocolate. Because the cost of not eating the chocolate is higher than the benefits of eating the waffles, it makes no sense to choose waffles. Of course, if one chooses chocolate, they are still faced with the opportunity cost of giving up having waffles. But one is willing to do that because the waffle's opportunity cost is lower than the benefits of the chocolate. Opportunity costs are unavoidable constraints on behavior because one has to decide what's best and give up the next-best alternative.

=== Price theory ===
Microeconomics is also known as price theory to highlight the significance of prices in relation to buyer and sellers as these agents determine prices due to their individual actions.<ref name=":1" /> Price theory is a field of [[economics]] that uses the [[supply and demand]] framework to explain and predict human behavior. It is associated with the [[Chicago school of economics|Chicago School of Economics]]. Price theory studies [[competitive equilibrium]] in [[Market (economics)|markets]] to yield testable hypotheses that can be rejected.

Price theory is not the same as microeconomics. Strategic behavior, such as the interactions among sellers in a market where they are few, is a significant part of microeconomics but is not emphasized in price theory. Price theorists focus on competition believing it to be a reasonable description of most markets that leaves room to study additional aspects of tastes and technology. As a result, price theory tends to use less [[game theory]] than microeconomics does.

Price theory focuses on how agents respond to prices, but its framework can be applied to a wide variety of socioeconomic issues that might not seem to involve prices at first glance. Price theorists have influenced several other fields including developing [[Public choice|public choice theory]] and [[law and economics]]. Price theory has been applied to issues previously thought of as outside the purview of economics such as criminal justice, marriage, and addiction.