Foundations

Object and Methods of Microeconomic Theory

Microeconomics is the science of scarcity and coping with the consequences of scarcity. Scarcity arises because the resources available to meet human needs are not enough to meet all existing desires. The concept of scarcity thus does not (only) refer here to the lack of essentials, but to any divergence between desire and reality. The central concepts of “needs” and “resources” are couched very broadly in modern economics.

The concept of need goes far beyond the area commonly termed “economic” in ordinary speech – namely, food, accommodation, clothing, and transport – to embrace needs often seen as “extraeconomic,” such as those for a clean environment, internal and external security, and indeed even the longing for peace and harmony in a relationship.

Similarly, the concept of resources is no longer confined in modern economics literature to the traditional factors of production – (paid) labor, capital, and land. Instead, natural (exhaustible or renewable) resources, as well as such elements as human knowledge and the work ethic in a society, are now taken into account.

A world of scarcity is necessarily one of conflicts over precious (because they are needed to reduce the scarcity) resources. No society is conceivable without mechanisms and institutions to settle these conflicts. The rules whereby scarce resources can be distributed among the all-too-numerous bearers of the all-too-numerous needs are varied.