Examples of a Microeconomic Decision

Microeconomic decisions are made every day by businesses, customers and individuals making choices about what they wish to do. All people face scarcity, because however bountiful resources might seem, there remain limits to income and options. Microeconomic theory provides an explanation for the routine decisions that we all make. The impact of these decisions is more observable by a small business because the owner is closer to the customer.

Microeconomic decision-making is based on the principal that people make rational choices. Given that, people make decisions at the margin. Each choice we make has an opportunity cost that is the next best foregone alternative. When you select activity A, the opportunity cost is activity B. All transactions are subject to the law of diminishing returns. Each additional unit of activity A yields less satisfaction than the previous. You continue activity A until the marginal satisfaction from the last unit used is lower than that of activity B; then you switch to activity B. Decision-making at the margin is the basis for your choices as well as those of your customers.

A consumer’s choices are made by weighing alternatives, i.e., should he buy the athletic shoes or the sandals; is tonight a movie or bowling night. If the choices cost the same, then the decision is based on which alternative provides the most marginal utility or satisfaction. The more he consumes the less satisfaction each additional unit provides. This means that he will continue to go to the movies, for example, until his taste is satisfied after which bowling will have more appeal.

Within your small business operations, how much time you spend looking for a new employee is an example of a microeconomic decision. Suppose you post an ad for a vacancy that needs to be filled quickly. As the resumes flow in, the marginal benefit of interviewing candidates -- the probability of finding a better candidate -- declines with each additional candidate you interview. At the same time, the marginal cost of leaving the position vacant grows. As long as the marginal benefit exceeds the marginal cost, it pays to keep looking.

Your decision as a business owner regarding how much to produce or how much inventory to stock is also a microeconomic decision. In reaching a decision about how much of a product to produce, you will make more as long as the marginal benefit is greater than the marginal cost of producing it; if you get more when you sell it than it cost to make it, you will make it. On the other hand, if it costs more to make than you can recoup in sales, you won't make it.