Government policy has microeconomic effects whenever its implementation alters the inputs and incentives for individual decisions. Economic costs and benefits for individuals are revised through changes to tax policy, fiscal policy, regulations, tariffs, subsidies, legal tender laws, licensing, and public-private partnerships.
Key Takeaways
- Government policy influences microeconomics by implementing incentives and inputs that shape individual decisions.
- Changes to tax policy, fiscal policy, interest rate policy, regulations, tariffs, and subsidies affect individual choices.
- Microeconomics studies the interaction of supply and demand when individuals make choices in response to changes in incentives, prices, resources, or production.
Supply and Demand
Microeconomics studies the interaction of supply and demand when individuals make choices in response to changes in incentives, prices, resources, or production. Individuals are grouped into microeconomic subgroups, such as buyers,sellers, and business owners. These groups create thesupply and demandfor resources, use money, and rely oninterest ratesas a pricing mechanism.
Governments can change the quantity of a good, the supply, or the level of funds that can be directed toward those goods, the demand. Governments can also make some forms of trade illegal.
Microeconomics looks at the economic behaviors of individuals, households, and companies. Macroeconomics analyzes economies on a larger scale, such as nationally or globally.
Examples of Policies that Affect Individuals and Firms
- Governments use subsidies to farmers to make their businesses more profitable and encourage farm production.
- A sales tax on cigarettes and alcohol may discourage an individual's buying behavior.
- Fiscal policy affects aggregate demand through changes in government spending and taxation, which causes ripple effects on individuals and firms through wages and prices.
- Monetary policies implemented by governments affect changes to money supply and interest rates, which affect individual loan rates.
How Does Government Taxation Affect the Microeconomic Level?
Non-voluntary government policies have microeconomic impacts. Governments are financed through taxes from individuals and firms. When this happens, individuals and businesses must either spend less income or work and produce an additional amount to offset the impact of the taxes.
How Can an Positive Macroeconomic Policy Negatively Affect Individuals or Firms?
Some aggregate policies are used during economic turmoil, which trickle down to the microeconomic level. When the U.S. government propped up wages during the Great Depression, it unintentionally made it unprofitable for individual firms to hire extra employees.
How Do Governments Affect Markets When They Spend?
Governments can also alter markets when spending money. Any individuals or businesses that receive government funds receive, in effect, a wealth transfer from other taxpayers. If a business gets a subsidy from the government, it produces at a higher cost curve than is possible without the subsidy. All others who might have received those funds have a corresponding change in income or revenue.
The Bottom Line
Microeconomics studies individual supply and demand behaviors in response to changes in incentives, prices, resources, or production. When a government revises tax policy, fiscal policy, monetary policy, regulations, tariffs, or subsidies, these changes affect individual choices.
