What is Microeconomics?
Learn how individual company factors—earnings, revenue, margins, and competition—determine why one stock soars while another crashes.
Quick Answer
Microeconomics is the study of individual companies and their specific factors—not the whole economy. While macroeconomics affects all stocks, microeconomics explains why Apple is up 50% while Facebook is down 30%. Strong earnings, high margins, competitive advantages, and growing demand = stock goes up, regardless of the broader market.
Microeconomics vs Macroeconomics
Microeconomics (This Company)
- •How much money does Apple make?
- •Is Tesla beating its competitors?
- •Can Netflix raise prices without losing customers?
- •Does Amazon have a competitive moat?
Macroeconomics (The Whole Economy)
- •Is the economy growing or shrinking?
- •What is the Fed doing with interest rates?
- •Is inflation rising or falling?
- •How high is unemployment?
Think of it this way: Macroeconomics is the tide (lifts or sinks all boats), microeconomics is the individual boat (some have motors, some have leaks).
The 6 Micro Factors That Determine Stock Prices
1. Earnings (Profits)
The #1 driver of stock prices. If earnings grow = stock goes up. If earnings shrink = stock crashes.
Real Example:
Apple Q1 2023: Earnings beat expectations by 5% → Stock up 7% in one day
Meta Q4 2021: Earnings missed by 3% → Stock crashed 26% overnight
Every quarter, companies report earnings. Beat = moon. Miss = crater. It's that simple.
2. Revenue Growth
How fast is the company growing? Revenue = total sales. Investors pay premium for fast growth.
Real Example:
Nvidia 2023: Revenue up 206% year-over-year (AI boom) → Stock up 239%
Netflix 2022: Revenue growth slowed to 2% → Stock down 51%
Growth stocks (tech, biotech) are valued on revenue growth. Slow growth = sell-off.
3. Profit Margins
How much profit per dollar of sales? High margins = pricing power. Low margins = cutthroat competition.
Real Example:
Apple: 25% profit margin → Can weather downturns, premium valuation
Airlines: 2-5% margins → One bad quarter = bankruptcy risk
Formula: Profit Margin = (Net Income ÷ Revenue) × 100. Above 15% = excellent.
4. Competitive Advantage (Moat)
Can competitors easily steal customers? Strong moat = pricing power. Weak moat = race to the bottom.
Strong Moats:
• Google Search: Network effects, data moat → No real competition
• Coca-Cola: Brand moat → People pay premium for the brand
• Amazon AWS: Scale moat → Too big to compete with
Weak Moats:
• Most restaurants: Easy to replicate → Tons of competition
• Commodity producers: No differentiation → Price wars
5. Supply and Demand
Are people buying what they're selling? High demand + limited supply = pricing power.
Real Example:
2021 Chip Shortage: High demand, low supply → Nvidia, AMD stocks doubled
2022 Used Cars: Demand collapsed → Carvana stock crashed 98%
When demand outpaces supply, companies can raise prices = higher profits = stock goes up.
6. Management Quality
Is the CEO a genius or a clown? Great leaders = great stocks. Bad leaders = disaster.
Real Example:
Steve Jobs returns to Apple (1997) → Stock up 90,000% over next 14 years
Elon buys Twitter (2022) → Advertisers flee, value crashes 71%
Look for: track record of execution, shareholder-friendly decisions, long-term vision.
Real-World Case Studies
Perfect Microeconomics: Apple (2010-2020)
Strong Micro Factors:
• Earnings growing 15% per year
• Revenue exploding (iPhone, Services)
• 25% profit margins (pricing power)
• Massive brand moat
• High demand for iPhones
• Tim Cook executing flawlessly
Result:
Stock: $10 → $120
1,100% gain in 10 years
Even during macro turmoil (2011 debt crisis, 2020 COVID), Apple kept rising because micro fundamentals were perfect.
Terrible Microeconomics: Peloton (2021-2023)
Weak Micro Factors:
• Earnings collapsing (losses mounting)
• Revenue shrinking 30% year-over-year
• Negative profit margins
• No moat (bikes aren't special)
• Demand evaporated post-COVID
• Management burning cash
Result:
Stock: $167 → $6
96% crash in 2 years
Even during a bull market (2021-2023), Peloton crashed because micro fundamentals were terrible.
How to Analyze Microeconomics
1. Read the Earnings Report
Every quarter, companies release earnings. This tells you everything: revenue, profit, growth, guidance.
Key Metrics to Check:
• EPS (Earnings Per Share): Beat or miss?
• Revenue: Growing or shrinking?
• Guidance: What's the company predicting for next quarter?
2. Calculate Key Ratios
Profit Margin: (Net Income ÷ Revenue) × 100 | Above 15% = excellent
Revenue Growth: (This Year - Last Year) ÷ Last Year | Above 15% = strong growth
P/E Ratio: Stock Price ÷ EPS | Compare to industry average
3. Assess the Competitive Moat
Ask: Could I start a competing business easily? If yes = weak moat. If no = strong moat.
Strong moats: Brand (Nike), Network effects (Facebook), Scale (Walmart)
Weak moats: Commodity products, easily replicable services
4. Check Supply/Demand Dynamics
Is the company in a hot industry? Are customers lining up or walking away?
2023: AI boom → High demand for Nvidia chips → Stock up 239%
2022: Streaming wars → Too much supply, demand flat → Netflix down 51%
Common Questions
Can a stock rise if macroeconomics is bad?
Yes! If microeconomics is strong enough. Example: 2022 bear market, but Nvidia rose 20% because AI demand was exploding. Great micro can overcome bad macro. But it's harder.
Which matters more: micro or macro?
Macro sets the tide (affects all stocks), micro determines individual winners. In bull markets, focus on micro (pick the best stocks). In bear markets, macro matters more (even great stocks fall).
How do I know if earnings are "good"?
Compare to: (1) Analyst expectations (beat = good), (2) Last year same quarter (growing = good), (3) Competitors (doing better = good). Stock price reaction tells you instantly—if it's up 5%+ the day after earnings, it was good.
Should I buy stocks with great micro but bad macro?
Risky. Bad macro (rising rates, recession) sinks most stocks, even great ones. Better strategy: wait for macro to improve, then buy stocks with great micro. Don't catch falling knives.
Key Takeaways
- •Microeconomics = company-specific factors (earnings, margins, competition) that determine individual stock performance
- •Earnings are the #1 driver—beat expectations = stock soars, miss = stock crashes
- •Strong competitive moats (brand, network effects, scale) protect against competition
- •High profit margins (15%+) indicate pricing power and quality business
- •Great micro can overcome bad macro, but macro sets the tide that affects all boats