Introduction to Economics: Microeconomics

Introduction to Economics

• Economics is the social science that studies how societies allocate scarce resources to satisfy unlimited wants and needs.
• It encompasses two main branches: microeconomics and macroeconomics.
• Microeconomics focuses on individual agents like households and firms, while macroeconomics examines the overall performance of the economy.

Microeconomics

• Supply and Demand: The interaction of supply and demand determines market prices and quantities.
  • Supply represents the quantity of a good or service that producers are willing to offer at different prices, typically increasing with price.
  • Demand represents the quantity of a good or service that consumers are willing to buy at different prices, typically decreasing with price.
  • Market equilibrium occurs when supply equals demand.
• Elasticity: Measures the responsiveness of quantity demanded or supplied to a change in price or other factors.
  • Price elasticity of demand measures how much quantity demanded changes when price changes.
  • Determinants and effects of elasticity are relevant in various economic policy decisions.
• Market Structures: Economies have different market structures that affect price, output, and competition.
  • Perfect competition (many buyers and sellers, homogenous products, free entry/exit)
  • Monopolistic competition (many buyers and sellers, differentiated products, relatively easy entry/exit)
  • Oligopoly (few large producers, significant interdependence, barriers to entry)
  • Monopoly (single seller, unique product, significant barriers to entry)
• Production Costs and Profit Maximization: Firms strive to minimize production costs and maximize profits to guide production decisions.
  • Understanding cost curves (fixed, variable, total, marginal) is key.

Macroeconomics

• Gross Domestic Product (GDP): A key measure of a nation's economic output.
  • Represents the total market value of all final goods and services produced within a country in a certain period.
• Inflation: The sustained increase in the general price level of goods and services in an economy over a period.
  • Measured by various indices like the Consumer Price Index (CPI).
• Unemployment: The percentage of the labor force that is actively seeking employment but unable to find work.
  • Understanding the different types of unemployment (frictional, structural, cyclical) and their effects.
• Economic Growth: An increase in the capacity of an economy to produce goods and services over time.
  • Factors involved include capital accumulation, technological advancement, labor force growth, and institutional factors.
• Fiscal Policy: Governments use taxation and spending to influence the economy.
  • Expansionary fiscal policy involves increasing government spending or decreasing taxes to stimulate demand.
  • Contractionary fiscal policy involves decreasing government spending or increasing taxes to reduce demand.
• Monetary Policy: Central banks use interest rates and money supply to influence the economy.
  • Expansionary monetary policy involves lowering interest rates or increasing the money supply to stimulate demand.
  • Contractionary monetary policy involves raising interest rates or decreasing the money supply to curb inflation.
• International Trade: The exchange of goods and services between countries.
  • Concepts like comparative advantage, tariffs, and trade agreements.

Economic Systems

• Capitalism: Resource allocation driven by markets and private ownership.
• Socialism: Resource allocation driven by social ownership and central planning.
• Mixed Economy: Characteristics of both capitalism and socialism.

Other significant concepts

• Opportunity Cost: The value of the next best alternative foregone when making a choice.
• Scarcity: The fundamental economic problem of unlimited wants and needs exceeding limited resources.
• Rational Choice Theory: Individuals and firms make decisions to maximize their utility or profit, respectively.