Introduction to Microeconomics

• Economics is a social science that studies how societies allocate scarce resources to satisfy unlimited wants and needs
• It involves the study of production, distribution, and consumption of goods and services

Microeconomics

• Microeconomics focuses on the behavior of individual economic agents, such as households, firms, and markets
• It analyzes how these agents make decisions and how their interactions determine prices and quantities in specific markets

Core Concepts in Microeconomics

• Scarcity: the fundamental economic problem that arises because resources are limited, whereas wants are unlimited
• Opportunity Cost: the value of the next best alternative that must be sacrificed when making a choice
• Rationality: the assumption that individuals make decisions to maximize their utility or satisfaction

Demand

• Demand represents the willingness and ability of consumers to purchase goods and services at various prices
• Law of Demand: as the price of a good increases, the quantity demanded decreases, and vice versa, holding other factors constant
• Demand Curve: a graphical representation of the relationship between price and quantity demanded

Factors Affecting Demand:

• Income: normal goods (demand increases with income), inferior goods (demand decreases with income)
• Prices of Related Goods: substitutes (goods that can be used in place of each other) and complements (goods that are used together)
• Tastes and Preferences: consumer preferences affect demand
• Expectations: expectations about future prices or income
• Number of Buyers: more buyers increase demand

Supply

• Supply represents the willingness and ability of producers to offer goods and services at various prices
• Law of Supply: as the price of a good increases, the quantity supplied increases, and vice versa, holding other factors constant
• Supply Curve: a graphical representation of the relationship between price and quantity supplied

Factors Affecting Supply:

• Input Costs: the cost of resources used in production
• Technology: technological improvements can increase supply
• Expectations: expectations about future prices
• Number of Sellers: more sellers increase supply
• Government Policies: taxes and subsidies

Market Equilibrium

• Equilibrium: the point where the quantity demanded equals the quantity supplied
• Equilibrium Price: the price at which the market clears (no surplus or shortage)
• Equilibrium Quantity: the quantity bought and sold at the equilibrium price
• Surplus: when the quantity supplied exceeds the quantity demanded (occurs above the equilibrium price)
• Shortage: when the quantity demanded exceeds the quantity supplied (occurs below the equilibrium price)
• Price Controls: government-imposed limits on prices
  • Price Ceiling: a maximum price (can cause shortages if set below equilibrium)
  • Price Floor: a minimum price (can cause surpluses if set above equilibrium)

Elasticity

• Elasticity measures the responsiveness of one variable to a change in another
• Price Elasticity of Demand (PED): measures how much the quantity demanded of a good responds to a change in the price of that good
  • PED = (% Change in Quantity Demanded) / (% Change in Price)
  • Elastic Demand: PED > 1 (quantity demanded is very responsive to price changes)
  • Inelastic Demand: PED < 1 (quantity demanded is not very responsive to price changes)
  • Unit Elastic Demand: PED = 1 (percentage change in quantity demanded equals the percentage change in price)
  • Perfectly Elastic Demand: PED = ∞ (quantity demanded drops to zero with any price increase)
  • Perfectly Inelastic Demand: PED = 0 (quantity demanded does not change with price changes)
• Income Elasticity of Demand (YED): measures how much the quantity demanded of a good responds to a change in consumer income
  • YED = (% Change in Quantity Demanded) / (% Change in Income)
  • Normal Good: YED > 0 (demand increases with income)
  • Inferior Good: YED < 0 (demand decreases with income)
  • Luxury Good: YED > 1 (demand increases more than proportionally with income)
• Cross-Price Elasticity of Demand (CPED): measures how much the quantity demanded of one good responds to a change in the price of another good
  • CPED = (% Change in Quantity Demanded of Good A) / (% Change in Price of Good B)
  • Substitutes: CPED > 0 (positive, as the price of one goes up, demand for the other increases)
  • Complements: CPED < 0 (negative, as the price of one goes up, demand for the other decreases)
• Price Elasticity of Supply (PES): measures how much the quantity supplied of a good responds to a change in the price of that good
  • PES = (% Change in Quantity Supplied) / (% Change in Price)
  • Elastic Supply: PES > 1 (quantity supplied is very responsive to price changes)
  • Inelastic Supply: PES < 1 (quantity supplied is not very responsive to price changes)
  • Unit Elastic Supply: PES = 1 (percentage change in quantity supplied equals the percentage change in price)
  • Perfectly Elastic Supply: PES = ∞ (quantity supplied can increase infinitely with any price increase)
  • Perfectly Inelastic Supply: PES = 0 (quantity supplied does not change with price changes)

Consumer Behavior

• Utility: the satisfaction or pleasure a consumer derives from consuming goods and services
• Total Utility: the total satisfaction from consuming a certain quantity of a good
• Marginal Utility: the additional satisfaction from consuming one more unit of a good
• Law of Diminishing Marginal Utility: as a consumer consumes more of a good, the additional satisfaction from each additional unit decreases
• Consumer Equilibrium: the condition where a consumer allocates their income to maximize their total utility

Production and Costs

• Production Function: the relationship between inputs (labor, capital) and output
• Short Run: a time period where at least one input is fixed
• Long Run: a time period where all inputs are variable
• Total Cost (TC): the sum of fixed costs and variable costs
• Fixed Costs (FC): costs that do not vary with the level of output
• Variable Costs (VC): costs that vary with the level of output
• Marginal Cost (MC): the additional cost of producing one more unit of output
• Average Total Cost (ATC): total cost divided by the quantity of output
• Average Fixed Cost (AFC): fixed cost divided by the quantity of output
• Average Variable Cost (AVC): variable cost divided by the quantity of output
• Economies of Scale: when long-run average total cost decreases as output increases
• Diseconomies of Scale: when long-run average total cost increases as output increases
• Constant Returns to Scale: when long-run average total cost remains constant as output increases

Market Structures

• Perfect Competition: many small firms, homogeneous product, free entry and exit
• Monopolistic Competition: many firms, differentiated product, relatively free entry and exit
• Oligopoly: few firms, may be homogeneous or differentiated product, significant barriers to entry
• Monopoly: single firm, unique product, high barriers to entry

Perfect Competition Characteristics

• Many Buyers and Sellers: no single buyer or seller can influence the market price
• Homogeneous Product: identical products across sellers
• Free Entry and Exit: no barriers to firms entering or leaving the market
• Price Takers: firms must accept the market price
• Profit Maximization: firms produce where marginal cost equals marginal revenue (MC = MR)

Monopoly Characteristics

• Single Seller: one firm controls the entire market
• Unique Product: no close substitutes
• High Barriers to Entry: prevent other firms from entering the market
• Price Maker: the firm has the power to set the price
• Profit Maximization: firm produces where marginal cost equals marginal revenue (MC = MR), but the price is determined by the demand curve

Monopolistic Competition Characteristics

• Many Firms: many firms compete in the market
• Differentiated Product: products are similar but not identical (branding, quality, features)
• Relatively Free Entry and Exit: low barriers to entry and exit
• Price Makers: firms have some control over the price due to product differentiation
• Profit Maximization: firms produce where marginal cost equals marginal revenue (MC = MR)

Oligopoly Characteristics

• Few Firms: a small number of firms dominate the market
• Homogeneous or Differentiated Product: products can be identical or differentiated
• Significant Barriers to Entry: high barriers to entry prevent new firms from easily entering
• Interdependence: firms' decisions are influenced by the actions of other firms
• Strategic Behavior: firms engage in strategic decision-making, considering the potential responses of competitors
• Game Theory: often used to analyze oligopoly behavior

Factor Markets

• Factor Markets: markets where factors of production (labor, capital, land) are bought and sold
• Demand for Labor: derived demand, meaning it depends on the demand for the final product
• Supply of Labor: the willingness and ability of workers to offer their labor at various wage rates
• Wage Determination: determined by the interaction of labor demand and supply
• Capital and Land Markets: similar principles apply to the markets for capital and land

Market Failures

• Market Failure: when the market fails to allocate resources efficiently
• Externalities: costs or benefits that affect parties who are not involved in the transaction
  • Negative Externality: a cost imposed on others (e.g., pollution)
  • Positive Externality: a benefit conferred on others (e.g., education)
• Public Goods: non-excludable and non-rivalrous goods (e.g., national defense)
• Asymmetric Information: when one party has more information than the other (e.g., used car market)