Introduction to Microeconomics

Introduction to Microeconomics

• Microeconomics studies individual economic decision-making units, like individuals, firms, and industries.
• The subject matter focuses on resource allocation, including scarcity, choice, and opportunity cost.
• The key concepts are:
  • Human Wants: Unlimited desires for goods and services.
  • Utility: The ability of a good or service to satisfy human wants.
  • Goods: Tangible items for consumption or production.
  • Value: The worth or utility of a good or service.
  • Price: The monetary value of a good or service.
  • Wealth: The total value of assets owned by an individual or nation.
  • Income: The flow of earnings received over a period.

Utility Analysis & Demand

• Total Utility: The total satisfaction derived from consuming a specific amount of a good or service.
• Marginal Utility: The change in total utility from consuming one additional unit.
• Law of diminishing marginal utility: As consumption increases, the additional satisfaction from consuming one more unit declines.
• Law of Equi-marginal utility: Consumers allocate their budget to maximize utility by ensuring that the marginal utility per rupee spent is the same for all goods.
• Demand Curve: A graphical representation of the relationship between price and quantity demanded.
• Consumer Surplus: The difference between what consumers are willing and able to pay for a good and the actual price they pay.

Supply Analysis & Market Equilibrium

• Supply: The quantity of goods producers are willing and able to sell at various prices.
• Law of Supply: As price increases, the quantity supplied increases (generally).
• Demand and Supply Equilibrium: Occurs at the price where the quantity demanded equals the quantity supplied.
• Price Controls: Government intervention to manipulate prices (price ceilings: maximum prices, price floors: minimum prices).
• Producer Surplus: The difference between the price received by producers and the minimum price they are willing to accept.

Production, Cost, and Revenue

• Law of Variable Proportions: In the short run, as more units of variable inputs are added to a fixed input, output will increase initially but at a decreasing rate, eventually diminishing.
• Production Function: A mathematical relationship showing the maximum output that can be produced with given amounts of inputs.
• Isoquant: A curve showing all combinations of inputs that produce the same level of output.
• Isocost: A line showing all combinations of inputs that cost the same total amount.
• Optimum Combination: This is where the firm uses the least-cost combination of inputs to produce a given level of output, determined by the point of tangency between the isoquant and isocost curves.
• Returns to Scale: How output changes as all inputs are increased proportionally (increasing returns to scale mean output increases at a faster rate than inputs).
• Short-Run Costs: Fixed costs (don't change with output) and Variable costs (change with output).
• Long-Run Costs: All inputs are variable.
• Revenue Concepts: Total revenue, Marginal revenue, and Average revenue.