Introduction to Microeconomics

• Economics is a social science that studies how societies manage scarce resources to satisfy unlimited wants and needs
• It involves the study of production, distribution, and consumption of goods and services
• Microeconomics focuses on the behavior of individual economic agents, such as households, firms, and governments, and their interactions in specific markets

Core Concepts in Microeconomics

• Scarcity is the fundamental economic problem of having unlimited wants and needs in a world of limited resources, requiring choices and trade-offs
• Opportunity cost is the value of the next best alternative forgone when making a choice
• Rationality assumes that individuals make decisions to maximize their own well-being or utility, given the available information and constraints
• Incentives are factors that motivate individuals to act in a certain way, playing a crucial role in shaping economic behavior
• Efficiency refers to the optimal allocation of resources, where it's impossible to make someone better off without making someone else worse off
• Equity concerns the fairness of the distribution of resources and outcomes in society
• Positive economics deals with objective and testable statements about how the economy works
• Normative economics involves subjective and value-based opinions about how the economy should be

Demand and Supply

• Demand represents the quantity of a good or service that consumers are willing and able to purchase at various prices during a specific period
• The law of demand states that, all else being equal, as the price of a good or service increases, the quantity demanded decreases
• Factors influencing demand include consumer income, tastes, expectations, and the prices of related goods (substitutes and complements)
• Supply represents the quantity of a good or service that producers are willing and able to offer for sale at various prices during a specific period
• The law of supply states that, all else being equal, as the price of a good or service increases, the quantity supplied increases
• Factors influencing supply include input costs, technology, expectations, and the number of sellers
• Market equilibrium occurs where the quantity demanded equals the quantity supplied, determining the equilibrium price and quantity
• Surpluses exist when the quantity supplied exceeds the quantity demanded, leading to downward pressure on prices
• Shortages exist when the quantity demanded exceeds the quantity supplied, leading to upward pressure on prices
• Price elasticity of demand measures the responsiveness of the quantity demanded to a change in price
• Price elasticity of supply measures the responsiveness of the quantity supplied to a change in price
• Income elasticity of demand measures the responsiveness of the quantity demanded to a change in consumer income
• Cross-price elasticity of demand measures the responsiveness of the quantity demanded of one good to a change in the price of another good

Market Structures

• Perfect competition is characterized by many small firms, homogeneous products, free entry and exit, and perfect information
• Monopolistic competition is characterized by many firms, differentiated products, relatively easy entry and exit
• Oligopoly is characterized by a few large firms, interdependent decision-making, and barriers to entry
• Monopoly is characterized by a single firm, unique product, and significant barriers to entry
• Market power is the ability of a firm to influence the market price of its product
• Barriers to entry are factors that prevent new firms from entering a market

Production and Costs

• Production function describes the relationship between inputs (e.g., labor, capital) and output
• Marginal product is the additional output produced by adding one more unit of input
• Law of diminishing returns states that as more of a variable input is added to a fixed input, the marginal product of the variable input will eventually decrease
• Fixed costs are costs that do not vary with the level of output
• Variable costs are costs that vary with the level of output
• Total cost is the sum of fixed costs and variable costs
• Marginal cost is the additional cost of producing one more unit of output
• Average cost is the total cost divided by the quantity of output
• Economies of scale occur when average costs decrease as output increases
• Diseconomies of scale occur when average costs increase as output increases

Game Theory

• Game theory is the study of strategic decision-making, where the outcome of one player's actions depends on the actions of other players
• A Nash equilibrium is a situation where no player can improve their payoff by unilaterally changing their strategy
• A dominant strategy is a strategy that is optimal for a player regardless of what the other players do
• The prisoner's dilemma is a classic game theory scenario that illustrates the challenges of cooperation

Market Failures

• Market failure occurs when the market fails to allocate resources efficiently
• Externalities are costs or benefits that affect parties not directly involved in a transaction
• Public goods are non-excludable and non-rivalrous, making it difficult for markets to provide them efficiently
• Asymmetric information exists when one party in a transaction has more information than the other party
• Government intervention, such as taxes, subsidies, regulations, and price controls, may be used to correct market failures
• Behavioral economics incorporates psychological insights into economic models, recognizing that individuals may not always behave rationally