Introduction to Microeconomics

• Economics is a social science that studies the production, distribution, and consumption of goods and services
• It analyzes how individuals, businesses, governments, and societies make choices to allocate limited resources to satisfy unlimited wants

Microeconomics

• Microeconomics focuses on the behavior of individual economic agents, such as households, firms, and markets
• It examines how these agents make decisions and how their interactions determine prices and quantities in specific markets
• Supply and Demand are core concepts:
  • Demand refers to the quantity of a good or service that consumers are willing and able to purchase at various prices during a specific period
  • Supply refers to the quantity of a good or service that producers are willing and able to offer for sale at various prices during a specific period
  • Market equilibrium is the point where the supply and demand curves intersect, determining the market-clearing price and quantity
• Elasticity measures the responsiveness of one variable to a change in another:
  • Price elasticity of demand measures how much the quantity demanded of a good responds to a change in its price
  • Income elasticity of demand measures how much the quantity demanded of a good responds to a change in consumers' income
  • Cross-price elasticity of demand measures how much the quantity demanded of one good responds to a change in the price of another good
• Market Structures describe the competitive environment in a market:
  • Perfect competition features many buyers and sellers, homogeneous products, and free entry and exit
  • Monopoly features a single seller, a unique product, and barriers to entry
  • Oligopoly features a few dominant firms, differentiated or homogeneous products, and barriers to entry
  • Monopolistic competition features many firms, differentiated products, and relatively easy entry and exit
• Production and Costs are analyzed to understand how firms make decisions about output and pricing:
  • Production function shows the relationship between inputs (e.g., labor, capital) and output
  • Costs include fixed costs (which do not vary with output) and variable costs (which do vary with output)
  • Firms aim to maximize profits by producing the quantity of output where marginal revenue equals marginal cost
• Market failures occur when the market fails to allocate resources efficiently:
  • Externalities are costs or benefits that affect parties not involved in a transaction (e.g., pollution)
  • Public goods are non-excludable and non-rivalrous, meaning that it is difficult to prevent people from consuming them and that one person's consumption does not diminish another person's consumption (e.g., national defense)
  • Asymmetric information occurs when one party in a transaction has more information than the other party (e.g., used car sales)

Macroeconomics

• Macroeconomics studies the behavior of the economy as a whole
• It focuses on topics such as economic growth, inflation, unemployment, and government policies
• Gross Domestic Product (GDP) measures the total value of goods and services produced within a country's borders during a specific period:
  • Nominal GDP is measured in current prices
  • Real GDP is adjusted for inflation
  • GDP growth rate measures the percentage change in real GDP from one period to another
• Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling:
  • Consumer Price Index (CPI) measures the average change over time in the prices paid by urban consumers for a basket of consumer goods and services
  • Inflation can be caused by demand-pull factors (e.g., increased government spending) or cost-push factors (e.g., rising oil prices)
• Unemployment refers to the percentage of the labor force that is without work and actively seeking employment:
  • Types of unemployment include frictional, structural, and cyclical
  • The natural rate of unemployment is the rate of unemployment that prevails when the economy is operating at its potential output
• Fiscal Policy involves the use of government spending and taxation to influence the economy:
  • Expansionary fiscal policy (e.g., increased government spending or tax cuts) is used to stimulate economic growth
  • Contractionary fiscal policy (e.g., decreased government spending or tax increases) is used to reduce inflation
• Monetary Policy involves the central bank's actions to control the money supply and credit conditions to influence the economy:
  • Central banks use tools such as the policy interest rate, reserve requirements, and open market operations to achieve their objectives
  • Expansionary monetary policy (e.g., lowering interest rates) is used to stimulate economic growth
  • Contractionary monetary policy (e.g., raising interest rates) is used to reduce inflation
• Business Cycles are the periodic but irregular fluctuations in economic activity, measured by fluctuations in real GDP and other macroeconomic variables:
  • Stages of the business cycle include expansion, peak, contraction, and trough
  • Macroeconomic policies aim to stabilize the business cycle and promote economic growth
• International Trade involves the exchange of goods and services between countries:
  • Comparative advantage is the ability of a country to produce a good or service at a lower opportunity cost than another country
  • Trade barriers, such as tariffs and quotas, can restrict international trade
  • Exchange rates determine the value of one currency in terms of another
• Economic Growth refers to the increase in the productive capacity of an economy over time, typically measured by the growth rate of real GDP:
  • Factors that contribute to economic growth include capital accumulation, technological progress, and human capital development
  • Sustainable economic growth involves meeting the needs of the present without compromising the ability of future generations to meet their own needs