Introduction to Microeconomics

• Economics is a social science that studies how societies allocate scarce resources to satisfy unlimited wants and needs
• It encompasses 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 in the face of scarcity and how their interactions determine prices and quantities in specific markets
• Demand is 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, and vice versa
• Factors influencing demand include consumer income, tastes, expectations, and the prices of related goods (substitutes and complements)
• Supply is 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, resulting in a stable price (equilibrium price) and quantity (equilibrium quantity)
• Shifts in either the demand or supply curve will lead to changes in the equilibrium 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
• Different types of elasticity include elastic (greater than 1), inelastic (less than 1), and unit elastic (equal to 1)
• Market structures describe the competitive environment in a market
• Perfect competition involves many buyers and sellers, homogeneous products, and free entry and exit
• Monopoly involves a single seller with significant market power
• Oligopoly involves a few dominant firms
• Monopolistic competition involves many firms selling differentiated products
• Externalities occur when the actions of one party affect the well-being of a third party who is not involved in the decision-making process
• Positive externalities benefit third parties, while negative externalities impose costs
• Public goods are non-excludable (individuals cannot be prevented from consuming them) and non-rivalrous (one person's consumption does not diminish another person's consumption)
• Common resources are rivalrous but non-excludable, leading to potential overuse and the "tragedy of the commons"

Macroeconomics

• Macroeconomics studies the behavior of the economy as a whole, focusing on aggregate variables such as GDP, inflation, and unemployment
• It analyzes the factors that determine long-run economic growth and short-run fluctuations in economic activity
• Gross Domestic Product (GDP) is the total market value of all final goods and services produced within a country's borders during a specific period
• GDP can be measured using the expenditure approach (sum of consumption, investment, government spending, and net exports) or the income approach (sum of wages, profits, rent, and interest)
• Real GDP adjusts for inflation and provides a more accurate measure of economic output than nominal GDP
• Inflation is the sustained increase in the general price level of goods and services in an economy
• It is typically measured using the Consumer Price Index (CPI) or the GDP deflator
• Causes of inflation can include demand-pull factors (excess demand) and cost-push factors (rising input costs)
• Unemployment refers to the situation where individuals who are willing and able to work are unable to find employment
• Different types of unemployment include frictional (temporary), structural (mismatch of skills), and cyclical (related to business cycle fluctuations)
• Monetary policy involves actions taken by a central bank to manipulate the money supply and credit conditions to influence economic activity
• Tools of monetary policy include open market operations (buying and selling government bonds), the reserve requirement (minimum amount of reserves banks must hold), and the discount rate (interest rate at which banks can borrow from the central bank)
• Fiscal policy involves the use of government spending and taxation to influence economic activity
• Expansionary fiscal policy (increased government spending or tax cuts) aims to stimulate economic growth, while contractionary fiscal policy (decreased government spending or tax increases) aims to cool down an overheating economy
• Economic growth refers to the increase in the productive capacity of an economy over time
• Factors contributing to economic growth include capital accumulation, technological progress, and human capital development
• International trade involves the exchange of goods and services between countries
• Comparative advantage suggests that countries should specialize in producing goods and services in which they have a lower opportunity cost
• Exchange rates determine the relative value of different currencies and influence the flow of international trade and investment
• Balance of payments tracks a country's transactions with the rest of the world, including imports, exports, and financial flows

Economic Systems

• An economic system is the way a society organizes the production, distribution, and consumption of goods and services
• Market economies rely on decentralized decision-making by individuals and firms, with prices determined by supply and demand
• Command economies involve centralized planning and control by the government
• Mixed economies combine elements of both market and command economies
• Property rights define the ownership and control of resources
• Well-defined and enforced property rights are essential for efficient resource allocation and economic growth
• Economic incentives influence the behavior of individuals and firms
• They can take the form of prices, profits, wages, or other rewards or penalties
• Government intervention in the economy can take various forms, including regulation, taxation, and subsidies
• The appropriate level and type of government intervention are debated among economists
• Welfare economics examines the efficiency and equity of resource allocation in an economy
• It seeks to identify policies that maximize social welfare
• Behavioral economics incorporates psychological insights into the study of economic decision-making
• It recognizes that individuals may not always act rationally and that emotions and cognitive biases can influence choices