Key Concepts in Microeconomics

Definition: Microeconomics is the branch of economics that studies individual agents and markets, focusing on the behavior of consumers and firms, and how they interact in markets.

Scarcity and Choice:
- Resources are limited, leading to the necessity of making choices.
- Opportunity cost: the next best alternative foregone when a choice is made.
Supply and Demand:
- Law of Demand: As price decreases, quantity demanded increases, and vice versa.
- Law of Supply: As price increases, quantity supplied increases, and vice versa.
- Market equilibrium: The point where quantity demanded equals quantity supplied.
Elasticity:
- Price elasticity of demand: Measures sensitivity of quantity demanded to price changes.
- Price elasticity of supply: Measures sensitivity of quantity supplied to price changes.
- Types of elasticity: Elastic (greater than 1), inelastic (less than 1), unitary (equal to 1).

Utility:
- Total utility: The overall satisfaction received from consuming goods and services.
- Marginal utility: The additional satisfaction gained from consuming one more unit.
- Law of diminishing marginal utility: As consumption increases, the added satisfaction from each additional unit decreases.
Budget Constraint:
- Represents the combinations of goods that a consumer can purchase given their income and the prices of goods.

Production Functions:
- Describes the relationship between inputs (labor, capital) and outputs (goods/services).
- Short run: At least one input is fixed.
- Long run: All inputs can be varied.
Cost Concepts:
- Total Cost (TC): The sum of fixed costs (FC) and variable costs (VC).
- Average Cost (AC): TC divided by quantity produced.
- Marginal Cost (MC): The additional cost of producing one more unit.

Perfect Competition:
- Many buyers and sellers.
- Homogeneous products.
- Free entry and exit from the market.
Monopoly:
- Single seller dominates the market.
- Unique product with no close substitutes.
- High barriers to entry.
Monopolistic Competition:
- Many firms sell products that are similar but not identical.
- Some control over price due to product differentiation.
Oligopoly:
- Few firms control a large market share.
- Products may be homogeneous or differentiated.
- Firms are interdependent in decision-making.

Occurs when the allocation of goods and services is not efficient.
Causes include:
- Externalities: Costs or benefits to third parties not reflected in prices.
- Public goods: Non-excludable and non-rivalrous goods leading to free-rider problem.
- Information asymmetry: When one party has more or better information than the other.

Price Controls:
- Price ceilings: Maximum legal prices (can lead to shortages).
- Price floors: Minimum legal prices (can lead to surpluses).
Taxes and Subsidies:
- Taxes can distort market outcomes and affect supply and demand.
- Subsidies can encourage production and consumption of certain goods.

Microeconomics provides a framework for understanding individual and firm behavior in the economy, influencing both theoretical and practical aspects of economic policy and decision-making.

Microeconomics focuses on individual agents like consumers and firms, analyzing their interactions in various markets.

Scarcity and Choice: Limited resources necessitate choices, with opportunity cost representing the value of the next best alternative.
Supply and Demand:
- Law of Demand: Price decrease leads to an increase in quantity demanded.
- Law of Supply: Price increase results in a higher quantity supplied.
- Market Equilibrium: Achieved when quantity demanded equals quantity supplied.
Elasticity:
- Price elasticity of demand indicates how much quantity demanded reacts to price changes.
- Price elasticity of supply reveals how quantity supplied is affected by price fluctuations.
- Elasticity types: Elastic (greater than 1), inelastic (less than 1), unitary (equal to 1).

Utility:
- Total utility measures overall satisfaction from consuming goods/services.
- Marginal utility refers to the additional satisfaction from consuming one more unit.
- Law of Diminishing Marginal Utility: Increased consumption results in lower added satisfaction.
Budget Constraint: Represents the possible combinations of goods a consumer can buy based on their income and the prices.

Production Functions: Illustrate the relationship between input factors (labor, capital) and output.
- Short Run: At least one input is fixed.
- Long Run: All inputs are variable.
Cost Concepts:
- Total Cost (TC) combines fixed costs (FC) and variable costs (VC).
- Average Cost (AC) is TC divided by the quantity of output.
- Marginal Cost (MC) represents the cost of producing one additional unit.

Perfect Competition: Characterized by many buyers/sellers, homogeneous products, and free market entry/exit.
Monopoly: A single seller controls the market with a unique product and high entry barriers.
Monopolistic Competition: Many firms offering similar but not identical products, allowing for some price control.
Oligopoly: A few firms dominate the market, either with homogeneous or differentiated products, and are interdependent in decision-making.

Defined by inefficient allocation of goods/services.
Causes of Market Failure:
- Externalities: Costs or benefits impacting third parties and not reflected in prices.
- Public Goods: Non-excludable and non-rivalrous goods causing free-rider issues.
- Information Asymmetry: Imbalances in information between parties involved in transactions.

Price Controls:
- Price Ceilings: Legal maximum prices that can cause shortages.
- Price Floors: Legal minimum prices that can lead to surpluses.
Taxes and Subsidies:
- Taxes can distort market outcomes affecting supply/demand.
- Subsidies promote production and consumption of targeted goods.