Microeconomic Definitions and Concepts

Microeconomic Definitions and Concepts

• Microeconomics is the study of individual economic agents like individuals, households, and firms, and how their decisions affect markets.
• It focuses on the behavior of individual agents, not the overall economy.
• Microeconomics uses models to understand how price and quantity are determined in particular markets.

Key Concepts in Microeconomics

• Demand: The relationship between a good's price and the quantity consumers are willing and able to buy.
• Supply: The relationship between a good's price and the quantity producers are willing and able to sell.
• Market Equilibrium: The intersection of supply and demand curves, establishing market price and quantity.
• Elasticity: Measures the responsiveness of one variable to changes in another (e.g., price elasticity of demand, supply).
• Maximizing Behavior: Economic agents (consumers and firms) aim to maximize utility/satisfaction (consumers) or profit (firms).
• Opportunity Cost: The value of the next best alternative sacrificed when making a choice.
• Marginal Analysis: Analyzing the additional benefit or cost of one more unit of an action or good.

Market Structures

• Perfect Competition: Many buyers and sellers, homogenous products, free entry/exit, perfect information.
• Monopoly: One seller, unique product with no close substitutes, significant barriers to entry.
• Monopolistic Competition: Many sellers with differentiated products, some price control, easy entry and exit.
• Oligopoly: Few large sellers, offering similar or identical products, strategic interaction is key.

Consumer Behavior

• Utility Maximization: Consumers seek to maximize satisfaction (utility) given budget constraints.
• Indifference Curves: Show combinations of goods providing the same level of satisfaction.
• Budget Constraints: Represent affordable combinations of goods given income and prices.
• Marginal Rate of Substitution (MRS): The rate a consumer is willing to trade one good for another while maintaining the same level of satisfaction.

Production and Costs

• Production Functions: Show the relationship between inputs (e.g., labor, capital) and outputs (e.g., goods, services).
• Short-Run vs. Long-Run Production: Short-run: one fixed input; long-run: all inputs variable.
• Cost Curves: Show the relationship between output and costs (total, average, marginal).
• Economies of Scale: Decreasing average cost as output increases.

Market Failures

• Externalities: Costs or benefits not reflected in market prices, imposed on third parties.
• Public Goods: Non-excludable and non-rivalrous (e.g., national defense).
• Asymmetric Information: One party in a transaction has more information than the other.
• Market Power: A firm's ability to influence market price.

Market Interventions

• Price Ceilings and Price Floors: Government-imposed price restrictions affecting market equilibrium.
• Taxes and Subsidies: Government interventions influencing market outcomes through prices and quantities.
• Regulation: Government actions controlling and influencing market behavior.