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Questions and Answers
What is the fundamental economic problem that leads to the concept of opportunity cost?
Which of the following is a principle of rational choice theory?
What is the law of demand?
What is the goal of consumers in utility maximization?
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What is the concept of diminishing marginal utility?
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What is the goal of firms in profit maximization?
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What is marginal analysis?
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What is the equilibrium price in a market?
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What is a surplus in a market?
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What is the opportunity cost of choosing one option over another?
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Study Notes
Microeconomic Theory
Definition
Microeconomic theory is a branch of economics that studies the behavior and decision-making processes of individual economic units, such as households, firms, and markets.
Key Concepts
Opportunity Cost
- The value of the next best alternative that is given up when choosing one option over another
- Represents the trade-off between different choices
Scarcity
- The fundamental economic problem of unlimited wants and needs, but limited resources
- Leads to the concept of opportunity cost
Rational Choice Theory
- Assumes that individuals make decisions based on rational self-interest
- People make choices that maximize their utility or satisfaction
Consumer Behavior
-
Demand Theory
- Law of Demand: as price increases, quantity demanded decreases
- Demand Curve: downward sloping curve showing the relationship between price and quantity demanded
-
Utility Maximization
- Consumers aim to maximize their total utility or satisfaction
- Diminishing Marginal Utility: each additional unit of a good or service yields less utility than the previous unit
Producer Behavior
-
Supply Theory
- Law of Supply: as price increases, quantity supplied increases
- Supply Curve: upward sloping curve showing the relationship between price and quantity supplied
-
Profit Maximization
- Firms aim to maximize their profits
- Marginal Analysis: comparing the additional cost of producing one more unit with the additional revenue it generates
Market Equilibrium
- Equilibrium Price: the price at which the quantity demanded equals the quantity supplied
- Equilibrium Quantity: the quantity at which the quantity demanded equals the quantity supplied
- Surplus: when quantity supplied exceeds quantity demanded
- Shortage: when quantity demanded exceeds quantity supplied
Microeconomic Theory
Definition
- Microeconomic theory studies the behavior and decision-making processes of individual economic units, such as households, firms, and markets.
Key Concepts
Opportunity Cost
- The value of the next best alternative that is given up when choosing one option over another.
- Represents the trade-off between different choices.
Scarcity
- The fundamental economic problem of unlimited wants and needs, but limited resources.
- Leads to the concept of opportunity cost.
Rational Choice Theory
- Assumes that individuals make decisions based on rational self-interest.
- People make choices that maximize their utility or satisfaction.
Consumer Behavior
Demand Theory
- Law of Demand: as price increases, quantity demanded decreases.
- Demand Curve: downward sloping curve showing the relationship between price and quantity demanded.
Utility Maximization
- Consumers aim to maximize their total utility or satisfaction.
- Diminishing Marginal Utility: each additional unit of a good or service yields less utility than the previous unit.
Producer Behavior
Supply Theory
- Law of Supply: as price increases, quantity supplied increases.
- Supply Curve: upward sloping curve showing the relationship between price and quantity supplied.
Profit Maximization
- Firms aim to maximize their profits.
- Marginal Analysis: comparing the additional cost of producing one more unit with the additional revenue it generates.
Market Equilibrium
Equilibrium Price and Quantity
- Equilibrium Price: the price at which the quantity demanded equals the quantity supplied.
- Equilibrium Quantity: the quantity at which the quantity demanded equals the quantity supplied.
Market Disequilibrium
- Surplus: when quantity supplied exceeds quantity demanded.
- Shortage: when quantity demanded exceeds quantity supplied.
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Description
Explore the fundamentals of microeconomic theory, including opportunity cost, scarcity, and more. Learn how individual economic units make decisions and interact with markets.
