Microeconomic Theory

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.