Microeconomics and International Trade Basics

Microeconomics

• Study of individual economic units such as households, firms, and markets
• Examines how resources are allocated and prices are determined in individual markets
• Key concepts:
  • Opportunity cost: the value of the next best alternative given up when a choice is made
  • Law of diminishing marginal utility: the additional satisfaction gained from consuming one more unit of a good or service decreases as consumption increases
  • Consumer equilibrium: the point at which the marginal utility of a good or service equals the price

Macroeconomics

• Study of the economy as a whole, focusing on aggregate variables such as GDP, inflation, and unemployment
• Examines issues related to economic growth, business cycles, and stabilization policies
• Key concepts:
  • Gross Domestic Product (GDP): the total value of goods and services produced within a country's borders
  • Inflation: a sustained increase in the general price level of goods and services in an economy over time
  • Fiscal policy: government's use of taxation and expenditure to influence the overall level of economic activity

Supply and Demand

• The price and quantity of a good or service are determined by the interaction of supply and demand in a market
• Law of Supply: as the price of a good or service increases, the quantity supplied also increases, ceteris paribus
• Law of Demand: as the price of a good or service decreases, the quantity demanded also increases, ceteris paribus
• Equilibrium: the point at which the quantity supplied equals the quantity demanded

Market Structures

• Perfect Competition:
  • Many firms producing a homogeneous product
  • Free entry and exit
  • Perfect information
  • No externalities
• Monopoly:
  • Single firm producing a product
  • Barriers to entry
  • Firm has market power to influence price
• Monopolistic Competition:
  • Many firms producing differentiated products
  • Free entry and exit
  • Non-price competition (e.g. advertising)
• Oligopoly:
  • Few firms producing a product
  • Interdependent decision-making
  • Firms have market power to influence price

International Trade

• Exchange of goods and services between countries
• Gains from Trade:
  • Comparative advantage: countries specialize in producing goods and services in which they have a lower opportunity cost
  • Absolute advantage: countries specialize in producing goods and services in which they have a higher productivity
• Tariffs and Quotas:
  • Tariffs: taxes on imported goods
  • Quotas: quantitative restrictions on imported goods
  • Used to protect domestic industries or raise revenue