Microeconomics Basics

Microeconomics

Definition

• Study of individual economic units such as households, firms, and markets
• Examines how these units make decisions about the allocation of resources and the prices of goods and services

Key Concepts

• Scarcity: The fundamental economic problem of unlimited wants and needs, but limited resources
• Opportunity Cost: The value of the next best alternative that is given up when a choice is made
• Rational Choice: The idea that individuals and firms make decisions based on maximizing their utility or profit

Consumer Behavior

• Demand: The quantity of a good or service that consumers are willing and able to buy at a given price level
• Law of Demand: The inverse relationship between the price of a good and the quantity demanded
• Substitutes: Goods or services that can be used in place of each other
• Complements: Goods or services that are used together

Production and Cost

• Production: The process of transforming inputs into outputs
• Cost: The expense of producing a good or service
• Fixed Cost: A cost that remains the same even if the level of production changes
• Variable Cost: A cost that changes as the level of production changes
• Average Cost: The total cost divided by the quantity produced
• Marginal Cost: The additional cost of producing one more unit of a good or service

Market Structure

• Perfect Competition: A market structure in which many firms produce a homogeneous product, and there is free entry and exit
• Monopoly: A market structure in which a single firm produces a product, and there are barriers to entry
• Monopolistic Competition: A market structure in which many firms produce differentiated products, and there is free entry and exit
• Oligopoly: A market structure in which a few firms produce a product, and there are barriers to entry

Market Equilibrium

• Supply and Demand: The interaction between the quantity of a good or service that producers are willing to sell and the quantity that consumers are willing to buy
• Equilibrium Price: The price at which the quantity supplied equals the quantity demanded
• Equilibrium Quantity: The quantity traded at the equilibrium price

Microeconomics

• Study of individual economic units, including households, firms, and markets
• Examines how these units make decisions about resource allocation and prices of goods and services

Key Concepts

• Scarcity: Unlimited wants and needs, but limited resources
• Opportunity Cost: Value of the next best alternative given up when a choice is made
• Rational Choice: Individuals and firms make decisions to maximize utility or profit

Consumer Behavior

• Demand: Quantity of a good or service consumers are willing and able to buy at a given price level
• Law of Demand: Inverse relationship between price and quantity demanded
• Substitutes: Goods or services used in place of each other
• Complements: Goods or services used together

Production and Cost

• Production: Transforming inputs into outputs
• Cost: Expense of producing a good or service
• Fixed Cost: Cost that remains the same even if production level changes
• Variable Cost: Cost that changes as production level changes
• Average Cost: Total cost divided by quantity produced
• Marginal Cost: Additional cost of producing one more unit of a good or service

Market Structure

• Perfect Competition: Many firms produce a homogeneous product, with free entry and exit
• Monopoly: Single firm produces a product, with barriers to entry
• Monopolistic Competition: Many firms produce differentiated products, with free entry and exit
• Oligopoly: Few firms produce a product, with barriers to entry

Market Equilibrium

• Supply and Demand: Interaction between quantity supplied and quantity demanded
• Equilibrium Price: Price at which quantity supplied equals quantity demanded
• Equilibrium Quantity: Quantity traded at the equilibrium price

Test your understanding of microeconomics, including the study of individual economic units, scarcity, opportunity cost, and rational choice.