Microeconomics Basics: Supply and Demand

Definition

• Microeconomics is the branch of economics that studies individual agents, such as consumers and firms, and their interactions in markets.

Key Concepts

1. Supply and Demand

   • Demand: The quantity of a good that consumers are willing and able to purchase at various prices.
   • Supply: The quantity of a good that producers are willing and able to sell at various prices.
   • Equilibrium: The point where supply equals demand, determining market price.

2. Elasticity

   • Price Elasticity of Demand: Measures responsiveness of quantity demanded to a change in price.
     • Elastic (>1): Demand changes significantly with price change.
     • Inelastic (<1): Demand changes little with price change.
   • Price Elasticity of Supply: Measures responsiveness of quantity supplied to a change in price.

3. Market Structures

   • Perfect Competition: Many firms, identical products, free entry/exit, and price-taking behavior.
   • Monopoly: Single firm dominates market; higher prices due to lack of competition.
   • Oligopoly: Few firms dominate; potential for collusion and price-setting.
   • Monopolistic Competition: Many firms with differentiated products; some price-setting ability.

4. Costs of Production

   • Fixed Costs: Costs that do not change with the level of output (e.g., rent).
   • Variable Costs: Costs that change with the level of output (e.g., materials).
   • Total Costs: Sum of fixed and variable costs.
   • Average Costs: Total costs divided by the quantity produced.
   • Marginal Costs: Additional cost of producing one more unit.

5. Consumer Behavior

   • Utility: Satisfaction derived from consuming goods or services.
   • Marginal Utility: Additional satisfaction from consuming one more unit.
   • Indifference Curves: Graphical representation of different combinations of goods providing equal utility.

6. Production and Firm Behavior

   • Production Function: Relationship between inputs and output level.
   • Short Run vs. Long Run: Short run includes at least one fixed input, while all inputs are variable in the long run.

7. Government Intervention

   • Taxes and Subsidies: Affect market outcomes, influencing supply and demand.
   • Price Controls: Price ceilings (maximum price) and price floors (minimum price) disrupt natural market equilibrium.

8. Market Failures

   • Externalities: Costs or benefits incurred by third parties not directly involved in the transaction.
     • Positive Externality: Benefits spill over to others (e.g., vaccinations).
     • Negative Externality: Costs spill over to others (e.g., pollution).
   • Public Goods: Non-excludable and non-rivalrous goods leading to free-rider problems.

9. Welfare Economics

   • Analyzes the allocation of resources and assesses economic well-being.
   • Focuses on efficiency (maximizing total surplus) and equity (fair distribution of wealth).

Applications

• Microeconomics informs pricing strategies, government policies, and business decisions based on consumer behavior and market dynamics.

Microeconomics

• Studies individual economic agents like consumers and firms, and how they interact in various markets.

Supply and Demand

• Demand reflects how much of a good consumers are willing to buy at different prices.
• Supply indicates how much of a good producers are willing to sell at different price points.
• Equilibrium is the point where supply and demand meet, establishing the market price for a certain good.

Elasticity

• Price Elasticity of Demand gauges how much quantity demanded changes in response to price fluctuations.
• Elastic demand (>1) means a substantial quantity change with a price change.
• Inelastic demand (<1) means a small quantity change in response to a price change.

Test your understanding of microeconomic principles focusing on supply and demand. This quiz covers key concepts including elasticity, market structures, and the equilibrium between supply and demand. Perfect for students looking to reinforce what they've learned in their economics class.