Microeconomics: Core Principles and Demand/Supply

• Microeconomics is crucial for informed business decisions by understanding core principles.
• Microeconomics studies individual and firm decisions amidst scarcity.
• Scarcity arises from limited resources, necessitating allocation choices.
• Microeconomics offers a framework to understand market operations and price determination.
• Comprehending microeconomics aids businesses in optimizing pricing, production, and investment strategies.

Core Principles

• Decision-making involves trade-offs, balancing competing objectives.
• Opportunity cost, what is given up to acquire something, is key in decision evaluation.
• Rational individuals make choices by comparing marginal costs and marginal benefits.
• Incentives influence behavior, with changes in costs or benefits altering actions.

Demand and Supply

• The demand curve illustrates the correlation between price and consumer willingness to buy.
• The supply curve depicts the relationship between price and producer willingness to sell.
• Market equilibrium occurs where demand and supply curves intersect, dictating price and quantity.
• Shifts in demand or supply cause changes in the equilibrium price and quantity.

Elasticity

• Elasticity measures how responsive quantity demanded or supplied is to price or other factors.
• Price elasticity of demand quantifies the change in quantity demanded based on price variations.
• Elasticity helps forecast how changes in price or other influencing factors impact revenue.

Costs of Production

• Firms incur costs when producing goods and services.
• Fixed costs remain constant regardless of production volume.
• Variable costs fluctuate with the quantity of output produced.
• Marginal cost represents the expense of producing one additional unit.
• Average total cost is calculated by dividing total cost by the output quantity.

Market Structures

• Perfect competition features numerous buyers and sellers, none of whom can dictate market price.
• Monopoly exists when a single seller controls the market and can influence prices.
• Oligopoly: Few sellers exert some control over market prices.
• Monopolistic competition involves many sellers offering slightly differentiated products.

Game Theory

• Game theory analyzes strategic behavior in situations where outcomes depend on multiple participants.
• A 'game' is defined by interdependent outcomes based on players' actions.
• A strategy outlines a player's planned actions within a game.
• Nash equilibrium occurs when no player benefits from altering their strategy, assuming others' strategies remain constant.
• The prisoner's dilemma exemplifies how Nash equilibrium may not yield the optimal outcome for all involved.

Externalities

• Externalities are costs or benefits imposed on uninvolved parties.
• Negative externalities, like pollution, impose costs on others.
• Positive externalities, like vaccinations, provide benefits to others.
• Externalities can cause market failures, leading to inefficient resource allocation.
• Governments address externalities through interventions like pollution taxes or vaccination subsidies.

Public Goods

• Public goods are non-rivalrous and non-excludable.
• Non-rivalrous means one person's consumption doesn't diminish availability for others.
• Non-excludable means preventing consumption, even without payment, is impossible.
• Markets struggle to provide public goods due to the incentive to free ride.
• Public goods like defense and parks are often government-provided.

Information Asymmetry

• Information asymmetry arises when one party has more information than the other.
• This can lead to adverse selection, where the informed party exploits their advantage, causing market failure.
• Moral hazard, another consequence, involves altered behavior post-transaction that harms the less-informed party.
• Signaling and screening can help reduce information asymmetry.

Behavioral Economics

• Behavioral economics integrates psychology and economics to understand decision-making processes.
• People deviate from rationality, relying on biases and heuristics.
• Examples of biases include framing effects, loss aversion, and present bias.
• Understanding these biases helps businesses create appealing products and services.

Using Microeconomics in Business

• Pricing: Set prices that maximize profits via understanding demand elasticity and cost structures.
• Production: Decide on production volume via understanding production costs and market demand.
• Investment: Invest more soundly via understanding market structure and competitive dynamics.
• Strategy: Improve strategic decisions in competitive settings via understanding game theory.
• Public Policy: Advocate for beneficial policies via understanding externalities and public goods.