Introduction to Microeconomics – Study Notes
1. What Is Microeconomics?
- Definition: The branch of economics that examines the behavior of individual economic agents—households, firms, and markets—and how they make decisions about allocating scarce resources.
- Scope:
- Consumer choice and demand
- Firm production and supply
- Market equilibrium and price formation
- Welfare analysis (efficiency & equity)
- Market failures and government intervention
2. Core Concepts & Terminology
| Concept |
Meaning |
Typical Example |
| Scarcity |
Limited resources vs. unlimited wants |
Land, labor, capital |
| Opportunity Cost |
Value of the next best alternative forgone |
Choosing to study economics instead of working |
| Marginal Analysis |
Decision based on the additional (marginal) benefit vs. cost |
Hiring one more worker |
| Elasticity |
Responsiveness of quantity to changes in price/income/etc. |
Price elasticity of demand for gasoline |
| Utility |
Satisfaction or happiness derived from consumption |
Utility from a cup of coffee |
| Profit Maximization |
Goal of firms: maximize the difference between total revenue and total cost |
A bakery deciding how many loaves to bake |
| Market Equilibrium |
Point where quantity demanded = quantity supplied |
Price where buyers and sellers agree on a product quantity |
3. The Consumer – Demand Side
-
Preferences & Utility
- Represented by indifference curves (higher curves → higher utility).
- Assumption: More is better (non‑satiation).
-
Budget Constraint
- ( p_x x + p_y y = I )
- Shows all affordable bundles given prices ((p_x, p_y)) and income ((I)).
-
Deriving the Demand Curve
- Utility Maximization: Choose (x) and (y) to maximize utility subject to the budget constraint.
- Result: Marshallian demand functions (x(p_x,p_y,I)).
- Plotting (x) against its own price ((p_x)) while holding other factors constant yields the individual demand curve.
-
Key Determinants of Demand
- Price of the good
- Income (normal vs. inferior goods)
- Prices of related goods (substitutes & complements)
- Tastes & preferences
- Expectations about future prices/income
4. The Firm – Supply Side
-
Production Theory
- Production Function: (Q = f(L, K)) – output ((Q)) as a function of labor ((L)) and capital ((K)).
- Diminishing Marginal Returns: Adding an extra unit of a variable input eventually yields smaller increases in output.
-
Cost Concepts
- Total Cost (TC): (TC = TFC + TVC) (fixed + variable).
- Average Cost (AC): (AC = TC/Q).
- Marginal Cost (MC): (\Delta TC / \Delta Q).
-
Profit Maximization
- Condition: (MR = MC) (where MR = marginal revenue).
- For perfectly competitive firms, (MR = P) → produce where (P = MC).
-
Supply Curve
- The upward‑sloping portion