Principles of Microeconomics
Unit 1: Introduction to Economics
Before we dive into the principles of microeconomics, we need to define
some of the major ideas that lie at the heart of economics. What is the
economic way of thinking? What do economists mean when they discuss
market structure and the invisible hand? In this unit we identify and define
these terms before addressing the driving principles behind
microeconomics: the idea that individuals and firms (economic agents)
make rational choices based on self-interest. These decisions are
necessary, because resources are scarce. In other words, no good or item
is infinitely available. We will also introduce a number of economic models,
the assumptions and constraints associated with each, and the ways they
help us better understand real-life situations.
Unit 2: Supply and Demand
In this unit we introduce the ceteris paribus assumption, which is crucial to
building correlations among economic variables. When using ceteris
paribus, we assume that all variables – with the exception of those in
explicit consideration – will remain constant. We then examine the supply
and demand models and the resulting market equilibrium that occurs
where the supply curve and the demand curve intersect. We also explore
what causes movements along the curve and the set of factors that cause
the curves to shift, affecting both price and quantity, before discussing the
meaning and significance of elasticity.
Next, we explore what happens when a market fails to produce a
reasonable equilibrium. This situation typically occurs when either the
market is not competitive or complete, or its participants are ill-informed.
We evaluate various ways the government can address these failures and
begin to understand the intricate relationship between government and
economics.
Unit 3: Markets and Individual Maximizing Behavior
In this unit we examine how markets increase overall welfare via the
concepts of consumer and producer surplus. We explore how the concepts
of marginal costs and benefits affect a company's decision to make one
more, or one less, product.
We have already learned that, at its most fundamental level,
microeconomics is the study of how we make decisions. To expand on this
point, we need to distinguish between the either/or and how much
decision. This concept is useful when you look more closely at why firms
produce certain levels of output, taking opportunity cost and sunk (fixed)
cost into consideration.
This unit concludes with the causes and ramifications of income inequality.
While there is much debate about how to address long-term inequality,
economists can objectively measure the problem's scope and offer options
to manage this economic phenomenon. Protracted poverty and inequality
can cause long-term harm to an economy's development.
Unit 4: The Consumer
In this unit we focus on the individual consumer and the characteristics
that compel them (to choose) to spend income on goods and services. The
consumer experiences utility – a measure of satisfaction – with every
purchase they make, and economists measure this utility to determine a
consumer's optimal rate of consumption. The theory of demand is derived
from the theory of consumer behavior presented in this unit. We can
explain an individual's demand function by two approaches that help
illustrate personal preferences: utility analysis and indifference analysis.
We explore these concepts more fully in this unit.
Unit 5: The Producer
In this unit we learn about one of the most important economic agents: the
producer. The producer (a company or firm) is responsible for creating the
production function (output) and is subject to various cost measures and
the results of diminishing returns. We explore these ideas more fully as we
delve into the relationship between quantity of input and quantity of output.
We will discuss how and why a firm's costs may differ in the short run
versus the long run.
Unit 6: Market Structure: Competitive and Non-Competitive Markets
This unit introduces the concept of perfect competition, an ideal model that
serves as a benchmark economists use to analyze real-world market
structures. The model of perfect (or pure) competition creates an efficient
allocation of resources. However, unregulated markets (which are central
to perfect competition) often fail to create desired outcomes in the real
world. Economists refer to these situations as examples of imperfect
competition.
Here we study the model of perfect competition and move on to what many
consider the antithesis of perfect competition, the monopoly model. We will
explore imperfect competition and two models that fall under it:
monopolistic competition and oligopoly. We also touch on game theory,
when we discuss the prisoner's dilemma model and the Nash equilibrium.
Unit 7: Resource Markets
In this unit we explore how firms decide how much to use their resources
(land, labor, capital, and entrepreneurial ability), which are required to
produce a final good, and at what price. We derive the demand for
resources from the demand for the final goods used to produce them. For
example, if consumer demand for cars increases (the final good), the
demand for steel (and every other resource car manufacturers use to build
the car) also increases.
