Core Concepts in Microeconomics: Study Guide

Microeconomics: Fundamental Principles and Definitions

Scarcity and the Nature of Economics

Microeconomics is the branch of economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources. Scarcity is a central concept, as resources are limited while wants are virtually unlimited.

• Scarcity: The condition in which human wants exceed the available resources to satisfy those wants.

• Economics as a Social Science: Focuses on the study of choices made under conditions of scarcity.

• Example: Deciding how to allocate a limited budget between food, rent, and entertainment.

Positive vs. Normative Statements

Economists distinguish between statements that describe the world as it is and those that prescribe how it should be.

• Positive Statement: Describes how the world is, based on facts and can be tested or verified.

• Normative Statement: Expresses opinions or value judgments about how the world should be.

• Example: "An increase in the minimum wage will lead to higher unemployment among teenagers" (positive); "The government should increase the minimum wage" (normative).

Market Fundamentals: Demand, Supply, and Equilibrium

Demand

Demand refers to the quantities of a good or service that consumers are willing and able to purchase at various prices during a given period.

• Definition: The quantity of a good that consumers are willing and able to purchase at various prices.

• Law of Demand: As the price of a good increases, the quantity demanded decreases, ceteris paribus.

• Demand Curve: Graphically shows the relationship between the price of a good and the quantity demanded.

• Equation: $Q_d = f(P)$, where $Q_d$ is quantity demanded and $P$ is price.

• Example: If the price of coffee rises, fewer people will buy coffee, all else equal.

Supply

Supply refers to the quantities of a good or service that producers are willing and able to sell at various prices during a given period.

• Definition: The amount of a good that sellers are willing to produce and sell at a given price.

• Law of Supply: As the price of a good increases, the quantity supplied increases, ceteris paribus.

• Supply Curve: Graphically shows the relationship between the price of a good and the quantity supplied.

• Equation: $Q_s = f(P)$, where $Q_s$ is quantity supplied and $P$ is price.

• Example: If the price of wheat rises, farmers are willing to supply more wheat.

Market Equilibrium

Market equilibrium occurs at the price and quantity where the quantity demanded equals the quantity supplied.

• Equilibrium: The point where the demand and supply curves intersect on a graph.

• Equation: $Q_d = Q_s$ at equilibrium price $P^*$.

• Example: If the market for apples is in equilibrium, the number of apples consumers want to buy equals the number producers want to sell at the market price.

Shifts in Demand and Supply

Changes in factors other than price cause the demand or supply curve to shift.

• Rightward Shift in Supply: Indicates an increase in supply (e.g., due to technological improvement).

• Rightward Shift in Demand: Indicates an increase in demand (e.g., due to higher consumer income).

• Example: A new technology reduces production costs, shifting the supply curve for smartphones to the right.

Marginal Analysis and Costs

Marginal Concepts

Marginal analysis examines the additional or incremental changes resulting from a decision.

• Marginal: Refers to the additional or extra amount of a good or service.

• Marginal Cost (MC): The additional cost incurred from producing one more unit of output.

• Equation: $MC = \frac{\Delta TC}{\Delta Q}$, where $\Delta TC$ is the change in total cost and $\Delta Q$ is the change in quantity produced.

• Example: If producing one more widget increases total cost by $5, the marginal cost is $5.

Market Structures and Public Goods

Perfect Competition

A perfectly competitive market is characterized by many buyers and sellers, identical products, and no control over market price.

• Price Takers: Firms in perfect competition accept the market price as given.

• Homogeneous Products: Products are not differentiated.

• Example: Agricultural markets like wheat or corn.

Public Goods and the Free Rider Problem

Public goods are non-excludable and non-rivalrous, leading to unique challenges in provision.

• Public Good: A good that is both non-excludable and non-rivalrous (e.g., national defense).

• Free Rider Problem: Occurs when individuals benefit from resources or services without paying for them, leading to under-provision in private markets.

• Example: People benefiting from a public park without contributing to its maintenance.

Key Terms Table

Term	Definition	Example/Application
Scarcity	Limited resources vs. unlimited wants	Budget constraints
Demand	Quantity consumers are willing and able to buy at various prices	Demand for coffee at different prices
Supply	Quantity producers are willing and able to sell at various prices	Supply of wheat by farmers
Equilibrium	Point where quantity demanded equals quantity supplied	Market price of apples
Marginal Cost	Cost of producing one more unit	Cost to produce one additional widget
Free Rider Problem	Individuals benefit without paying, leading to under-provision	Public broadcasting
Perfect Competition	Many firms, identical products, price takers	Wheat market

Summary of Key Equations

• Marginal Cost: $MC = \frac{\Delta TC}{\Delta Q}$

• Equilibrium Condition: $Q_d = Q_s$

Additional info: These notes synthesize foundational microeconomic concepts, definitions, and relationships, suitable for introductory college-level study and exam preparation.