Microeconomics Core Concepts and Supply & Demand: Study Notes

1. Core Concepts

Scarcity, Opportunity Cost, and Incentives

Microeconomics begins with several foundational ideas that explain how individuals and societies allocate limited resources.

• Scarcity: The fundamental economic problem of having limited resources to meet unlimited wants. Because resources (such as time, money, and raw materials) are finite, choices must be made about their allocation.

• Opportunity Cost: The value of the next best alternative that is forgone when a choice is made. Every decision involves a trade-off, and opportunity cost quantifies what is sacrificed.

• Incentives: Factors that motivate individuals to act in certain ways. Incentives can be monetary (such as prices or wages) or non-monetary (such as prestige or personal satisfaction).

Example: If a student spends time studying for an economics exam instead of working a part-time job, the opportunity cost is the wage they would have earned during that time.

2. Supply & Demand

Market Forces and Equilibrium

The interaction of supply and demand determines prices and quantities in most markets. Understanding these concepts is central to microeconomic analysis.

• Law of Demand: As the price of a good increases, the quantity demanded decreases, ceteris paribus (all else equal). This relationship is typically represented by a downward-sloping demand curve.

• Law of Supply: As the price of a good increases, the quantity supplied increases, ceteris paribus. This is shown by an upward-sloping supply curve.

• Equilibrium: The point where the quantity demanded equals the quantity supplied. At this price, there is no shortage or surplus in the market.

Key Equations:

• Demand: $Q_d = f(P)$ (Quantity Demanded is a function of Price, typically $Q_d = a - bP$)

• Supply: $Q_s = f(P)$ (Quantity Supplied is a function of Price, typically $Q_s = c + dP$)

• Equilibrium: $Q_d = Q_s$

Example: If the price of coffee rises, consumers may buy less coffee (movement along the demand curve), while producers may supply more (movement along the supply curve). The new equilibrium price and quantity are found where the two curves intersect.

Supply and Demand Graph

The following is a standard supply and demand diagram:

Additional info: The graph in the original notes shows a typical intersection of downward-sloping demand and upward-sloping supply curves, with equilibrium at their intersection.