Microeconomics Fundamentals: Introduction, Market Model, and Demand & Supply

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Introduction to Economics

What is Economics?

Economics is the social science concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity. The study of economics revolves around the concept of choices, as resources are limited relative to our wants.

Scarcity: The condition whereby the resources used to produce goods and services are limited compared to our wants for them.
Scarce Good (Economic Good): A good for which you cannot get all you want at zero cost.
Free Good: A good for which you can get all you want at zero cost.

Price vs. Cost

Price: The signal that tells producers what and how much to produce; paid by the consumer in a standard market transaction.
Cost: The sacrifice associated with making a choice; paid by the producer in a standard market transaction.

Types of Costs

Explicit Costs: Out-of-pocket, monetary payments.
Implicit/Opportunity Cost: The most valued option forgone.
Economic Cost: The sum of explicit and implicit costs.

Example: Economic Cost of Attending Auburn

Tuition: $11,796 × 4 = $47,184
Books: $1,240 × 4 = $4,960
Full Time Job (Opportunity Cost): $27,708 × 4 = $110,832
Total Economic Cost: $162,976

Resources (Factors of Production)

Resources are the inputs used in the production of outputs, products, goods, and services.

Natural: Land, oil, lumber, etc.
Labor: Physical and mental talents used in production.
Capital: All manufactured goods used in production.
Entrepreneurship: The ability to combine other resources into valuable outputs.

Utility and Marginal Decision Making

Utility: The satisfaction a consumer obtains from the consumption of a good or service.
Marginal: Refers to the additional change resulting from an extra unit.
Utility maximization by producers and consumers usually maximizes social welfare.

The Market Model

Purpose of Economic Principles and Models

Economic Principles: Statements about economic behavior or the economy that enable prediction of the probable effects of certain actions.
Model: A simplified representation of how something works, used to analyze and predict behavior.

Market Definition

A market is any institution that brings together consumers and producers of a particular good or service.
In product markets, households demand goods and services supplied by firms in exchange for money.
In resource markets, firms demand resources supplied by households in exchange for money.

Circular Flow Model

The circular flow model illustrates the movement of resources, goods, services, and money between households and firms through product and resource markets.

Demand and Supply

Demand

Demand Schedule: A table showing how much of a good or service consumers will want to buy at various prices.

Price	$100	$80	$60	$40	$20	$0
Quantity	0	40	80	120	160	200

Law of Demand: The price of a good and the quantity demanded are inversely related.
Demand Curve: A graphical representation of the quantities of a good or service that consumers are willing and able to purchase at all possible prices.
Change in Quantity Demanded (): A movement along the demand curve caused by a change in price.
Change in Demand (): A shift of the entire demand curve to the left or right, caused by factors other than price.

Factors That Shift the Demand Curve

Income:
- Normal Goods: Income and demand move together.
- Inferior Goods: Income and demand move opposite.
Price of Related Goods:
- Substitutes: The price of one good and the demand for the other move together.
- Complements: The price of one good and the demand for the other move opposite.
Expectations of Future Prices: Expected future price changes and current demand move together.
Number of Buyers: As the number of buyers increases, demand increases.
Tastes and Preferences: Changes in consumer preferences can shift demand.

Supply

Supply Schedule: A table showing how much of a good or service producers will offer for sale at various prices.

Price	$100	$80	$60	$40	$20	$10
Quantity	360	280	200	120	40	0

Law of Supply: The price of a good and the quantity supplied are directly (positively) related.
Supply Curve: A graphical representation of the quantities of a good or service that producers are willing to offer for sale at all possible prices.
Change in Quantity Supplied (): A movement along the supply curve caused by a change in price.
Change in Supply (): A shift of the entire supply curve to the left or right, caused by factors other than price.

Factors That Shift the Supply Curve

Input/Resource Prices: Input prices and supply move opposite.
Technology: Improvements in technology increase supply.
Taxes: Taxation and supply move opposite.
Expectations of Future Prices: Expected future price changes and current supply move opposite (for durable/storable goods).
Number of Sellers: The number of sellers in a market changes as profits change; more sellers enter when profit is high and exit when it is low.

Market Equilibrium

Equilibrium Price and Quantity

Equilibrium Price (Pe): The price at which the market clears ().
Equilibrium: No tendency for change at equilibrium.

Surplus and Shortage

Surplus: At prices above Pe, . Surpluses put downward pressure on prices until eliminated.
Shortage: At prices below Pe, . Shortages put upward pressure on prices until eliminated.

Solving for Equilibrium

Set and solve for price and quantity.

Example:

Set
units

Price Rationing

The allocation of goods among consumers using prices.
Economists believe price rationing is the most efficient method of allocating goods and services.
Every consumer willing to pay at least the equilibrium price will get the good.

Example: Market Analysis

If the price of gas (a complement to SUVs) falls, demand for SUVs increases, leading to a higher equilibrium price and quantity.
If the price of steel (an input for SUVs) falls, supply of SUVs increases, leading to a lower equilibrium price and higher quantity.

Additional info: These notes cover foundational microeconomic concepts including scarcity, opportunity cost, market equilibrium, and the determinants of demand and supply, suitable for introductory college-level microeconomics.