Microeconomics Principles: Structured Study Notes (Chapters 1-6)

Chapter 1 – Principles and Practice of Economics

Key Concepts

Economics studies how people allocate scarce resources to satisfy unlimited wants. This chapter introduces foundational distinctions and frameworks in microeconomics.

• Definition of Economics: The study of how people allocate scarce resources to satisfy unlimited wants.

• Positive vs. Normative Economics:

  • Positive Economics: Describes "what is" (facts, cause and effect).

  • Normative Economics: Prescribes "what should be" (value judgments).

• Microeconomics vs. Macroeconomics:

  • Micro: Individual markets, consumers, firms.

  • Macro: Overall economy, inflation, unemployment, GDP.

• Trade-offs: Choosing one option means giving up another—"no free lunch."

• Opportunity Cost: The value of the next best alternative foregone.

• Equilibrium: The situation where no one has an incentive to change behavior; supply equals demand.

Chapter 2 – Economic Methods and Questions

Core Ideas

This chapter covers the scientific approach and tools used in economic analysis.

• Scientific Method (Empiricism): Using data and models to test hypotheses.

• Models and Theories: Simplified representations of reality to explain/predict outcomes.

• Means and Medians: Tools for summarizing data; mean = average, median = middle value.

• Causation vs. Correlation:

  • Correlation: Two variables move together.

  • Causation: One variable directly affects the other.

Chapter 3 – Optimization: Doing the Best You Can

Main Concepts

Optimization is the process of making the best possible choice given constraints. Economists use marginal analysis to compare costs and benefits.

• Two Methods of Optimization:

  • Total Value: Choose the option with the highest overall benefit.

  • Marginal Analysis: Compare marginal benefit (MB) vs. marginal cost (MC).

• Applications: Rational decision-making uses marginal analysis—take action when MB ≥ MC.

Formula:

• $MB \geq MC$

Chapter 4 – Demand, Supply, and Market Equilibrium

Key Topics

This chapter explains how buyers and sellers interact in markets, and how prices and quantities are determined.

• Markets: Where buyers and sellers interact.

• Law of Demand: As price ↑, quantity demanded ↓ (ceteris paribus).

• Demand Schedule & Curve: Table and graph showing this inverse relationship.

• Difference Between D and QD:

  • QD (Quantity Demanded): Movement along the curve due to price change.

  • D (Demand): Shift of the entire curve due to other factors (income, tastes, etc.).

Additional Topics

• Individual vs. Market Demand: Sum of all individuals' demand curves.

• Law of Supply: As price ↑, quantity supplied ↑.

• Difference Between QS and S:

  • QS (Quantity Supplied): Movement along the supply curve.

  • S (Supply): Shift of the entire curve (input prices, technology, etc.).

• Market Equilibrium: Where Qd = Qs.

• Market Disequilibrium:

  • Surplus: Qs > Qd (prices fall).

  • Shortage: Qd > Qs (prices rise).

• Changes in Equilibrium: Shifts in supply or demand change equilibrium price and quantity.

Chapter 5 – Consumers and Incentives

Buyer's Problem

Consumers make choices based on preferences, budget, and prices. This chapter introduces the budget constraint and consumer equilibrium.

• Preferences, Budget, Prices: The three pillars of consumer choice.

• Budget Constraint Line (BCL): Shows combinations of goods affordable at given income/prices.

• Consumer Equilibrium Condition: Occurs where marginal utility per dollar is equal across goods.

• Consumer Surplus: Difference between what consumers are willing to pay and what they actually pay.

• Shifts or Rotations in the BCL: Caused by income changes or price changes.

Elasticities

• Price Elasticity of Demand: % change in Qd / % change in price.

  • Elastic: $|E_d| > 1$

  • Inelastic: $|E_d| < 1$

• Cross-Price Elasticity: % change in Qd of one good / % change in price of another.

  • Positive if substitutes, Negative if complements.

• Income Elasticity: % change in Qd / % change in income.

  • Positive = normal good, Negative = inferior good.

• Relationship between Ed and Revenue:

  • Elastic → price ↑ → revenue ↓

  • Inelastic → price ↑ → revenue ↑

Formula:

• $E_d = \frac{\%\,\text{change in } Q_d}{\%\,\text{change in price}}$

• $E_{xy} = \frac{\%\,\text{change in } Q_{dx}}{\%\,\text{change in price of } y}$

• $E_I = \frac{\%\,\text{change in } Q_d}{\%\,\text{change in income}}$

Chapter 6 – Producers and Incentives

Seller's Problem

Producers aim to maximize profit by considering production functions, costs, and revenues. This chapter introduces cost calculations and the law of diminishing returns.

• Production Function: Relationship between inputs and output.

• Law of Diminishing Returns: As input increases, additional output eventually decreases.

Cost Calculations

• TC (Total Cost): Fixed + Variable costs.

• ATC (Average Total Cost): $ATC = \frac{TC}{\text{Quantity}}$

• AVC (Average Variable Cost): $AVC = \frac{VC}{\text{Quantity}}$

• AFC (Average Fixed Cost): $AFC = \frac{FC}{\text{Quantity}}$

• MC (Marginal Cost): $MC = \frac{\Delta TC}{\Delta \text{Quantity}}$

Tips for the Exam

• Be able to draw and label demand & supply graphs and explain shifts.

• Know how to calculate elasticity and interpret it.

• Understand optimization using both total value and marginal analysis.

• Review budget constraint problems and consumer equilibrium.

• Practice short numerical problems on costs and revenue relationships.