Microeconomics Study Guide: Core Concepts, Demand & Supply, and Market Equilibrium

Introduction to Microeconomics

Basic Economic Concepts

Microeconomics is the study of individual decision-makers, such as households and firms, and how they allocate scarce resources. The following concepts are foundational to understanding microeconomic theory.

• Economics: The social science that studies how people choose to use limited resources to satisfy unlimited wants.

• Opportunity Cost: The value of the next best alternative forgone when making a choice.

• Marginalism: The analysis of the additional or incremental costs or benefits arising from a choice or decision.

• Positive vs. Normative Economics: Positive economics deals with objective analysis and facts ("what is"), while normative economics involves value judgments ("what ought to be").

• Economic Models: Simplified representations of reality used to analyze economic situations and predict outcomes.

Example: Choosing to spend an hour studying economics instead of working at a part-time job means the opportunity cost is the wage you would have earned.

Production Possibilities Frontier (PPF)

The PPF illustrates the maximum combinations of two goods or services that can be produced given available resources and technology.

• Efficiency: Points on the PPF represent efficient production; points inside are inefficient, and points outside are unattainable.

• Law of Increasing Opportunity Cost: As production of one good increases, the opportunity cost of producing additional units rises.

• Shifts in the PPF: The PPF shifts outward with economic growth (e.g., more resources, better technology) and inward with resource loss.

Equation:

$\text{Opportunity Cost} = \frac{\text{Loss in Good Y}}{\text{Gain in Good X}}$

Example: If moving from point A to point B on the PPF means producing 10 more cars but 5 fewer computers, the opportunity cost of the cars is 0.5 computers per car.

Factors of Production and Economic Agents

Categories of Resources

Resources, or factors of production, are inputs used to produce goods and services. They are typically classified as:

• Land: Natural resources

• Labor: Human effort

• Capital: Manufactured goods used in production

• Entrepreneurship: The ability to organize resources and take risks

Difference between Labor and Entrepreneur: Labor provides effort, while entrepreneurs organize production and innovate.

Economic Systems and Choices

Scarcity and Allocation

Scarcity forces societies to make choices about how to allocate resources. Economic systems (market, command, mixed) differ in how these choices are made.

• Consumer Goods: Goods used by individuals for personal satisfaction.

• Capital Goods: Goods used to produce other goods and services.

Example: A country investing more in capital goods may experience faster economic growth in the future.

Demand, Supply, and Market Equilibrium

Demand

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

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

• Demand Schedule: A table showing quantities demanded at different prices.

• Demand Curve: A graphical representation of the demand schedule, typically downward sloping.

• Determinants of Demand: Income, tastes, prices of related goods, expectations, and number of buyers.

Equation:

$Q_d = f(P, I, T, P_r, E, N)$

Where $Q_d$ = quantity demanded, $P$ = price, $I$ = income, $T$ = tastes, $P_r$ = price of related goods, $E$ = expectations, $N$ = number of buyers.

Supply

Supply is the quantity of a good or service that producers are willing and able to sell at various prices.

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

• Supply Schedule: A table showing quantities supplied at different prices.

• Supply Curve: A graphical representation of the supply schedule, typically upward sloping.

• Determinants of Supply: Input prices, technology, expectations, number of sellers, and government policies.

Equation:

$Q_s = f(P, P_i, T, E, N_s, G)$

Where $Q_s$ = quantity supplied, $P$ = price, $P_i$ = input prices, $T$ = technology, $E$ = expectations, $N_s$ = number of sellers, $G$ = government policies.

Market Equilibrium

Market equilibrium occurs where quantity demanded equals quantity supplied. The equilibrium price is where the demand and supply curves intersect.

• Surplus: Quantity supplied exceeds quantity demanded at a given price.

• Shortage: Quantity demanded exceeds quantity supplied at a given price.

• Adjustments: Surpluses and shortages cause price changes that move the market toward equilibrium.

Equation:

$Q_d = Q_s$ at equilibrium price $P^*$

Shifts vs. Movements Along Curves

Changes in Demand and Supply

A movement along a curve is caused by a change in the good's own price. A shift of the curve is caused by changes in other determinants.

• Increase in Demand: Demand curve shifts right.

• Decrease in Demand: Demand curve shifts left.

• Increase in Supply: Supply curve shifts right.

• Decrease in Supply: Supply curve shifts left.

Example: If consumer income rises, the demand for normal goods increases, shifting the demand curve right.

Price Controls: Ceilings and Floors

Price Ceilings

A price ceiling is a legal maximum price. If set below equilibrium, it creates a shortage.

• Example: Rent control in housing markets.

Price Floors

A price floor is a legal minimum price. If set above equilibrium, it creates a surplus.

• Example: Minimum wage laws.

Consumer and Producer Surplus

Definitions and Calculations

Consumer surplus is the difference between what consumers are willing to pay and what they actually pay. Producer surplus is the difference between the price received and the minimum price at which producers are willing to sell.

• Consumer Surplus: Area above the price and below the demand curve.

• Producer Surplus: Area below the price and above the supply curve.

Equation:

$\text{Consumer Surplus} = \int_{0}^{Q^*} [D(Q) - P^*] dQ$

$\text{Producer Surplus} = \int_{0}^{Q^*} [P^* - S(Q)] dQ$

Where $Q^*$ is the equilibrium quantity, $P^*$ is the equilibrium price, $D(Q)$ is the demand function, and $S(Q)$ is the supply function.

HTML Table: Comparison of Price Controls

Type	Definition	Effect on Market	Example
Price Ceiling	Legal maximum price	Creates shortage if below equilibrium	Rent control
Price Floor	Legal minimum price	Creates surplus if above equilibrium	Minimum wage

Additional info:

• Some questions reference independent readings and real-world applications, such as food economics and newspaper pricing, which can be explored for deeper understanding.

• Graphical analysis is essential for understanding demand, supply, and market equilibrium.

• Students should be able to interpret and draw demand and supply curves, identify shifts versus movements, and calculate consumer and producer surplus.