Principles of Microeconomics: Structured Study Notes

Limits, Alternatives, and Choices

Introduction to Scarcity and Choice

Microeconomics begins with the concept of scarcity, which necessitates choices among competing alternatives. Scarcity arises because resources are limited while human wants are unlimited.

• Scarcity: The fundamental economic problem of having limited resources to meet unlimited wants.

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

• Trade-offs: Choosing one option means giving up others due to limited resources.

• Production Possibilities Curve (PPC): Illustrates the maximum combinations of goods/services that can be produced with available resources and technology.

Example: If a country can produce either 100 units of food or 50 units of clothing, choosing to produce more food means less clothing is produced.

The Market System and Circular Flow

Understanding How Markets Operate

The market system coordinates economic activity through the interaction of buyers and sellers. The circular flow model demonstrates how households and firms interact in product and resource markets.

• Market: Any arrangement that allows buyers and sellers to exchange goods and services.

• Circular Flow Model: Shows the flow of resources, goods, services, and money between households and firms.

• Product Market: Where goods and services are bought and sold.

• Resource Market: Where factors of production (land, labor, capital, entrepreneurship) are bought and sold.

Example: Households provide labor to firms in exchange for wages, and use those wages to buy goods and services from firms.

Demand, Supply, and Market Equilibrium

How Prices and Quantities Are Determined

Demand and supply are the core concepts that determine market prices and quantities. Market equilibrium occurs where quantity demanded equals quantity supplied.

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

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

• Market Equilibrium: The price at which quantity demanded equals quantity supplied.

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

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

Formula:

$Q_d = Q_s$ (at equilibrium)

Example: If the price of apples is set above equilibrium, a surplus results; if below, a shortage occurs.

Elasticity

Measuring Responsiveness in Economics

Elasticity measures how much quantity demanded or supplied responds to changes in price, income, or other factors.

• Price Elasticity of Demand: Measures the responsiveness of quantity demanded to a change in price.

• Formula: $E_d = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}$

• Income Elasticity of Demand: Measures responsiveness to changes in income.

• Cross-Price Elasticity: Measures responsiveness to changes in the price of related goods.

Example: If the price of coffee rises by 10% and quantity demanded falls by 20%, the price elasticity of demand is $-2$.

Utility Maximization

Consumer Choice and Utility

Consumers aim to maximize their satisfaction (utility) given their budget constraints. Utility analysis helps explain consumer choices.

• Utility: The satisfaction or pleasure derived from consuming goods and services.

• Total Utility: The total satisfaction received from consuming a certain quantity.

• Marginal Utility: The additional satisfaction from consuming one more unit.

• Law of Diminishing Marginal Utility: As more units are consumed, the additional satisfaction from each unit decreases.

Formula: $MU = \frac{\Delta TU}{\Delta Q}$

Example: Eating a second slice of pizza gives less additional satisfaction than the first.

Production and Costs

How Firms Make Production Decisions

Firms analyze costs and production to maximize profit. Understanding cost structures is essential for decision-making.

• Total Cost (TC): Sum of all costs incurred in production.

• Marginal Cost (MC): The cost of producing one more unit.

• Average Cost (AC): Total cost divided by quantity produced.

• Short Run vs. Long Run: In the short run, some inputs are fixed; in the long run, all inputs are variable.

Formulas:

$TC = FC + VC$

$MC = \frac{\Delta TC}{\Delta Q}$

$AC = \frac{TC}{Q}$

Example: If producing 10 units costs $100, and producing 11 units costs $108, marginal cost is $8.

Market Structures

Types of Markets and Their Characteristics

Market structure refers to the organization and characteristics of markets, affecting competition and pricing.

• Perfect Competition: Many firms, identical products, no barriers to entry.

• Monopoly: One firm dominates, unique product, high barriers to entry.

• Monopolistic Competition: Many firms, differentiated products, some barriers.

• Oligopoly: Few firms, interdependent decisions, significant barriers.

Example: Agricultural markets often resemble perfect competition; utilities may be monopolies.

Market Failures and Externalities

When Markets Do Not Allocate Resources Efficiently

Market failures occur when markets fail to produce efficient outcomes, often due to externalities or public goods.

• Externality: A cost or benefit incurred by a third party not involved in the transaction.

• Public Goods: Non-excludable and non-rivalrous goods, such as national defense.

• Non-excludability: Impossible to prevent non-payers from consuming the good.

• Non-rivalry: One person's consumption does not reduce availability for others.

Example: Pollution is a negative externality; street lighting is a public good.

Price Discrimination and Regulation

Pricing Strategies and Government Intervention

Firms may engage in price discrimination, charging different prices to different consumers. Governments regulate markets to correct failures and promote fairness.

• Price Discrimination: Selling the same product at different prices to different buyers.

• Antitrust Policy: Laws and regulations to promote competition and prevent monopolies.

• Regulation: Government intervention to correct market failures or protect consumers.

Example: Movie theaters charging different prices for children and adults.

Income Inequality, Poverty, and Behavioral Economics

Broader Issues in Microeconomics

Microeconomics also examines income distribution, poverty, and deviations from rational behavior.

• Income Inequality: Unequal distribution of income among individuals or groups.

• Poverty: The state of having insufficient income to meet basic needs.

• Behavioral Economics: Studies how psychological factors affect economic decision-making.

Example: People may make choices that contradict standard economic predictions due to bounded rationality or social influences.

Course Learning Objectives Table

Summary of Key Goals and Objectives

Goal	Description	Included in Course
PG1	Business Knowledge: Students will have knowledge in core business disciplines.	1
PG2	Critical Thinking: Students will apply critical thinking to business contexts.	1
PG3	Communication: Students will communicate effectively in business contexts.	1
PG4	Ethics: Students will apply ethical reasoning to decision making in business.	1

Additional info: The course also covers analytical, quantitative, and qualitative reasoning, as well as stakeholder analysis and ethical implications in business decisions.

Course Schedule and Topic Outline Table

Weekly Topics and Chapters

Week	Topic	Chapters
1	Limits, Alternatives, and Choices	1
2	The Market System and Circular Flow	2
2	Demand, Supply, and Market Equilibrium	3
3/4	Elasticity	6
5	Utility Maximization + REVIEW / PROJ	7
8	Midterm Exam	1 to 7
9	Businesses and the Costs of Production	9
10	Pure Competition in the Short Run	11
11	Pure Competition in the Long Run	12
12	Pure Monopoly	13
13	Price Discrimination	14
14	Monopolistic Competition	21
15	Oligopoly	23
15	Income Inequality, Poverty and Discrimination	24, 25
16	FINAL	Comprehensive

Additional info: The schedule provides a logical progression from foundational concepts to advanced topics in microeconomics.

Summary

These study notes cover the essential topics in Principles of Microeconomics, including scarcity, market systems, demand and supply, elasticity, utility, production and costs, market structures, market failures, price discrimination, regulation, and broader issues such as income inequality and behavioral economics. The course emphasizes analytical skills, critical thinking, and ethical reasoning in economic decision-making.