Principles of Microeconomics: Structured Study Notes

Introduction to Microeconomics

Overview of Microeconomics

Microeconomics is the study of how individuals, households, and firms make decisions regarding the allocation of scarce resources. It focuses on the behavior and interactions of economic agents within markets and the outcomes of these interactions.

• Definition: Microeconomics analyzes the economic behavior of individual units, such as consumers and firms, within an economy.

• Key Objectives:

  • Understanding resource allocation

  • Analyzing price mechanisms

  • Studying supply and demand

  • Examining government intervention and market efficiency

• Applications: Topics include minimum wage legislation, competition, and comparative advantage.

Example: How does a change in the price of gasoline affect consumer behavior and firm production decisions?

Basic Economic Concepts

Scarcity and Choice

Scarcity refers to the limited nature of resources, which necessitates choices about their allocation.

• 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 decision.

• Production Possibility Frontier (PPF): A curve showing the maximum attainable combinations of two products that may be produced with available resources and technology.

Formula:

$Opportunity\ Cost = \frac{Loss\ in\ Good\ A}{Gain\ in\ Good\ B}$

Example: Choosing between producing cars or computers with limited resources.

Supply and Demand

Market Mechanisms

Markets coordinate the actions of buyers and sellers through the forces of supply and demand, determining prices and quantities exchanged.

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

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

• Equilibrium: The point where quantity demanded equals quantity supplied.

Formula:

$Q_d = a - bP$

$Q_s = c + dP$

Equilibrium occurs where $Q_d = Q_s$.

Example: The market for coffee reaches equilibrium when the amount consumers want to buy equals the amount producers want to sell at a given price.

Elasticity

Price Elasticity of Demand and Supply

Elasticity measures the responsiveness of quantity demanded or supplied to changes in price or other factors.

• Price Elasticity of Demand (PED): The percentage change in quantity demanded divided by the percentage change in price.

• Price Elasticity of Supply (PES): The percentage change in quantity supplied divided by the percentage change in price.

Formula:

$PED = \frac{\%\ \text{Change in Quantity Demanded}}{\%\ \text{Change in Price}}$

$PES = \frac{\%\ \text{Change in Quantity Supplied}}{\%\ \text{Change in Price}}$

Example: If the price of bread rises by 10% and quantity demanded falls by 5%, PED = -0.5.

Efficiency and Fairness in Markets

Market Efficiency

Efficiency in markets occurs when resources are allocated in a way that maximizes total surplus (the sum of consumer and producer surplus).

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

• Producer Surplus: The difference between the price received by producers and their minimum acceptable price.

• Deadweight Loss: The loss of total surplus due to market inefficiency, often caused by price controls or taxes.

Example: Imposing a price ceiling on rent may lead to deadweight loss and reduced efficiency.

Government Intervention

Price Controls and Taxes

Governments may intervene in markets through price controls (ceilings and floors) and taxation to achieve social objectives.

• Price Ceiling: A maximum legal price, often leading to shortages.

• Price Floor: A minimum legal price, often leading to surpluses.

• Taxes: Levied on goods and services, affecting market equilibrium and efficiency.

Formula:

$Tax\ Revenue = Tax\ per\ unit \times Quantity\ sold$

Example: A minimum wage law sets a price floor in the labor market.

Market Failure and Public Policy

Externalities and Public Goods

Market failure occurs when markets do not allocate resources efficiently, often due to externalities or the nature of public goods.

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

• Public Goods: Goods that are non-excludable and non-rivalrous, such as national defense.

• Common Resources: Resources that are rivalrous but non-excludable, such as fisheries.

Example: Pollution from a factory imposes a negative externality on nearby residents.

Decision Making: Marginal Analysis

Marginal Utility and Cost

Marginal analysis involves comparing the additional benefits and costs of a decision to maximize utility or profit.

• Marginal Utility: The additional satisfaction gained from consuming one more unit of a good.

• Marginal Cost: The additional cost incurred from producing one more unit of output.

Formula:

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

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

Example: Deciding whether to buy an extra slice of pizza based on the additional satisfaction versus cost.

Market Structures

Perfect Competition, Monopoly, and Oligopoly

Market structures describe the competitive environment in which firms operate, affecting pricing and output decisions.

• Perfect Competition: Many firms, identical products, free entry and exit.

• Monopoly: Single firm dominates the market, unique product, barriers to entry.

• Oligopoly: Few firms, interdependent decision-making, potential for collusion.

Formula for Profit Maximization:

$MR = MC$

Example: A wheat farmer operates in a perfectly competitive market, while a local utility company may be a monopoly.

Incomes and Equality

Distribution of Income

Microeconomics examines how income is distributed among factors of production and the resulting issues of inequality.

• Factors of Production: Land, labor, capital, and entrepreneurship.

• Wage Determination: Influenced by supply and demand for labor, education, and skills.

• Income Inequality: Differences in income among individuals and groups, measured by tools such as the Gini coefficient.

Example: Comparing wage rates for skilled versus unskilled labor.

Classical Economic Theory

Key Contributors

Classical economic theory laid the foundation for microeconomics, emphasizing market forces and the role of self-interest.

• Adam Smith: Advocated for the 'invisible hand' guiding markets.

• John Maynard Keynes: Focused on government intervention (more macroeconomic).

• Milton Friedman: Supported free markets and minimal government intervention.

Example: Adam Smith's concept of the invisible hand explains how individual self-interest can lead to socially beneficial outcomes.

Grading and Assessment

Grading Scale

Grades are assigned based on performance in exams, assignments, and participation.

Letter Grade	Percentage
A	93-100
A-	90-92.9
B+	87-89.9
B	83-86.9
B-	80-82.9
C+	77-79.9
C	73-76.9
C-	70-72.9
D+	67-69.9
D	63-66.9
D-	60-62.9
F	below 60

Additional info: Participation and attendance are required; final exam is cumulative and worth 40% of the course grade.

Additional Resources

Textbook and Support Services

• Required Text: "Foundations of Microeconomics," 9th edition, Robin Bade and Michael Parkin, Pearson.

• Support Services: Tutoring, counseling, accessibility services, and academic integrity resources are available to students.

Additional info: Students are encouraged to use campus resources for academic and personal support.