Essential Microeconomics Concepts & Market Structures
Understanding Core Microeconomics Principles
Microeconomics focuses on individual decision-makers and their interactions within an economy. The central challenge is the economizing problem: how to allocate scarce resources to best satisfy unlimited wants. This always involves a clear goal, specific constraints, and the necessity of making choices.
Fundamental Economic Concepts
- People Face Tradeoffs: Decisions require giving up one thing for another.
- Opportunity Cost: The value of the next best alternative
Basic Economics Concepts Explained
What is Economics?
The science of how people, firms, and societies make choices under scarcity of resources to satisfy the greatest number of unlimited wants.
- Scarcity: When there is not enough of a resource available to satisfy all the potential ways in which people want to use it.
- Feasible: Possible to do easily or conveniently.
- Tradeoff: A compromise; giving up one thing to get another.
First Principle: Incentives
Incentives are opportunities to make oneself better off. They don’t always work as intended.
Read MoreMonopolist Profit Maximization and Equilibrium
Total Revenue vs Total Cost Approach
A monopolist earns maximum profits when the gap between Total Revenue (TR) and Total Cost (TC) is maximum. The TR curve starts from the origin as there is no revenue if output is zero, and TR is inverse ‘U’ shaped because of the inverse relation between price and quantity. TC is inverse ‘S’ shaped because of the Law of Variable Proportions. Total profits are derived by subtracting TC from TR. Initially, with TC being greater than TR, the firm incurs losses. Points
Read MoreEconomics Production and Cost Theory: Solved Problems
Economics: Production and Cost Theory – Solved Problems
Production and Cost Theory Problems
- c. The company produces at the technical optimum.
- d. It should choose 1,500 units of labor and 7,500 units of capital.
- a. Straight lines with a negative slope.
- a. Decreasing returns to scale and diseconomies of scale.
- b. Increasing.
- c. Increasing returns to scale.
- b. It will buy all labor and no capital.
- e. All of the above are correct.
- d. For the cost function CT(Q) = 8Q3 – 3Q2 + 10Q + 100, all of the above are correct.
Profit Maximization and Competitive Supply Explained
Profit
- Profit is total revenue minus total cost. Total cost includes explicit and implicit costs. Economic profit occurs when total revenue is greater than total cost. Normal profit occurs when total revenue is equal to total cost. Economic loss occurs when total revenue is less than total cost.
- The firm’s goal is to maximize profit. The firm will choose the profit-maximizing level of output where marginal revenue equals marginal cost.
- If the firm is not at the output where marginal revenue equals
Core Economic Principles and Market Concepts
1. People Face Trade-offs
Efficiency: The property of society getting the maximum benefits from its scarce resources.
Equality: The property of distributing economic prosperity fairly among the members of society.
2. The Cost of Something Is What You Give Up
Opportunity Cost: Whatever must be given up to obtain some item, or the last best alternative forgone.
3. Rational People Think at the Margin
Rational decision-making involves comparing marginal benefits and marginal costs: Marginal Benefits ≥ Marginal
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