Introduction toMicroeconomics

Economics begins with scarcity: resources are limited and every choice involves a trade-off. This chapter introduces the economic way of thinking — opportunity cost, marginal analysis, and the production possibilities model — as the foundation for all that follows.

Market economies coordinate millions of individual decisions through prices and incentives. This chapter examines how the market system works, the role of private property and competition, and the circular flow of income and expenditure between households and firms.

Supply and demand is the core model of market economics. This chapter examines what drives buyers and sellers, how markets reach equilibrium, and what happens when either curve shifts due to changes in income, prices of related goods, or expectations.

Markets sometimes fail to allocate resources efficiently. This chapter examines two major sources of market failure: externalities, where costs or benefits spill over onto third parties, and asymmetric information, where one party to a transaction knows more than the other.

How sensitive are buyers and sellers to price changes? Elasticity measures the responsiveness of quantity demanded or supplied to changes in price, income, or prices of related goods — a critical tool for business pricing decisions and public policy analysis.

Consumers allocate their limited income to maximize satisfaction. This chapter develops the theory of utility, how economists model preferences, and derives the law of demand from the consumer's optimization problem using marginal utility and budget constraints.

Firms transform inputs into outputs. This chapter analyzes the relationship between inputs and output in the short and long run, and derives the cost curves — fixed, variable, average, and marginal — that underlie every firm's pricing and production decisions.

In a perfectly competitive market, no single firm can influence price. This chapter examines how competitive firms maximize profit at the output where marginal revenue equals marginal cost, how markets reach long-run equilibrium, and why competition drives economic profits to zero.

A monopolist is the sole producer in a market, giving it pricing power. This chapter analyzes how monopolies choose output and price, the resulting deadweight loss to society, price discrimination strategies, and the rationale for government regulation.

Monopolistic competition combines elements of both competition and monopoly. Firms sell differentiated products and face downward-sloping demand curves, but free entry erodes economic profits in the long run, leaving firms with excess capacity.

Oligopolies are markets dominated by a small number of interdependent firms. Because each firm's decisions affect the others, strategy matters. This chapter introduces game theory, the prisoner's dilemma, and models of price leadership and collusion.

Firms hire labor, land, and capital to produce output. Resource demand is derived from product demand — firms hire inputs up to the point where the marginal revenue product equals the resource price. This chapter also examines wage determination and the impacts of monopsony.

Income is distributed unequally in market economies. This chapter measures inequality using the Lorenz curve and Gini coefficient, examines the causes of poverty and the effectiveness of redistribution programs, and analyzes the economic effects of labor market discrimination.

Trade allows nations to specialize and consume beyond their production possibilities. This chapter develops the theory of comparative advantage, examines the gains from trade, and evaluates trade barriers — tariffs, quotas, and subsidies — along with the political economy behind them.