Microeconomics: Difference between revisions

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'''Microeconomics''' is the branch of economics that deals with transactions between suppliers and consumers, acting individually or in groups. It is conventionally defined as being concerned with the allocation of scarce resources among alternative uses, but it is really about such down-to-earth matters as the way consumers' and suppliers' decisions affect the prices and the output of goods and services. Its practical importance arises from the influence of those decisions upon [[economic efficiency]] and hence the [[economic welfare]] of the community
'''Microeconomics''' is the branch of economics that deals with transactions between suppliers and consumers, acting individually or in groups. It is conventionally defined as being concerned with the allocation of scarce resources among alternative uses, but it is really about such down-to-earth matters as the way consumers' and suppliers' decisions affect the prices and the output of goods and services. Its practical importance arises from the influence of those decisions upon people's wellbeing.
==The basic models of microeconomics==


==The nature of economic activity==


[[Competition]]
==Production==


==The consumer==


===Production Possibilities Curves===
==Markets==


The ''production possibility curve'' <ref name=PRODPOSS>[http://www.chass.utoronto.ca/~reak/eco100/shift.swf '''Production Possibility Curve''' <small>Animated graph</small>]</ref> is a hypothetical representation of the amount of two different goods that can be obtained by shifting resources from the production of one good to the production of the other. It is "strictly hypothetical" and "static" in nature. The curve is used to represent a society’s choice between two different goods. A society can use up all its potential resources producing a lot of butter and no guns at all. Or can use most of its resources producing guns and no butter.  Between those to extremes there are infinite combinations of possibilities for production of guns and butter that can be choosed by society. <ref name=PRODUCPOSSIB>[http://krypton.mnsu.edu/~renner/ppc.htm '''Production Possibility Curves''']</ref><small>See graphs at the links</small>
(to include[[competition]])


Any two different goods could be chosen arbitrarily. This is one of the "assumptions" for this economic model. The curve, (plotted on a X-Y axis) shows graphically, during a specific period of time (another assumption), which combined quantities of both goods could be produced, "if all resources are fully employed" (another assumption), while "technology and institutions do not change" (yet another assumption). Given those "hypotetical" conditions, society's "output potential" for those two goods combined is realized anywhere on the curve (which is called the "production possibility curve’s frontier"). Any point on the "production curve" represents the maximum output possible for both commodities. (mathematically all points in the curve represent the "locus" of the maximum possible combination of output for both goods simultaneoulsy). <ref name=PRODUCPOSSIB>[http://krypton.mnsu.edu/~renner/ppc.htm '''Production Possibility Curves''']</ref><small>See graphs at the links</small>
==How it works out==


Any "unemployed" resources by society, such as labor, capital, or physical resources would cause society to remain in an "inefficient production level". This would be shown in the graph as a point to the left, (or inside) the curve. (So, when some people are unable to find a job, society is not reaching its "most efficient level of production" and the whole of society pays a price for that unemployment). By definition all point to the right (or outside) of the production possibility curve (frontier) are impossible to be attained, given the limits of existing resources and technology (another assumprion).
(to include[[economic efficiency]])


====Assumptions used for the construction of this economic model====
==Welfare consequences==


* Any two different goods could be chosen arbitrarily;
(to include [[economic welfare]])
* Production takes place during a specific period of time;
* All resources are fully employed;
* Technology and institutions do not change, and
* All points to the right (or outside) of the "production possibility curve" (frontier) are impossible to be attained.


We will never find all of those conditions in real life. However they represent a "reasonable scenario" which allows economists to reduce the number of variables in the problem and better analyse the phenemenon.
==Theories and evidence==


::<small><This article is under construction></small>
==Policy implications==


===Demand Functions and Demand Curves===
The demand for any good is the amount consumers want to buy and are able to buy in a particular period of time. The basic model of demand says that the amount demanded of any good depends on the good's own price, consumer income, the prices of substitutes and complements, consumer preferences, and perhaps other factors (assumptions for this model).
====A most basic example====
Imagine that a fruit merchant, Mr. Wilson, used to mark down how many oranges his client, Mrs Smith, buys at his shop every week. He noticed that as the price of oranges varies during the year, Mrs. Smith buys more or less oranges from him.
*If oranges cost 5 cents  each > Mrs Smith buys 10 oranges
*If oranges cost 4 cents  each > Mrs Smith buys 17 oranges
*If oranges cost 3 cents  each > Mrs Smith buys 26 oranges
*If oranges cost 2 cents  each > Mrs Smith buys 38 oranges
*If oranges cost 1 cents  each > Mrs Smith buys 53 oranges
By drawing an x-y graph and ploting those results into the graph, we will have a "demand curve for oranges" showing Mrs. Smith's preference schedule. <small> (By convention  the demand curve displays quantity (oranges) as the independent variable (the x axis - horizontal ) and price (cents) as the dependent variable (the y axis- vertical)</small>. This curve is a "portrait" that represents the "demand" for oranges (by Mrs. Smith, at Mr. Wilson shop). <ref name=DMNDCRVSMPL>[http://www.netmba.com/econ/micro/demand/curve/ Demand Curve (very simple)]</ref><small> <See graph at the link></small>
From this simple schedule the fruit dealer drew an important conclusion: "the demand for oranges increases as its price drops, and drops as its price increases". He might not have been aware of one fact, however: to draw this conclusion he made a very important "assumption": "all other factors remaining constant". If, for instance, Mrs, Smith was giving a party the day she bought 53 oranges at 1 cent each, (and that particular day would have bought 53 oranges even if the price was at 5 cents) the conclusions of Mr. Smith "demand function" would be worthless. Mr Smith also noticed some other things that puzzle him: his client Mr. Bernstein never buys any orange, no matter how cheap they get. And Mr. Gates, his  millionaire customer, always takes home two dozen oranges, doesn't matter if they are cheap or very expensive. Why is that so? Mr. Smith keeps asking himself those questions, without finding an answer.
====Assumptions used by Mr. Smith (implicitly) in this economic model====
* ALL other factors remain equal
* This demand function reflects the "consumer preference" of a single customer, Mrs Smith's.
====A more realistic scenario====
For example, one could build an schedule showing a hypothetical demand curve for spaghetti in San Francisco, measured in plates per day. Demand depends on the price of spaghetti, average annual
money income of consumers, the price of tacos, and the price of wine (assumptions). You may build your own spreadsheet, place all those variables on it as "parameters"  and see how demand varies. (Or you may use this link to an already built spreadsheet; all of the
prices and income and the spaghetti demand will be updated. The graph of the demand curve wil be redrawn to show the effects of your changes.) <ref name=SPAG>[http://www.msu.edu/course/ec/201/brown/xlfiles98/demand98.xls Demand Curves, a live exercise <small> Requires "Firefox" or Netscape", requires "Excel 97" or higher. Enable macros</small>]</ref><small> <See live graph at the link></small>
Economists make a distinction between the effects on the amount demanded of changing a "good's own price", and the effects on the amount demanded when one of the other determinants of demand varies, such as "income". When a good's own price changes, consumers "move along" a particular demand curve. When any other determinant changes, the "demand curve
shifts", as can be seen on the live graph when "income" is changed. <ref name=SPAG>[http://www.msu.edu/course/ec/201/brown/xlfiles98/demand98.xls Demand Curves, a live exercise <small> Requires "Firefox" or Netscape", requires "Excel 97" or higher. Enable macros</small>]</ref><small> <See live graph at the link></small> Changes in a good's own price are said to cause a "change in quantity demanded", while changes in other factors are said to cause a "change in demand".
=====Assumptions used in this model=====
* The amount demanded of any good depends on the good's own price, consumer income, the prices of substitutes and complements, consumer preferences, and perhaps other factors such as weather;
* The consumer is absolutely rational and has an almost infinite desire for the good considered; in this case he likes spaghetti a lot. So, if the price of spaguetti keeps falling, he will always eat more and more spaguetti.
{{main|Supply and demand}}
===Supply Functions and Supply Curves===
===Equilibrium Prices===
===Labor Markets===
===Elasticity of Demand===
===Consumer and Producer Surplus===
===Taxes and Welfare===
===Trade and Welfare===
===Externalities===
===Production Functions & Isoquants===
===Cost Minimization===
===Marginal Products and Minimizing Cost===
===Production and Cost in the Short-Run===
===Total, Average, and Marginal Cost===
===Profit Maximization for the Competitive Firm===
===Competitive Markets in the Short-Run===
===Competitive Markets in the Long-Run===
===Monopoly===
===Natural Monopoly===
===Price discrimination===
===Utility Functions and Indifference Curves===
===Utility Maximization===
===Demand Curves, and Income and Substitution Effects===
===Marginal Utility and Optimization===
===Discounted Present Value===
===Internal Rate of Return===
===Comparative Advantage===
===Labor Demand for the Competitive Firm===
===Competitive Labor Markets===
==See also==
*[[Economics]]
*[[Macroeconomics]]
*[[Economic Theory]]
==References==
<div class="references-small" style="-moz-column-count:2; column-count:2;"><references /></div>
==External Links==
<div class="references-small" style="-moz-column-count:2; column-count:2;">
* [http://www.chass.utoronto.ca/~reak/eco100/contents.htm '''''ECONOMICS 100 ONLINE'''''. Department of Economics at the University of Toronto<small><copyright K.J. Rea, 2000-2003 all rights reserved>.</small>] ('''A great "primer" to understanding the basic principles of Economics''')
* [http://www.msu.edu/course/ec/201/brown/pim/ '''''MICROECONOMICS: Most important concepts explained in detail'''''. Text and workable problems. <small>'''WARNING: Internet Explorer will not work!''' Get "Firefox" or "Netscape". Requires "Adobe Acrobat Reader" as a helper to your web browser. You will need "Excel 97" or higher running on your computer to use the spreadsheets.</small>]
* [http://www.helsinki.fi/WebEc/ ''World Wide Web Resources in Economics''.  Center for Innovative Education, Helsinki School of Economics, Finland. (An excellent sorce of links to the various Economics subdisciplines)]


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[[Category:CZ Live]]
[[Category:CZ Live]]
[[Category:Economics Workgroup]]
[[Category:Economics Workgroup]]

Revision as of 06:52, 15 September 2007

<This article is being completely rebuilt>

Microeconomics is the branch of economics that deals with transactions between suppliers and consumers, acting individually or in groups. It is conventionally defined as being concerned with the allocation of scarce resources among alternative uses, but it is really about such down-to-earth matters as the way consumers' and suppliers' decisions affect the prices and the output of goods and services. Its practical importance arises from the influence of those decisions upon people's wellbeing.

The nature of economic activity

Production

The consumer

Markets

(to includecompetition)

How it works out

(to includeeconomic efficiency)

Welfare consequences

(to include economic welfare)

Theories and evidence

Policy implications

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