Microeconomics
- <This article is under construction>
Microeconomics is the branch of Economics that studies the behavior of units called "economic agents". Microeconomic models investigate assumptions about "economic agents" activities and about interactions between these agents. An "economic agent" is the basic unit operating in the model. Most often, we do have in mind that the "economic agent" is an individual, a person with one head, one heart, two eyes, and two ears. However, in some economic models, an economic agent is taken to be a nation, a family, or a parliament. At other times, the "individual" is broken down into a collection of economic agents, each operating in distinct circumstances and each regarded as an economic agent. When we construct a model with a particular economic scenario in mind, we might have some "degree of freedom" regarding whom we take to be the "economic agents". [1]
Those economic models are instruments or "tools" which help economists better understand the economic reality. As reality is too complex, and has infinite variables - that cannot be analysed simultaneoulsy - those models make simplifying assumptions about real life. We could compare economic models to geographical maps: the models create a "map" of the economic reality the same way a map creates a conventional representation of a country. As with maps, no information will come out of an economic model unless it had been previously incorporated in the model by the researcher; this information will only be presented in a more comprehensive manner. It is important to fully understand all the "assumptions" which lie behind any economic model in order to rationally understand their results.
The basic models of microeconomics
Production Possibilities Curves
The production possibility curve 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. [2]See graphs at the links
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). [2]See graphs at the links
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).
Assumptions used for the construction of this economic model
- Any two different goods could be chosen arbitrarily;
- 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.
- <This article is under construction>
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
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.) [3]
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". 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;
- The consumer is absolutely rational and likes to eat spaghetti indefinetely; so if the price of spaguetti falls, he will always eat some more spaguetti.