Pages: 14

Microeconomics is the field of study that addresses how individuals, households, and firms make decisions and how those decisions interact. These decisions would be straightforward if individuals and firms did not experience constraints. However, these economic agents must work with the principles of scarcity and choice. Scarcity exists because the economic resources that produce output do not exist in an unlimited supply. Economists use models as tools of analysis. The circular flow model demonstrates that markets facilitate the transformation of economic resources into goods and services, a process that generates income for both households and firms. Because models are representations of reality, they help economists analyze important issues and problems. In the field of economics, several important principles exist, including tradeoffs, opportunity costs, incentives, marginal analysis, and trade.

Pages: 60

No chapter abstract available.

Pages: 14

Supply and demand is the most important model in the field of economics. Markets bring together buyers and sellers for the purpose of exchange. Both the supply and demand sides of the market are important in the determination of equilibrium, when quantity demanded equals quantity supplied. On the demand side, the Law of Demand determines the shape of the demand curve. The determinants of demand then demonstrate how the demand curve shifts. On the supply side, the Law of Supply determines the shape of the supply curve. The determinants of supply then demonstrate how the supply curve shifts. These applications demonstrate when market equilibrium rises or falls.

Pages: 13

Free markets do not always create desirable outcomes. Markets, for example, may create pollution damage. In addition, markets may underprovide important services, such as public education. In the presence of externalities, the market price and quantity may be too high or too low from the perspective of society. This reality provides an economic incentive for government intervention. Other reasons for government intervention include asymmetric information, a lack of market competition, and public goods. Efficient public policies that address these forms of market failure improve society’s position; however, inefficient public policy may lead to government failure.

Pages: 16

Elasticity considers the degree of responsiveness of one variable when another variable changes. This chapter provides additional perspectives on the supply and demand model. An example is the price elasticity of demand. When price changes, the question is the extent to which the quantity demanded changes. Given a percentage change in price, the quantity demanded may change by a higher, lower, or the same amount. Many implications of elasticity exist. If consumers are responsive to price changes, they demonstrate elastic responses. If consumers are not responsive to price changes, they demonstrate inelastic responses. Additional applications include cross price elasticity, income elasticity, and elasticity of supply.

Pages: 15

Consumer choice addresses how consumers make decisions in the presence of budget constraints. The determinants of demand establish a framework of analysis by identifying the factors for consumer willingness to pay. The topics of consumer surplus and price discrimination provide additional context. The choice among different forms of output entails a discussion of consumer satisfaction, preferences, and budgets. An application of consumer choice demonstrates that, when making decisions, consumers balance the additional satisfaction from consumption with the cost.

Pages: 72

No chapter abstract available.

Pages: 14

With production, the objective of the firm is to maximize profit. The production function demonstrates how the firm uses economic resources to produce output. Short-run versus long-run decisions establish whether economic resources are fixed or variable. These timelines provide context for the production decision. In the short run, marginal returns to labor show that additional workers may contribute less to output over time. In the long run, firms may alter all aspects of the production process by changing their operating capacity. The act of producing and selling output leads to revenue generation. With respect to costs, the shape of average and marginal cost curves helps to identify whether a firm is operating at a profit, loss, or break-even position.

Pages: 15

The market structure provides context for the theory of the firm. The market structure demonstrates the number of firms in the industry, whether a product is standardized or differentiated, and the degree of difficulty of entry and exit. With perfect competition, a large number of firms exist in the industry, the product is standardized, and it is straightforward for firms to enter and exit the industry. But the result of this market structure is that firms are price takers, taking the price established in the market as a given. In addition, the firm’s demand curve is perfectly elastic. For the firm, if the output price exceeds ATC, the firm generates a profit. But this outcome provides a signal in the market for other firms to enter. The increase in market supply drives down prices, reducing profit for the typical firm. Price continues to decline until it reaches the minimum point of ATC, the break-even point. For the firm, this long-term position creates both allocative and productive efficiency.

Pages: 13

With the monopoly market structure, one firm constitutes the entire industry. The product is standardized, and firms cannot enter or exit the industry. An example is a natural monopoly such as a public utility. Because one firm constitutes the entire industry, the monopoly may sustain profit over time. However, the monopoly is regulated by the government to make sure it is offering a product in an efficient manner and it is charging a fair price. When the market conditions change, demand may shift or a cost-saving technological advance may occur, which alters the MC curve. A monopoly may or may not charge a single price for its output. It may, for example, charge different prices to different customers for reasons other than cost. Price discrimination exists if a monopolist charges a different price to different consumers.

Pages: 14

In an oligopoly market, a small number of large firms produce a majority of the output. With this market structure, the product is standardized or differentiated. Entrance into and exit out of the industry is difficult. The key is that the firms are strategically interdependent: when making production decisions, they consider the actions of their rivals. Even though the firms are profit maximizers, the oligopoly market arises because of economies of scale. The existence of strategic interdependence means that oligopoly markets are analyzed from a game theory perspective. This perspective establishes rules, strategies, and payoffs. For a firm, a dominant strategy exists when it is the best strategy, regardless of the actions of its rivals. A Nash equilibrium occurs when each player makes the optimal decision.

Pages: 14

Monopolistic competition entails a large number of firms, a differentiated product, and easy entry and exit. In the short run, the firms may earn a profit or suffer a loss. In the long run, a movement exists to the break-even point. Monopolistically competitive firms experience a high level of competition. This reality results in product differentiation. An example is nonprice competition. Firms may advertise or offer superior service. Because of nonprice competition, the ATC curve of firms is higher than it would be otherwise. As a result, the firms do not experience the same level of efficiency as firms in perfect competition.

Pages: 28

No chapter abstract available.

Pages: 13

The labor market is an example of a factor market. This market brings together the supply of labor by individuals seeking jobs and the demand for labor by firms wanting to hire. The supply of labor is the time an individual is willing to spend working at different wage rates. The demand for labor is derived from the demand for the goods and services that it helps to produce. Market equilibrium occurs when the market labor supply curve intersects the market labor demand curve, leading to the equilibrium wage and the quantity of labor hired in the market. Several factors cause the market labor supply and market labor demand curves to shift, creating a change in equilibrium price and quantity.

Pages: 13

With capital and financial markets, the question of whether to sacrifice in the present for a payoff in the future occurs on a regular basis. For economic agents, the value in the present of revenue received in the future depends on when the payment is received. In economics, investment occurs when a firm purchases additional units of capital. The financial markets are markets in which money is transferred from economic agents who have excess funds to economic agents who demand the money. Financial markets increase economic efficiency by transmitting money from economic agents who do not have a productive use of it to the economic agents who do. Because of their role in this process of lending and borrowing, financial markets facilitate the process of economic growth.