1 - Microeconomics

Summary

Introduction

Microeconomics is the study of decisions made by individual economic units. It is often called “price theory” because the emphasis is on how prices bring decisions made by individuals (consumers or producers) into balance. Marginal analysis is key in microeconomics and decisions are “made at the margin,” meaning the decision often is reduced to “should one more unit be consumed, or produced?” When the benefit from one more unit is less than its cost then the answer is “no” and an optimum has been achieved.

Most standard textbooks at the intermediate level approach microeconomic analysis using geometry and algebra, with optimizations often shown as tangency points between two curves. Calculus can also be employed as the “marginal” is closely approximated by the first derivative of a function. As a simple example, firms are assumed to choose to produce a level of output that maximizes total profit. Total profit is defined as total revenue minus total cost. The optimal output is where marginal revenue (the change in total revenue for a one-unit change in output) is equal to marginal cost (the change in total cost for a one-unit change in output). This is really just a statement that total profit is maximized at the level of output where marginal profit (defined as marginal revenue less marginal cost) is zero.