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    Microeconomics: A Simple Introduction
    Microeconomics: A Simple Introduction
    Microeconomics: A Simple Introduction
    Ebook111 pages1 hour

    Microeconomics: A Simple Introduction

    By K.H. Erickson

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    About this ebook

    Microeconomics: A Simple Introduction offers an accessible guide to the central principles and ideas of microeconomics, with over 50 diagrams included to illustrate the analysis.

    Understand opportunity cost, diminishing returns, demand and supply, the market equilibrium, market failure, adverse selection and moral hazard. Learn how to calculate price and income elasticities.

    Consumer theory explores budget constraints, indifference curves, marginal rate of substitution, utility maximization, Hicks and Slutsky income and substitution effects, and Samuelson’s revealed preference theory.

    Firm theory examines production factors, Cobb-Douglas and other production functions, returns to scale, isoquant curves, isocost lines, cost minimization, profit maximization, Lerner index, and differentiation to derive a marginal revenue curve.

    Perfect competition, monopolistic competition, oligopoly, and monopoly are explained. Monopoly welfare effects are shown, with oligopoly models of kinked demand, cartels, dominant price leadership, Cournot and Bertrand.

    Game theory investigates duopoly and battle of the sexes games, assessing them with dominance and credible threats.

    LanguageEnglish
    PublisherK.H. Erickson
    Release dateJan 13, 2014
    ISBN9781311206992
    Microeconomics: A Simple Introduction

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    • 4/5
      It is exactly what it claims to be: a simple introduction. This would be a good book to review before taking an intro ECON course.

    Book preview

    Microeconomics - K.H. Erickson

    Microeconomics: A Simple Introduction

    By K.H. Erickson

    Copyright © 2014 K.H. Erickson

    All rights reserved.

    No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the author.

    Also by K.H. Erickson

    Simple Introductions

    Choice Theory

    Financial Economics

    Game Theory

    Game Theory for Business

    Investment Appraisal

    Microeconomics

    Table of Contents

    1 Introduction to Microeconomics

    2 Market Supply and Demand

    3 Elasticity

    4 Market Failure

    5 Consumer Demand

    6 Firm Supply and Costs

    7 Factors of Production

    8 Market Power and Profit Maximization

    9 Perfect and Monopolistic Competition

    10 Monopoly

    11 Oligopoly

    12 Games

    1 Introduction to Microeconomics

    Economics can be separated into two main areas of focus; Macroeconomics and Microeconomics. Microeconomics is the focus of this book, as decisions made by individuals and firms in an economy are explained and analysed.

    The Basic Economic Problem

    The basic economic problem is that of insatiable wants, far beyond the level of essential human needs, in a world of scarce resources. An individual or firm will be held back by time, information, money, and physical or human capital constraints, while their wants and desires have no limit. As a result choices have to made, and certain wants have to be prioritized over others. A choice is a trade-off, where one thing is gained as something else is substituted and given up, and the highest value alternative given up is called the choice’s opportunity cost.

    Production Possibilities Frontier

    Every firm faces an opportunity cost, and must choose its business specialization. It can either focus on only one good or on several product types at once, but both choices involve an opportunity cost as this diagram suggests for a firm deciding between book and video game production.

    If a firm only produces books and no video games it operates at the leftmost and highest part of the production possibilities frontier (PPF) above, while a choice to only produce video games sees it operate at the rightmost and lowest part of the PPF. A move along the curve from left to right sees the firm switch from only producing books, to mostly producing books but also some video games, to a focus on video games with a minority of books, and finally only producing video games at the rightmost point.

    As the firm moves away from book production the PPF’s shape changes, becoming steeper as the focus shifts to video games. This represents diminishing returns to production and just like all other resources low cost video game production opportunities may be in limited supply, as it’s far harder to find the resources needed for the one hundredth video game than the first when relevant resources haven’t yet been used up. Initial units of video game production come at a low opportunity cost, with only a small amount of books required as substitution as shown by the flatter part of the curve. But later units see the production cost rise to give a higher opportunity cost of a large number of books, represented by the steeper curve.

    Moving from the rightmost end of the PPF to the left shows that diminishing returns also holds for increasing book production, and the first few units of books come at a low cost as shown by the curve’s steepness, but the final units are far more expensive as shown by a flatter curve. Diminishing returns and rising opportunity cost holds for all production, and the graph will apply for all products.

    Marginal Costs and Benefits

    Producers and consumers make decisions at the margin and assess the effects of an incremental (i.e. one unit) change, determining the marginal cost and marginal benefit of a choice before they proceed. The PPF just explained gives the overall cost relationship between two goods as the amount of each changes, and from this the marginal cost can be found, which represents the cost of producing one more unit measured in terms of the activity foregone. In the example here the marginal cost would give the number of books produced per video game as the amount of video games rises, and diminishing returns to production ensure increasing marginal costs of production.

    A consumer with no books or video games can gain significantly from them but the more of each good they have the less satisfaction will be derived from each additional unit. And as the amount of video games consumed rises the number of books an individual will sacrifice for another video game falls, due to these diminishing returns from consumption, and this gives a decreasing marginal benefit, defined as the benefit gained by one more unit of consumption measured in terms of the buyer’s willingness to pay. The following graph combines marginal benefits (MB) and marginal costs (MC) to reveal how an individual or firm can make an efficient choice.

    The downward sloping MB curve shows the decreasing marginal benefit while the upward sloping MC curve shows the increasing marginal cost, and the point where the two curves cross is the efficient number of video games to select for both a consumer and producing business. With a lower amount chosen the MB curve is greater than the

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