IV.
Microeconomic Analysis Microeconomic Analysis Consumer Behavior and Utility Utility: The satisfaction one gets from consuming a good or service.
Consumers make choices to maximize their utility.
Diminishing Marginal Utility: The satisfaction gained from consuming each successive unit of a good tends to decrease.
This principle helps explain the downward slope of the demand curve.
Consumer Surplus: The difference between the maximum price a consumer is willing to pay for a good and the actual market price they do pay.
Production Costs and Firm Behavior Costs of Production: Explicit Costs: Direct monetary payments for resources (e.g., wages, rent).
Implicit Costs: The opportunity costs of using self-owned resources (e.g., forgone salary, forgone interest).
Economic Profit: Total revenue minus both explicit and implicit costs.
Short Run vs.
Long Run: Short Run: A period where at least one input (like factory size) is fixed.
The law of diminishing marginal returns applies, stating that as more variable input (like labor) is added to a fixed input, the marginal product will eventually decline.
Long Run: A period where all inputs are variable.
Firms experience economies of scale (long-run average total cost falls as output increases), constant returns to scale, and diseconomies of scale (long-run average total cost rises as output increases).
Profit Maximization: All firms maximize profit by producing at the quantity where Marginal Revenue (MR) equals Marginal Cost (MC).
Market Structures and Competition Characteristic Perfect Competition Monopolistic Competition Oligopoly Monopoly Number of Firms Very many Many A few dominant firms One Type of Product Homogeneous (identical) Differentiated Standardized or Differentiated Unique; no close substitutes Control Over Price None (Price Taker) Some, due to differentiation Significant, due to interdependence Considerable (Price Maker) Conditions of Entry Very easy, no barriers Relatively easy Significant barriers Blocked Non-Price Competition None Considerable (advertising, branding) Significant Primarily public relations Long-Run Profit Zero economic profit Zero economic profit Can be positive Can be positive Government Intervention and Market Failures Market Failure: The inability of a market to allocate resources efficiently.
This occurs when the full costs or benefits of a transaction are not borne by the producers and consumers involved.
Externalities: A cost or benefit imposed on a third party outside of a market transaction.
Negative Externality (Spillover Cost): An uncompensated cost imposed on others (e.g., pollution).
The market overproduces the good.