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. Government can correct this with taxes or regulation.
Positive Externality (Spillover Benefit): An uncompensated benefit conferred on others (e.g., vaccinations). The market underproduces the good. Government can correct this with subsidies.
Public Goods: Goods that are non-rival (one person’s use doesn’t diminish another’s) and non-excludable (people cannot be prevented from using them), such as national defense. The private market fails to provide them due to the “free-rider” problem.
Income Inequality: The Lorenz curve illustrates the distribution of income in a society. A perfectly straight 45-degree line represents perfect equality. The government addresses inequality through progressive taxation and transfer payments.
Taxation Types:
Progressive: Tax rate increases as income increases.
Proportional: Tax rate remains constant regardless of income.
Regressive: Tax rate decreases as income increases.