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Microeconomics studies individual agents' behavior in the economy, focusing on consumer choices, firm behavior, and pricing mechanisms, distinct from macroeconomics. Key concepts include the laws of demand and supply, elasticity, and various market structures like perfect competition and monopoly. Understanding microeconomics is crucial for analyzing market outcomes, resource allocation, and pricing strategies.

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Document 2

Microeconomics studies individual agents' behavior in the economy, focusing on consumer choices, firm behavior, and pricing mechanisms, distinct from macroeconomics. Key concepts include the laws of demand and supply, elasticity, and various market structures like perfect competition and monopoly. Understanding microeconomics is crucial for analyzing market outcomes, resource allocation, and pricing strategies.

Uploaded by

danaomargad
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© © All Rights Reserved
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Introduction to Microeconomics

1. What is Microeconomics?
Microeconomics is a branch of economics that analyzes the behavior of
individual agents in the economy—consumers, firms, and industries. It
explores how people make decisions given limited resources and how these
decisions affect the supply and demand for goods and services.

Unlike macroeconomics, which looks at the economy as a whole (GDP,


inflation, unemployment), microeconomics focuses on:

 Individual markets (e.g., the smartphone market)


 Consumer choices
 Firm behavior
 Pricing mechanisms

Microeconomics is fundamental to understanding how resources are


allocated and how prices are determined in various types of markets.

2. Law of Demand and Supply


Law of Demand

 As the price of a good or service decreases, the quantity demanded


increases (ceteris paribus).
 Demand curves slope downward due to the income effect and
substitution effect.

Law of Supply

 As the price of a good or service increases, the quantity supplied


increases.
 Supply curves slope upward because higher prices provide incentives
for producers.

Market Equilibrium

 The equilibrium price is where supply equals demand.


 If price is too high → surplus.
 If price is too low → shortage.

3. Elasticity
Elasticity measures how much one variable responds to changes in another.
The most common type is Price Elasticity of Demand (PED):

PED = (% change in quantity demanded) / (% change in price)

Types of Demand Elasticity

 Elastic Demand (PED > 1): Quantity demanded changes greatly with
price (luxury goods).
 Inelastic Demand (PED < 1): Quantity demanded changes little with
price (necessities).
 Unit Elastic (PED = 1): Proportional change.

Other Elasticities

 Income Elasticity of Demand (YED): Measures response to changes


in income.
 Cross-Price Elasticity of Demand (XED): Measures response of one
good’s demand to another good’s price.

Understanding elasticity helps firms set prices and governments evaluate tax
effects.
4. Market Structures
Market structure refers to the nature and level of competition in a market.
Each structure affects pricing, output, and efficiency differently.

Perfect Competition

 Many small firms


 Identical products
 No barriers to entry/exit
 Firms are price takers

Monopolistic Competition

 Many firms
 Differentiated products (branding, quality)
 Some price control
 Low entry barriers

Oligopoly

 Few large firms


 Interdependent decision-making
 May lead to collusion
 Significant barriers to entry

Monopoly

 Single seller
 Unique product
 High entry barriers (legal, natural)
 Price maker

5. Conclusion
Microeconomics provides the tools to analyze decision-making and market
outcomes on a small scale. It explains:
 Why goods are priced the way they are
 How markets allocate resources
 The role of competition and regulation

This foundational knowledge is essential for careers in business, economics,


finance, and public policy.

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