microeconomics essay introduction

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Microeconomics

Unit 1: basic economic concepts, unit 2: supply, demand, and market equilibrium, unit 3: elasticity, unit 4: consumer and producer surplus, market interventions, and international trade, unit 5: consumer theory, unit 6: production decisions and economic profit, unit 7: forms of competition, unit 8: factor markets, unit 9: market failure and the role of government.

What is Microeconomics Essay And How to Write it With Perfection

Most of the students are still not aware of how to write microeconomics essay. That is why the students always finding it difficult to write their essay on microeconomics. Here in this blog we are going to help you to find out the best ever tips on how to write a microeconomics essay with perfection. But before we start, let’s have a look on what is microeconomics.

What is Microeconomics?

Table of Contents

Macroeconomics is the study of how a large-scale economy works. It is concerned with economics at the regional, national, and global levels. 

Inflation, GDP, unemployment rates, investment, national income, consumption, production, international finance. And international commerce are some of the themes in macroeconomics.

Tips Before Writing a Microeconomics Essay

Macroeconomics is one such subject that is not enjoyed by everyone. Only a few people enjoy this subject. But many of us are not in those few people. In such situations, doing an assignment in the same subject is quite a task for us. However, in this guide, we tried to bring you everything possible that you might need to know before writing a macroeconomics essay. Below are the tips that should consider before instantly starting to write:

Decide Topic

First, decide the field and the topic you want to write about.

Before jumping into writing. You should gather all the possible information about your topic using the internet, books, or any other type of sources. And you can even make notes of important points you want to add to your essay.

THE PURPOSE OF THE ESSAY. While you search for the information. Try looking for the purpose of the essay too. You have to consider answering questions like; what are you trying to convey with this essay?

Answer Keywords

Always answer keywords like ‘why’, ‘when’, and ‘what’.

Information

You need to give complete details about the subject. You need to give “causes and effects”, “arguments” and “related-information”.

Draw an Outline

It’s better to make an outline to give a structure to your essay. It helps you locate facts, necessary information, and data perfectly. From the introduction to the main body to the conclusion. Your outline should have it all. The introduction and conclusion of one paragraph and the main body is generally three paragraphs long.

Size of Different Parts of Essay

The introduction should not be too long but at the same, it should be catchy. Make sure it is not more than 25% of the essay. The same ratio is for the conclusion. And ensure that you don’t add anything new in the conclusion and summarize everything in it properly. The rest of 50% is for the main body. The main argument and problems and solutions should be included in it. 

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Before you jump into the structure directly. Make sure that you understand the topic entirely. After doing the proper research, arrange your material and start planning to write. Economic essay themes are frequently posed as questions. As soon as you’ve decided on a topic, read it through numerous times to ensure that you grasp it completely. If you have any questions, don’t be afraid to consult your professor for clarification. Once you’re sure that you’re right grasped the question. Write it down on a piece of paper

The ideal essay outline structure followed by most of the economists is 

Introduction- 1 Paragraph

Main Body- 3 Paragraphs

Conclusion- 1 Paragraph

Introduction

Once you have collected the information and data about your matter. You can now proceed with writing the essay. Starting any piece of writing is ordinarily more difficult for most people than writing the whole essay. The introduction should be catchy and it should make the reader curious about the subject. It should set the foundation of the essay. The reader must know what he is going to know about. 

Now in this part, expand everything that you have discussed a bit about in the introduction paragraph. This part is for explanation, information, and arguments to make. As already said this part should be of three paragraphs. Every paragraph should have a different argument. 

The argument in every paragraph should be stated at first and be discussed further. And it should be supported by facts and theory. After you are done giving details, you should also include counter arguments. So that you do not miss out on anything. And after you discuss everything related to the argument. Conclude it with a reasonable result.

You can consider the main body paragraphs of your economic essay once you’ve completed the main body paragraphs. It does not, however, imply that you can rest and anticipate any conclusion you come up with to fit your essay. The value of a strong conclusion in an article, particularly economic essays, cannot be overstated. A weak conclusion will leave your reader with the kind of impression you don’t want, as it is the part of your essay that adds the most to their overall opinion of your writing.

A conclusion can be thought of as a condensed version of your entire essay. When your reader has completed reading your paper and moved on to whatever else he or she has to do, this is what you leave them with. Restating your major argument that you offered in the introduction is a solid and established technique to end your essay. If you are still finding it difficult to understand then take our best economics essay writing help now.

Frequently Asked Questions

What are some interesting topics in macroeconomics.

Gross Domestic Product (GDP). Price ranges. The rate of inflation. Political economy Unemployment rates are high. Invest in development. Fiscal and monetary policies are both important. National and international trade are both important.

What are some basic tips to keep in mind?

Make sure you know exactly what you’re supposed to do. Extensive research. Make a plan. To back up your claim, include facts and instances. Once it’s finished, read it. Make sure there are no misspellings or grammatical problems

Difference between micro and macroeconomics?

Microeconomics focuses on how individuals and businesses make decisions, whereas macroeconomics focuses on how countries and governments make decisions. Microeconomics is a bottom-up approach that focuses on supply and demand, as well as other influences that influence price levels. Macroeconomics adopts a top-down perspective, examining the economy as a whole and attempting to predict its trajectory and nature. Microeconomics is a tool that investors can use to make investment decisions, whereas macroeconomics is an analytical instrument that is primarily used to formulate economic and fiscal policy.

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What Is Microeconomics?

Understanding microeconomics, the uses of microeconomics, method of microeconomics, basic concepts of microeconomics, the bottom line.

• Guide to Microeconomics

Microeconomics Definition, Uses, and Concepts

Peter Westfall is a distinguished professor of information systems and quantitative sciences at Texas Tech University. He specializes in using statistics in investing, technical analysis, and trading.

Pete Rathburn is a copy editor and fact-checker with expertise in economics and personal finance and over twenty years of experience in the classroom.

• Economics Defined with Types, Indicators, and Systems
• Economy Definition
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• Is Economics a Science?
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• Law of Supply and Demand
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• Gross Domestic Product (GDP)
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Microeconomics is the social science that studies the implications of incentives and decisions, specifically how those affect the utilization and distribution of resources on an individual level. Microeconomics shows how and why different goods have different values, how individuals and businesses conduct and benefit from efficient production and exchange, and how individuals best coordinate and cooperate with one another. Generally speaking, microeconomics provides a more detailed understanding of individuals, firms, and markets, whereas macroeconomics provides a more aggregate view of economies.

Key Takeaways

• Microeconomics studies the decisions of individuals and firms to allocate resources of production, exchange, and consumption.
• Microeconomics deals with prices and production in single markets and the interaction between different markets but leaves the study of economy-wide aggregates to macroeconomics.
• Microeconomists formulate various types of models based on logic and observed human behavior and test the models against real-world observations.

Investopedia / Tara Anand

Microeconomics is the study of what is likely to happen—also known as tendencies—when individuals make choices in response to changes in incentives, prices, resources, or methods of production. Individual actors are often grouped into microeconomic subgroups, such as buyers, sellers , and business owners. These groups create the supply and demand for resources, using money and interest rates as a pricing mechanism for coordination.

Microeconomics can be applied in a positive or normative sense. Positive microeconomics describes economic behavior and explains what to expect if certain conditions change. If a manufacturer raises the prices of cars, positive microeconomics says consumers will tend to buy fewer than before.

If a major copper mine collapses in South America, the price of copper will tend to increase, because supply is restricted. Positive microeconomics could help an investor see why Apple Inc. stock prices might fall if consumers buy fewer iPhones. It could also explain why a higher minimum wage might force The Wendy's Company to hire fewer workers.

These explanations, conclusions, and predictions of positive microeconomics can then also be applied normatively to prescribe what people, businesses, and governments should do in order to attain the most valuable or beneficial patterns of production, exchange, and consumption among market participants.

This extension of the implications of microeconomics from what is to what ought to be or what people ought to do also requires at least the implicit application of some sort of ethical or moral theory or principles, which usually means some form of utilitarianism .

Microeconomic study historically has been performed according to general equilibrium theory , developed by Léon Walras in "Elements of Pure Economics" (1874), and partial equilibrium theory, introduced by Alfred Marshall in "Principles of Economics" (1890).

The Marshallian and Walrasian methods fall under the larger umbrella of neoclassical microeconomics. Neoclassical economics focuses on how consumers and producers make rational choices to maximize their economic well-being, subject to the constraints of how much income and resources they have available.

Neoclassical economists make simplifying assumptions about markets—such as perfect knowledge, infinite numbers of buyers and sellers, homogeneous goods, or static variable relationships—in order to construct mathematical models of economic behavior.

These methods attempt to represent human behavior in functional mathematical language, which allows economists to develop mathematically testable models of individual markets. Neoclassicals believe in constructing measurable hypotheses about economic events, and then using empirical evidence to see which hypotheses work best.

In this way, they follow the “logical positivism” or “logical empiricism” branch of philosophy. Microeconomics applies a range of research methods, depending on the question being studied and the behaviors involved.

The study of microeconomics involves several key concepts, including (but not limited to):

• Incentives and behaviors : How people, as individuals or in firms, react to the situations with which they are confronted.
• Utility theory : Consumers will choose to purchase and consume a combination of goods that will maximize their happiness or “utility,” subject to the constraint of how much income they have available to spend.
• Production theory : This is the study of production, or the process of converting inputs into outputs. Producers seek to choose the combination of inputs and methods of combining them that will minimize cost in order to maximize their profits.
• Price theory : Utility and production theory interact to produce the theory of supply and demand, which determine prices in a competitive market. In a perfectly competitive market, it concludes that the price demanded by consumers is the same supplied by producers. That results in economic equilibrium .

Where Is Microeconomics Used?

Microeconomics has a wide variety of uses. For example, policymakers may use microeconomics to understand the effect of setting a minimum wage or subsidizing the production of certain commodities. Businesses may use it to analyze pricing or production choices. Individuals may use it to assess purchasing and spending decisions.

What Is Utility in Microeconomics?

In the field of microeconomics, utility refers to the degree of satisfaction that an individual receives when making an economic decision. The concept is important because decision-makers are often assumed to seek maximum utility when making choices within a market.

How Important Is Microeconomics in Our Daily Life?

Microeconomics is critical to daily life, even in ways that may not be evident to those engaging in it. Take, for example, the case of someone who is looking to buy a car. Microeconomic principles play a central role in individual decision-making. They will likely consider various incentives, such as rebates or low interest rates when assessing whether or not to purchase a vehicle.

They will likely select a make and model based on maximizing utility while also staying within their income constraints. On the other side of the scenario, a car company will have made similar microeconomic considerations in the production and supply of cars into the market.

Microeconomics is a field of study focused on the decision-making of individuals and firms within economies. This is in contrast with macroeconomics, a field that examines economies on a broader level.

Microeconomics may look at the incentives that may influence individuals to make certain purchases, how they seek to maximize utility, and how they react to restraints.

For firms, microeconomics may look at how producers decide what to produce, in what quantities, and what inputs to use based on minimizing costs and maximizing profits. Microeconomists formulate various types of models based on logic and observed human behavior and test the models against real-world observations.

S. P. S. Chauhan. " Microeconomics: Theory and Applications, Part 2 ," Page 224. PHI Learning, 2009.

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Introduction

Chapter objectives.

In this chapter, you will learn about:

• What Is Economics, and Why Is It Important?
• Microeconomics and Macroeconomics
• How Economists Use Theories and Models to Understand Economic Issues
• How Economies Can Be Organized: An Overview of Economic Systems

Bring It Home

Decisions ... decisions in the social media age.

To post or not to post? Every day we are faced with a myriad of decisions, from what to have for breakfast, to which route to take to class, to the more complex—“Should I double major and add possibly another semester of study to my education?” Our response to these choices depends on the information we have available at any given moment. Economists call this “imperfect” because we rarely have all the data we need to make perfect decisions. Despite the lack of perfect information, we still make hundreds of decisions a day.

Now we have another avenue in which to gather information—social media. Outlets like Facebook and Twitter are altering the process by which we make choices, how we spend our time, which movies we see, which products we buy, and more. How many of you chose a university without checking out its Facebook page or Twitter stream first for information and feedback?

As you will see in this course, what happens in economics is affected by how well and how fast information disseminates through a society, such as how quickly information travels through Facebook. “Economists love nothing better than when deep and liquid markets operate under conditions of perfect information,” says Jessica Irvine, National Economics Editor for News Corp Australia.

This leads us to the topic of this chapter, an introduction to the world of making decisions, processing information, and understanding behavior in markets —the world of economics. Each chapter in this book will start with a discussion about current (or sometimes past) events and revisit it at chapter’s end—to “bring home” the concepts in play.

What is economics and why should you spend your time learning it? After all, there are other disciplines you could be studying, and other ways you could be spending your time. As the Bring it Home feature just mentioned, making choices is at the heart of what economists study, and your decision to take this course is as much as economic decision as anything else.

Economics is probably not what you think. It is not primarily about money or finance. It is not primarily about business. It is not mathematics. What is it then? It is both a subject area and a way of viewing the world.

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• Authors: Steven A. Greenlaw, David Shapiro
• Publisher/website: OpenStax
• Book title: Principles of Microeconomics 2e
• Publication date: Sep 15, 2017
• Location: Houston, Texas
• Book URL: https://openstax.org/books/principles-microeconomics-2e/pages/1-introduction
• Section URL: https://openstax.org/books/principles-microeconomics-2e/pages/1-introduction

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Principles of Microeconomics

(18 reviews)

Timothy Taylor, Saint Paul, Minnesota

Steven A. Greenlaw, Fredericksburg, Virginia

Eric Dodge, Hanover, Indiana

Copyright Year: 2014

ISBN 13: 9781938168246

Publisher: OpenStax

Language: English

Formats Available

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Learn more about reviews.

Reviewed by Yi Duan, Assistant Professor, Marshall University on 12/5/23

The book covers all major topics in introductory microeconomics. It encompasses discussions on both theories and policies. read more

Comprehensiveness rating: 5 see less

The book covers all major topics in introductory microeconomics. It encompasses discussions on both theories and policies.

Content Accuracy rating: 4

The majority of the content is precise and accurate. However, there can be some subtle issues. In 7.3 “Costs in the Short Run”, the gap between ATC (average total cost) and AVC (average variable cost) is AFC (average fixed cost), and AFC is supposed to decrease as output increases since the fixed cost is distributed across a larger number of units. But 7.3 fails to highlight this point and some of the graphs fail to show this feature.

Relevance/Longevity rating: 5

The majority of the content is current, with discussions addressing the impact of recent events such as the COVID-19 pandemic.

Clarity rating: 4

Most of the content is clear and easily understandable. The “Clear It Up” sessions can be very helpful in clarifying some confusing content. However, some content can be improved. 5.1 “Price Elasticity of Demand and Price Elasticity of Supply” highlights the importance of using the absolute values for price elasticity of demand, but the following mathematical calculations simply equate negative values to positive values, which can be mathematically confusing; I suggest adding absolute value symbols in mathematical calculations to avoid this confusion.

Consistency rating: 5

The content and writing style maintain consistency throughout the entire book.

Modularity rating: 5

This book is well-organized into modular sections. The individual modules of the book collectively contribute to an enhanced overall understanding of the subject matter.

Organization/Structure/Flow rating: 5

In general, this book exhibits a well-organized structure. It adheres to the principles of microeconomics effectively.

Interface rating: 5

The design and layout are good. I would appreciate the inclusion of graphs in high resolution.

Grammatical Errors rating: 5

I did not find any grammatical errors.

Cultural Relevance rating: 5

This book introduces economic theories that apply to most of the countries in the world. In addition, Chapter 19 “International Trade” and Chapter 20 “Globalization and Protectionism” discuss economic interactions across countries.

This book is one of the best open textbooks featuring introductory microeconomics. I have seen tremendous improvement from the first edition to the current third edition.

Reviewed by Lori Lavigne, Professor, Framingham State University on 11/7/22

The book covers all of the major topics from a intro micro course. I would consider using this text in the future. read more

The book covers all of the major topics from a intro micro course. I would consider using this text in the future.

Content Accuracy rating: 5

Relevance/Longevity rating: 4

Relevant, but typically always pulling recent events for examples.

Consistency rating: 4

Consistent with other texts

Modularity rating: 4

Well organized

The text covers the topics in the order that are typically covered.

Seems easy to navigate.

Grammar looks correct

Cultural Relevance rating: 4

Reviewed by ATM Sayfuddin, Assistant Professor, Randolph College on 4/2/22

The book covers almost all major areas typically contained in an introductory microeconomics textbook. However, I expected the chapter discussing "public goods" (chapter 13) to also discuss all four categories of goods - private goods, public... read more

Comprehensiveness rating: 4 see less

The book covers almost all major areas typically contained in an introductory microeconomics textbook. However, I expected the chapter discussing "public goods" (chapter 13) to also discuss all four categories of goods - private goods, public goods, common resources, and quasi-public goods.

I the content of the book accurate.

Content is up-to-date. I liked the idea of using hyperlinks to external sources in the online version, allowing students to dig deeper into interesting ideas/scenarios in the real world.

In my experience with my students, I think most of my students find the textbook written in clear and concise language, although use of more examples would be helpful.

The text is consistent.

I see the value of introducing the concept of consumers' Budget Constraints and Production Possibility Frontier in chapter 2, but I still think those topics are better served in their own subsequent chapters - chapters 9 and 19, respectively - because the brief introduction of these topics in the 2nd chapter leaves many questions unanswered in the students' minds.

Organization/Structure/Flow rating: 4

I liked the overall flow of the book.

The interface is user-friendly.

I did not notice any grammatical errors.

The text is not culturally insensitive or offensive in any way.

I liked the book most helpful because of the length of each chapter, which students find manageable rather than burdensome.

Reviewed by Jean-Baptiste Tondji, Assistant Professor, University of Texas Rio Grande Valley on 10/31/20

Principles of Economics is impressive and extremely comprehensive. It covers interesting and current topics that are suitable and relevant for any principles of Microeconomics and Macroeconomics courses at the lower undergraduate level. read more

Principles of Economics is impressive and extremely comprehensive. It covers interesting and current topics that are suitable and relevant for any principles of Microeconomics and Macroeconomics courses at the lower undergraduate level.

The textbook is accurate, error-free, and unbiased. The contents can be used to raise issues at the national and international levels. This is important given that we navigate in the world with many social networks and connections.

Principles of Economics is up-to-date since it tackles several current economic topics such as environmental protection, poverty, inequality, healthcare, race, gender, immigration, among others. In future editions, I think topics such as protests, (social) justice, political polarization, pandemics (vaccines), and the future of the green economy might be useful for our undergraduate students. The text is written in such a way that it will not be tedious to implement such updates.

Clarity rating: 5

The text presents a clear, concise, and accessible approach for each concept. The lucidity in the writing makes the contents easily accessible to every student, including the one to which English might not be the first language.

The text is consistent in terms of both terminology and its framework. Principles of Economics is based on a solid pedagogical foundation. Each chapter builds on a case study and offers new facts and knowledge to extend the understanding of the current environment. The chapter ends with a summary of key terms, a brief summary of the contents, and assessments. The latter are arranged in a progressive path towards the learning goals. I think having some self-check questions at the end of each topic might also help. In the text, all problems and questions are relegated to the end of the chapter.

The text is easily and readily divisible into smaller reading sections that can be assigned at different points within the course.

The text covers several relevant topics that are presented in a logical, and clear fashion.

Principles of Economics is free of significant interface issues, including navigation problems, distortion of images (or charts), and any other display features that may distract or confuse the reader.

I did not find any grammatical or mechanical errors that could cloud meaning.

The textbook covers a range of issues on immigration, gender, race with facts, and no bias at the national or international focus. Examples used are relevant and are not culturally insensitive or offensive in any way.

Overall, Principles of Economics is an excellent textbook for all students in a face-to-face introduction to Microeconomics and Macroeconomics courses at the undergraduate level. The text is up-to-date, concise, clear, consistent, accurate, and it covers relevant topics with a national and international focus. The text also presents additional materials, such as the use of mathematics in economics, to complement the intuitive and applied sections. Finally, the text is well organized so that instructors can easily select appropriate contents to be covered in a full semester.

Reviewed by Jay Leung, Instructor, Bunker Hill Community College on 7/13/20

The textbook covers most of the intro-level mainstream microeconomic topics. An honors level microeconomics course would consider a textbook that was more advanced and in-depth. read more

The textbook covers most of the intro-level mainstream microeconomic topics. An honors level microeconomics course would consider a textbook that was more advanced and in-depth.

The content is accurate.

Photos and real-world examples would need to be regularly updated.

Clarity rating: 3

The text is written in an easy-to-read manner. However, the book would benefit significantly from graphic design overhaul. The graphs are too small in size and lack color. The use of color would illuminate the various cost curves. Math equations could be typeset more clearly by using a different font and improved layout. Table data could be laid out more clearly.

The textbook is consistent in its use of terminology.

The chapters can be used in the same groupings as other microeconomics textbook.

The chapters are organized in a standard way.

There are no issues with the interface.

I didn’t find any grammatical errors, but there are quite a few typos.

I didn’t find anything that was culturally offensive. Many of the examples are quite dated though. Note that the textbook is from an American perspective.

OER is a very worthy project. I root for its success. The prose of the book is very approachable; however, the graphic design including the text layout makes this textbook not ready for primetime. Although the free price tag of this book is attractive, the lack of integration between the explanations and the graphs (e.g. no use of color) detracts from the effectiveness of the textbook.

Reviewed by Damindi De Silva, Adjunct Professor, Quinsigamond Community College on 6/29/20

The text covers all areas and ideas of the subject and provides an effective index and/or glossary. The text can be used as a required text at an Introductory level Microeconomics course at College level. read more

The text covers all areas and ideas of the subject and provides an effective index and/or glossary. The text can be used as a required text at an Introductory level Microeconomics course at College level.

Most part I found the text to be accurate and error free and unbiased. But I would like to mention the following as improvements to the text. The Figure 1.2 on page 11 shows a picture of absolute poverty rather than scarce resources for me. Scarcity is a relative term and the picture on the figure shows an absolute concept. Students will surely get confused as to scarcity is something like poverty. Scarcity is limited resources to fulfill unlimited wants. Scarcity is prevalent everywhere even among the rich. So I wouldn't put that figure 1.2 as scarcity. Another improvement that I suggest is to explain absolute advantage and comparative advantage where the explanation of specialization and division of labor is mentioned. If Trade and Markets are introduced in page 14 some understanding about absolute and comparative advantage should be mentioned at that point. This can be connected to the Chapter on International Trade later on. I like how the cost curves and product curves are well explained in chapter 7. However on page 199 it would be great if another two diagrams are used after Figure 8.6 showing the shaded areas such as contribution towards covering fixed cost in the short run and the loss areas when price goes below Average Variable Cost. The Chapter on Oligopoly could be expanded with sub topics as price wars and non price competition. Since this market is a very interesting market more examples from different countries could be used. In the chapter on Monopoly a dead weight loss diagram comparing perfect competition and monopoly firms, a diagram to show Allocative inefficiency and sub topic on price discrimination would complete that chapter well.

Content is up- to-date on most part but Table 1.2 and many other tables could be updated. The text is written in such away that necessary updates will be relatively easy and straight forward to implement.

The text is written in lucid, accessible prose and provides adequate context for any jargon/technical terminology used.

The text is internally consistent in terms of framework.

The text is easily and readily divisible into smaller reading sections that can be assigned at different points within the course (i.e., enormous blocks of text without subheadings should be avoided). The text should not be overly self-referential, and should be easily reorganized and realigned with various subunits of a course without presenting much disruption to the reader.

The topics in the text are presented in a logical, clear fashion. But in Chapter 3 I would include a section on distinction between movement along and the shifts of demand and supply curves. Also an explanation on how excess demand and excess supply moves towards a market equilibrium will be a needed addition to page 50 on Chapter 3. The features such as Link it Up, Work it Out, Bring it Home, Key terms, Key concepts and summary,Review Questions, Critical Thinking questions, Problems at the end of each chapter are great features.

The text is free of significant interface issues, including navigation problems, distortion of images/charts, and any other display features that may distract or confuse the reader. The Link it up feature is great feature. Videos and articles both could be used for this feature.

the text contains no grammatical errors.

The text is not culturally insensitive. But I would not include Table 1.2 with countries like China. Based on the national income categorization China is a upper middle income country and India is a lower middle income country. Tables like table 1.2 can be culturally sensitive especially in an era where trade wars and controversies are happening with this country.

Education resources such as these texts are way of bridging the gap between the divided world. Especially texts on Economics can be used to do this bridging very well. I would use many examples from around the world in my classes of Macro and Micro Economics. When using countries as examples I would be cautious as to what the essence the students will bring home. Overall this text has done great justice in building a text of Principles of Microeconomics. I recommend it to Instructors for an introductory level course at College level.

Reviewed by David Ornstil, adjunct lecturer, University of Massachusetts Lowell on 6/17/20

This principles textbook covers all areas generally taught in a principles of microeconomics course as well as including chapters on social welfare and behavioral economics. Theories are thoughtfully presented and easy to read with many examples... read more

This principles textbook covers all areas generally taught in a principles of microeconomics course as well as including chapters on social welfare and behavioral economics. Theories are thoughtfully presented and easy to read with many examples that students will enjoy reading about.

All information appears to be accurately presented and covers many subjects that might be considered controversial but are explained in a neutral, unbiased manner

There are plenty of examples of companies and policies that are current, However, a number of the tables offered need to be updated with current statistics. Many end in 2015 or before. By early on offering the availability of the FRED website students will be able to take the tables used in the text and update the information to make it more relevant.

This textbook is extremely well written and clearly explains the topics offered. Students will find the readings easy to follow.

A great framework for presenting the material. Each chapter gives an overview of the material then proceeds to follow that outline step by step. Each chapter ends with a glossary of terms used for easy reference and questions that are thought provoking. However, I found some of the graphs difficult to follow as they are one color and not bold enough to present a clear understanding of the graphical presentation. Found that the switch back and forth between linear and non linear graphs might be somewhat confusing for the students.

This textbook will be easy to divide into sections that can be brought forward or pushed back as you organize your class structure.

I found the position of some chapters very curious. I would have talked about elasticity before government involvement and international trade much earlier when looking at consumer and producer surplus.

Interface rating: 4

As mentioned above the only complaint I have is the presentation of the graphs. They need to be bolder and more consistent in shape.

no major grammatical errors

The textbook is neutral in its presentation

This textbook can easily be adapted to cover any topic covered in a Principles of Microeconomics course

Reviewed by Colin Jareb, Graduate Student, University of Colorado Boulder on 6/11/20

The textbook covers all of the sections that are expected for a principles class. Further extensions into financial markets, income inequality, and political economy are covered well. There is a nice index with links to the appropriate pages,... read more

Comprehensiveness rating: 3 see less

The textbook covers all of the sections that are expected for a principles class. Further extensions into financial markets, income inequality, and political economy are covered well. There is a nice index with links to the appropriate pages, however there is no glossary with all of the key terms and definitions in one place; instead they are presented at the end of each chapter which could potentially make them difficult to find. A drawback of the way the material is presented is that trade is covered in the last two chapters; the concept of comparative advantage and the gains from trade are fundamental reasons that markets form and should thus be covered much earlier. Further, the authors introduce consumer, producer, and social surplus but neglect to tie these concepts to deadweight loss and market inefficiencies in subsequent chapters.

The graphs and diagrams are for the most part high-quality and accurate. There are some specific instances, for example the chapter on externalities, where the graphs presented don't flow with the material as well as they could. In the chapter on externalities the graphs do not clearly show that the social cost curve lies above the private supply curve as a result of the size of the externality. Otherwise, in the examples, clear it up, and bring it home sections material is presented well and in a non-biased manner.

The base content is up-to-date and in general the content taught in a standard principles class will not change frequently. Some of the examples and policy applications are somewhat out-of-date. For example, one example concerns Netflix charging for streaming and DVD rentals, which most college students won't really connect with as they don't consume DVDs anymore. Any economics textbook will have to deal with this dilemma and new editions and updates are straightforward; however, this book may be out of date within two or three years.

The text is well-written and easy to follow. Each chapter is structured well so that it is clear what topics are covered in which sections and the flow is sensible. The biggest issue I find is that some of the graphs and diagrams do not always align smoothly with the text that discusses the associated concepts.

Terminology and the flow of each chapter is consistent with each other. As mentioned previously there are some concepts that could easily be linked across chapters. The authors are consistent in that this content does not appear and disappear readily.

The book is modular. As noted earlier it may be very beneficial to in fact go out of order, for example, by teaching chapter 19 early in the course and linking this content to the production possibilities frontier and why markets form. Within chapters the introduction clearly lays out what is covered in each section and sections can easily be re-ordered or skipped.

Within chapters the content is well-organized, has a clear logical flow and hard-to-digest concepts are properly built and presented. As mentioned earlier, I would re-order some of the chapters if using this book to teach my class.

The textbook has several hyperlinks and qr codes that function properly. There are no noticeable distortions or errors that prevent delivery of the textbook content.

The book is well-written and does not contain noticeable grammatical or spelling errors.

Economics generally can tackle questions that are divisive and some of the topics in the book should be treated with care if presented in class. Having pointed that out, the authors are very objective in presenting these examples, applications, and concepts in a way that is unoffensive and culturally relevant.

Reviewed by Shengnan Fang, Economics Instructor, Linn-Benton Community College on 1/9/20

This textbook not only covers the major content for principles level class, but also introduces chapters related to industrial organization, labor economics, environmental economics and international trade. The index is hyperlinked, which is... read more

This textbook not only covers the major content for principles level class, but also introduces chapters related to industrial organization, labor economics, environmental economics and international trade. The index is hyperlinked, which is useful and efficient to locate the chapter accurately. Each chapter begins with a real world economic example or question in "Bring it Home" section, and it also ends with a detail explanations related to the examples or questions in "Bring it Home". This layout is efficient and helpful for students to catch up the application of the chapter content. Key terms, concepts and summary at the end of each chapter are also useful to help student better catch the main points.

The content is accurate. However, I want to point out that the graphs in Chapter 3 are little bit messy, especially on Page 53. The students might be confused to see the graph at the first time. In my opinion, it might be not necessary to put all the dots on the graph, and the numbers of arrows are more than needed. And this also shows on Page 48 and 49. You have already shown the demand schedule and supply schedule in tables, it might be much clearer to show two dots on the graph to explain how to draw the curves.

The textbook begins with a question to Facebook, which and catch students' attentions as they use it often. And this question can also make student realize that Economics is everywhere. I think the book content is up-to-date and policy relevant. For example, Chapter 12 introduces the environmental protection, and it uses the example of bottle bills, which is what we need to pay in Oregon. Therefore, it might be interesting to encourage my students' engagement to discuss it.

Overall, the text is written in lucid and accessible prose. But I still want to point out the layout of Chapter 3. It might be better to move Figure 3.2 on Page 48 to Page 47, which is easier to student to understand how to draw a demand curve based on the demand schedule. At the end of Page 51, it might be better to move the title 3.2 to next page. Too many pairs of price and quantity in graphs of Chapter 3 might be a little bit messy.

The book is consistent in terms of terminology and framework.

There are 20 chapters in this textbook. I think it might be a little bit more than my students. For example, after Chapter 3, the authors add Chapter 4 which mainly focuses the policy application of Chapter 3. And there are also some contents, such as Minimum Wage, repeating in Chapter 14. Chapter 12 and Chapter 13 introduce the negative and positive externalities, and it might be better to combine these two chapters into one chapter.

Each chapter is well organized. I like the "Introduction" at the beginning of each chapter. It highlights the questions needed to understand and gives me a guideline to go through the content.

Download the textbook online is easy and the hyperlinks and QR codes in "Link It Up" section work well.

I cannot recall any grammatical errors in the textbook.

I think there is no culturally offensive content.

As an instructor to community college students, I think the content of this textbook is up-to-date and easy to go through. However, for microeconomics, I think 20 chapters might be more for my students. For the section of "Link-It-Up", it might be better to put more video (less than 4 mins) to catch students' attention and improve their engagement.

Reviewed by Rupayan Gupta, Professor, Roger Williams University on 12/9/19

I find the book very comprehensive. Comparing with some of the leading published textbooks the coverage and depth are both comparable. Perhaps the section on Oligopoly could be expanded a bit with a few more examples. read more

I find the book very comprehensive. Comparing with some of the leading published textbooks the coverage and depth are both comparable. Perhaps the section on Oligopoly could be expanded a bit with a few more examples.

The subject matter is accurate and unbiased.

The book is relevant today and I believe it will be relevant long term.

I feel that the presentation of the material is lucid.

The subject matter is internally consistent.

Very well demarcated into modules for easy reading and understanding.

Nicely organized, though I would have had a better demarcation between monopolistic competition and oligopoly.

The book's interface is a little less attractive than some of the textbooks from traditional publishers. It is by no means bad, but students used to current levels of gloss might find the interface a bit drab. However, this has more to do with superficial presentation techniques than with real factors associated with learning. The less expense might make students more amenable to forgoing the catchiness of the product.

Grammatically correct

Not culturally offensive

It is a book that is thoughtful and comprehensive. It can compete on an equal footing with textbooks offered by traditional commercial publishers.

Reviewed by Zhongjin Li, Assistant Professor, University of Missouri - Kansas City on 12/14/18

The textbook covers most of the intro-level standard microeconomic materials and provides students a relatively full picture of the microeconomic landscape with real-world examples. I do hope it can incorporate more heterodox and historical... read more

The textbook covers most of the intro-level standard microeconomic materials and provides students a relatively full picture of the microeconomic landscape with real-world examples. I do hope it can incorporate more heterodox and historical perspectives and research, so students can be exposed to the arguments and contribution made by Institutionalists, Marxists, etc on a variety of topics in microeconomics and get the impression that many theories and issues are debatable and many terms have a historical context. I did use a real-world micro reader as a complementary text in teaching.

It's a quite standard intro-level microeconomics textbook. The mainstream interpretation in microeconomics is accurate.

I would like to see more updates in the chapter on international trade.

The text is written in lucid, accessible prose. It may be better to include more real-world examples, debates, and data, so students can feel more involved, especially on issues directly related with a college campus, such as a tobacco ban, contingent labor form, and student debt.

The text is quite consistent in terminology and the general framework.

I was not able to teach the entire book in one semester, so a few later chapters were skipped, but students had no problem to do the readings.

The topics are organized in a standard way.

My students, in general, feel the textbook quite easy to navigate.

The text contains no grammatical errors.

The text is not culturally offensive.

Given the high price of other standard non-open source textbooks, I think this textbook does a fairly good job as a substitute. I would recommend instructors to consider adopting this book while at the same time using a more non-standard book/reader (collection of short essays) as a complementary (but also required) piece of readings.

Reviewed by Pablo Hernandez, Associate Professor of Economics, Hollins University on 5/21/18

This OER text offers readers a comprehensive breadth of topics from an introductory standard microeconomics perspective. This text features a table of contents, index, end-of-chapter key terms, and a comprehensive chapter/topic list of references. read more

This OER text offers readers a comprehensive breadth of topics from an introductory standard microeconomics perspective. This text features a table of contents, index, end-of-chapter key terms, and a comprehensive chapter/topic list of references.

Content Accuracy rating: 3

Content is accurate and error-free. The book is biased toward an assessment of economic outcomes from market approaches and fairly free-market driven processes. Early in their careers, young aspiring economists ought to be exposed to an understanding of the enclosure of the commons and the overriding importance of alternative property regimes. “Because things are driven by tradition, [DOES NOT NECESSARILY MEAN] there is little economic progress or development”. (Principles of Microeconomics, p. 15. My emphasis) Conversely, self-sustenance and small-scale farming – elements under a “traditional economy”- are considered key bottom-up principles for the conservation of natural capital and a revitalization of the commons.

Relevance/Longevity rating: 3

Content is up-to-date and policy-relevant. The relevance may improve should alternative policy examples be included in areas such as international migration; forced migration due to global climate change, a juxtaposition of views surrounding controversial economic theories or themes related to microeconomics (i.e.: environmental and natural resources economics views versus ecological economic views concerning natural capital).

Prose is clear. Use of jargons and techncal terminology is limited. Although diagrams may seem a bit convoluted at first sight. Authors may removing so many quantity,price numbered pairs, particularly under chapter 3: Demand and Supply.

Book is consistent based on approach (standard microeconomics) and terminology.

Modularitty is evident from the beginning of the text, as authors offer alternate sequencing. Also, more advanced topics may be read and discussed without significant prior knowledge in microeconomics.

Topics are presented in a logical and consistent manner. Text structure is fine.

The text's interface is also fairly nimble. Navigation (online or on downloaded PDF version) is smooth.

I can't recall any grammatical errors.

Cultural Relevance rating: 3

Text may offer cultural or "traditional economy" insenstivity. Refer to above case concerning "traditional economy".

Reviewed by Aida Odobasic, Assistant Professor , University of Delaware on 2/1/18

Principles of Microeconomics textbook covers the breath of microeconomic topics from introduction to the subject, to development of the main model of demand and supply, fundamentals of the microeconomics theory, microeconomic policy issues, and... read more

Principles of Microeconomics textbook covers the breath of microeconomic topics from introduction to the subject, to development of the main model of demand and supply, fundamentals of the microeconomics theory, microeconomic policy issues, and it finishes by introducing international economics. It covers everything typically covered in the introductory microeconomics course. Index is hyperlinked, which makes it efficient. The book is well organized. Each chapter has a 'Clear It Up' sections where the most typical misconceptions are addressed. Additionally, there are review and practice problems at the end of the chapter, along with summaries, and key terms.

The examples used are relevant and current. Hyperlinks to different websites where examples came from are provided for further reading. Definitions and explanations are straightforward and accurate. The data used in numerous examples is current as of 2015.

The book uses examples and data from 2015. The examples are carefully picked. The textbook will stay current for the number of years. For example, oil price changes in the US economy will always be a topic of interest that captures students attention regardless when the particular price change discussed took place. Number of examples are about the US economy.

The text is straightforward and easy to understand. Explanations are clear. For example, the text provides one of the best explanations for the concept of perfectly elastic demand that I have ever read in a principles textbook. I put special focus on topics that students usually have troubles grasping, such as elasticity, and I am excited to introduce this textbook to my principles class this winter and see how students react to it.

I did not find any inconsistency in terms of terminology and framework.

The text is divided into 20 chapter. Each chapter is subtitled and organized by topics. Examples are provided throughout the text. The organization of topics is organized in a way I typically use when I teach the material. Depending on the class, instructor can chose to skip some of the later chapters on policy issues without disruption to the reader.

I found the text easy to read and interesting, well organized in a logical order. The effort that went into producing this text is admirable.

I downloaded the pdf version of the textbook without any issues. I used hyperlinks for internal end external materials without any problems.

I found no grammatical errors while reading the text.

I did not find text offensive. It is geared mostly to the US audience, but without favoritism or bias. Authors are from the US and they use examples from their own frame of reference, which is as expected.

I enjoyed the text and I am going to adopt it in my principles class. I would like to thank the authors and everyone involved for the time and effort they devoted to creating a high quality textbook.

Reviewed by John Brouwer, Principal, Eton College on 5/8/17

The text covers all the areas and ideas of Macroeconomics that one would expect to find at the introductory level. The subjects are clear, easy to follow, relevant with applied examples. Global examples are used through the lens of US laws and... read more

The text covers all the areas and ideas of Macroeconomics that one would expect to find at the introductory level. The subjects are clear, easy to follow, relevant with applied examples. Global examples are used through the lens of US laws and economics. No index or glossary was provided with the version that was reviewed.

Text is accurate, error-free, but does have a bias towards US law and economics. Many of the case studies are global in origin, which are excellent, however, the authors always return to the effects towards the US, or if a US case study is examined there is very little mention of the effect towards the Canadian economy.

The content is up to date and should constantly be up dated to truly connect the student to the learning objectives as they effect the global economies of today. Generally the text will not become obsolete in a short period of time yet the authors will need to either update the data within the text or provide updated links to the already numerous web sites referred to within the text.

The authors use a story telling format that is easy to read and comprehend.

The text is consistent in terminology and framework. The early chapters are well setup providing foundational information for the each of the subsequent chapters. Each chapter progressively provides the learner with more challenging concepts, language, and equations.

The text builds upon each chapter that provides effective information to the reader to continue. There are many reading sections with each followed by "Key Takeaway" statements and "Checking Your Understanding" questions. It may be difficult for those not familiar with economic concepts to not read the chapters sequentially.

Story telling format; the reader is provided with fundamental economic realities in the world using examples that are relevant to people in general. The foundational concepts are discussed before the math and graphs are introduced hence the reader has already seen the "what's in it for me" reality.

No problems were found.

Grammatical Errors rating: 4

None were found.

The text does not appear to be insensitive or offensive in any way. As the text is focused to US learners, students from other countries, such as Canada, may not feel that this is relevant to their history, or future.

The text is well laid out as is the content but the text should be entitled: Macroeconomics: Theory in Application from a US Perspective. Web links worked as did page reference links (there was a request to register to Flatworldknowledge.com which I did not do). The international examples are excellent for any student to use. Overall the text would be excellent if there was a considerable amount of Canadian content added. The reason for this is that while economic policies appear to be similar between Canada and the USA, the decision making is different.

This review originated in the BC Open Textbook Collection and is licensed under CC BY-ND.

Reviewed by Anna Antus, Adjunct Professor, North Hennepin Community College on 4/11/17

The textbook is very comprehensive. It covers all topics covered in most principle of microeconomics courses and more. It has great index of the whole textbook and glossary attached to each chapter. It provides with good order of all major areas... read more

The textbook is very comprehensive. It covers all topics covered in most principle of microeconomics courses and more. It has great index of the whole textbook and glossary attached to each chapter. It provides with good order of all major areas covered in principles of microeconomics. I like organization of the topics as they follow most of the main stream textbook order of concepts.

After reading the textbook I could not find any errors or lack of accuracy in the textbook. Great link and updated stories attached in the body of the textbook. I really like the "Link it Up" section that bring accurate and updated stories to the students attention.

The content is relevant and up-to-date. It might be that the chapters (some of them) are a little too long. I might not be to objective as I am mostly teaching hybrid accelerate courses and the longevity of each textbook chapters are sort of important to me. But I like the section "Clear it Up" and "Work it Out" as a great resource for students regardless if the class is online or face-to-face.

I think the text is written with very clear language with some technical terminology that is necessary for better and clear understanding of economics.

The text is very consistent in using the same terms and framework through all the chapters.

The text has some flexibility and modularity as it can be assigned at different points within the course. Well organize with plenty of flexibility to reorganize the order of the assigned material.

The topics are presented in a logical, clear order following most of the main economics textbook like Krugman or Mankiw.

I have downloaded the text in PDF to better navigate on my computer (as being bigger file it was slowing down my navigation on line) and using PDF file I have not noticed any interface problems. It was not having any distortion of images/charts etc.

I did not detect any grammar issues in the textbook myself.

I have not found any cultural insensitive issues or examples that would have improper cultural relevance.

Very well done textbook. I might use it in the future in my classes.

Reviewed by Joseph Schoen, Lecturer, Anoka-Ramsey Community College on 4/11/17

The textbook covers the major content areas covered in a Principle of Microeconomics course. The index and the glossary are just as good, if not better, than those found in other textbooks. On top of the topics you come to expect in any... read more

The textbook covers the major content areas covered in a Principle of Microeconomics course. The index and the glossary are just as good, if not better, than those found in other textbooks. On top of the topics you come to expect in any Microeconomics textbook, other relevant topics are also included later in the book, such as risk and insurance, issues in labor markets, and financial markets.

Even though the textbook goes into many examples and additional areas of Microeconomics, little was found in terms of errors. The textbook seems to be unbiased in its presentation, but that would be more of a concern in a Macroeconomics textbook. Typing errors are very rare, and most likely will not be noticed by most readers. Overall, the textbook was found to be accurate throughout.

The textbook does have lots of relevant examples throughout, which is one of its strong points, but with that comes the issue of ensuring that these examples are updated as time goes on, which may have implications on the books longevity. When it comes to the core issues covered, the textbook is again relevant and the longevity issue becomes much less of a concern.

The textbook is written at a level appropriate for the expected audience. Plenty of context is given for the economic terminology that is presented throughout the book. The structure of the chapters makes the textbook very approachable, and provides a good structure in explaining the complicated concepts that can arise in a microeconomics course.

The book is consistent in its chapter structures and general layout. After the first few chapters, students will know where to look in a chapter for additional resources (list of key terms, self check questions, etc.) and what to expect in these resources.

The textbook breaks the topics up in an appropriate matter that makes it easy for the instructor to "bounce" around the textbook as they see fit. The textbook also mentions how the material to be covered in a particular section may relate to other topics within the book.

Great structure overall. The text starts with the fundamental concepts that are typically covered in a Principles of Microeconomics course and builds off of them nicely as it progresses through the topics. If the instructor finds the structure doesn't necessarily follow the way they would normally address the topics, the textbooks modularity makes it easy for them to organize it in a way that works for them.

Interface rating: 1

Overall, the books interface seems to be adequate for the topic, but also its weakest area. It would have been nice for the graphs to be bolder in color and professional looking. For instance, the graphs of supply, demand, and market equilibrium are all monotone with thin lines. This becomes even more of an issue when looking at the graphical representation of profit maximization in later topics. Adding more color would go a long way.

Very few grammatical errors were found throughout the textbook.

The textbook is not culturally insensitive or offensive. Like many other economic textbooks, it does address some controversial issues to lure the reader in, but does so in a way that avoids issues of insensitivity.

Overall a good textbook. It has smooth transitions from one topic to the other and interrelates the areas covered nicely. The graphs could be improved upon though, but this does not make or break the textbook.

Reviewed by Janice Kinghorn, Senior Lecturer, Miami University on 8/21/16

The text covers all the learning objectives required for an introductory microeconomic theory course. Examples extend the content to topics such as supply and demand in financial and labor markets, and antitrust policy. Additional chapters at... read more

The text covers all the learning objectives required for an introductory microeconomic theory course. Examples extend the content to topics such as supply and demand in financial and labor markets, and antitrust policy. Additional chapters at the end of the text provide extensions into current topics such as poverty and inequality, unions, discrimination, and immigration. Chapters on public economics and financial markets are a nice addition for an instructor who wants to extend the typical micro theory content.

I did not find any material mistakes in the text. I was pleased with how more controversial topics were presented. The books gave facts and introduced methods of analysis without betraying a bias.

Examples are quite up to date. Some of the latest data in graphs were 2010 or 2012. Material in the international trade section will need to be updated by an instructor or a future edition.

The writing seems to be very clear and straightforward. Disciplinary specific terms are defined and placed in context but may need to be pointed out by an instructor.

The book is quite consistent - each chapter's layout is similar thus increasing the clarity for a student.

The book is broken down into short modules within chapters. Each chapter begins by placing it in the context of the course material and referring to other places in the text where it may be integrated. An instructor should have no difficulty using individual chapters.

The books begins with production possibility frontiers, incorporating budget lines in that content, then proceeds to supply and demand analysis. Examples from labor and financial markets reinforce supply and demand analysis before proceedings to elasticity and consumer choice. The next section of the book discusses industry structure and includes antitrust policy. The text then introduces externalities in the context of environmental protection and public goods. Finally, issues such as poverty, labor market issues, information, public economics are covered. The book ends with a section on international trade and globalization.

I reviews a print copy of the text that was professionally presented.

I did not observe any grammatical errors in the text.

Most examples in the text were from common firms or products (Amazon, the cotton industry, TSA, etc.).

Reviewed by Alexandra Nica, Lecturer, The University of Iowa on 1/7/16

The textbook overall is very comprehensive, it covers all the areas of study and concepts that are typically covered in a Principles of Microeconomics course. The amount of information included in this book is impressive and some of the chapters... read more

The textbook overall is very comprehensive, it covers all the areas of study and concepts that are typically covered in a Principles of Microeconomics course. The amount of information included in this book is impressive and some of the chapters actually have more information than a typical textbook of this level. There are also chapters that are not necessarily covered in this type of class (mostly due to time constraints), however they are well presented in general and quite a great resource for instructors and students who want to include more and relevant material in their coursework. As with any other textbook there are also a few minor shortcomings. Some of the chapters can be a little longer than anticipated, which could have a distracting side effect on students. For example the introductory chapter does a good job of going over a lot of the topics that will be covered, but it feels as if it goes into too many details right from the beginning. It also talks about a few Macroeconomics issues that won’t be part of the textbook as it goes along, so it feels more of an introductory chapter to a Principles of Economics book. Another example is the presentation of the budget constraint, which appears in the same chapter as the presentation of the production possibilities frontier (to reflect choice for consumers versus choice for society) and then appears again in the consumer choice chapter. It is a more unusual way to present this topic, as typically the budget constraint and utility go together without having to refer back to another chapter. It is by no means a big problem, just an observation. Some other less typical groupings are negative externalities and positive externalities treated in separate chapters, grouped with other concepts (environmental protectionism and public goods respectively). This particular approach could potentially be a little confusing to students, especially since the Coase Theorem is not treated in a lot of detail. All chapters in general are well constructed. There are a few other concepts/details in some of these chapters though that miss certain aspects that one would expect to see. For example the elasticity chapter does not cover the details of elasticity along a demand curve. The oligopoly chapter does not have a detailed preliminary discussion on game theory and its elements before presenting actual game setups. Also, the monopoly chapter does not go into a lot of detail on the inefficiency and deadweight loss that results from a monopoly. There is also no discussion on price discrimination and it would have been great to see more explanatory graphs in here. There is however a separate chapter on monopoly and antitrust law and cases, which is well presented, if albeit slightly long. One last observation is related to the production side (i.e. the chapters on costs and perfect competition), which seem a little disjointed, with some aspects that we would expect to see in one chapter presented in the other. Other chapters are particularly well done and the concepts are very nicely and clearly explained, some with unique approaches (e.g. the supply and demand chapter, the labor and financial market chapters, the more unique labor market related chapter concentrated on unions, immigration, discrimination, the international trade and globalization chapters, the asymmetric information and risk chapter, the poverty and inequality chapter and the public economy chapter). There are also three Appendices included with this book, which are very useful. One covers the mathematics needed to understand all the concept explanations and applications, one covers a thorough presentation on indifference curves including a step by step explanation on income and substitution effects. The third appendix covers a presentation of present value calculation methods. Answers to review questions are provided as well, which can be extremely useful to students for self-assessment and better understanding of concepts. The PDF version of the book provides a comprehensive index at the end of it. The online version of the book has a glossary at the end of each of the modules from each chapter, which comes in very handy.

From what I have seen, the content of the book is accurate and error free. There are a few rare typos, but nothing that would distract the reader from the material. It also does not seem to be biased even though it covers some controversial topics in a few chapters, however it is in a manner of stating facts, not choosing sides, which is the most important distinction. There could be the argument that many examples are related to the US economy, however they contribute to the relevancy of the topic discussed. All examples included are very well chosen and one of the strong points of the book.

The book contains many current examples/cases/information, which is a big plus especially for a Microeconomics text that contains a lot of theory and many times it does not need frequent updates because of this reason. This book however has many examples and I think that from the way the book is structured and the manner in which these cases are included in each chapter, it would not make it too hard to keep them up to date. And it would have the added benefit that it would refresh the content and make it especially interesting to current and future students

Here is where this textbook excels in almost every chapter. The material is presented very clearly and in a very approachable style. There are learning goals listed at the beginning of each chapter and at the beginning of each of the subsections of said chapter as well, which is a great way to keep everything on track and make it clear to students what they should expect to know after reading that particular part of the material. The book gives a lot of examples, uses current information and data and clarifies concepts very well in this manner. It addresses the students directly and almost has the feel of the instructor talking to the class when reading it. It contains many step-by-step explanations of concepts and graphs and clarifies even elementary notions without giving the sense of simplifying things too much. It achieves a good level of interactivity (so to speak), because it breaks the text down in several ways. Each chapter has a “Bring it Home” example or case at the beginning and at the end of the chapter. It also contains “Work it Out” sections with solved problems relevant to the concepts presented. There are “Link it Up” sections that contain a link to a real world case or example relevant to the concept studied. And also there are “Clear it Up” sections that describe well many of the concepts that tend to be challenging to students at the beginning. In the online version of the book, these sections are not titled in that manner, but start with a “NOTE”, which does not provide the same level of detail. The PDF version’s notation is preferable from this point of view, to keep student’s interest high. Also each chapter contains key concept summaries at the end of it, self-check questions, review questions and critical thinking questions. All of these add to the clarity and understanding of the concepts studied.

The text is consistent in terms of terminology and framework, the presentation as well throughout the book with only a few exceptions that I mentioned in the comprehensiveness part of this review.

The way the text is separated in the sections mentioned above (in the “Clarity” part of the review) makes it very engaging and interactive for students. This way the student has the opportunity to read the material pertaining to a specific concept, relate it to a real-world example and also try a problem that would help deepen the understanding of that concept. It also helps by not making all the material in a chapter too overwhelming to go through. In the online version of the book, the modularity aspect is even more prevalent, because each chapter is separated in modules, each module containing a glossary, references and review questions at the end of it (whereas the PDF version has all the review questions at the end of the chapter, together with key concept reviews, self-check questions and critical thinking questions).

Organization/Structure/Flow rating: 3

Some of the chapters of this book are not organized in a typical manner. I gave a few examples of this in the comprehensiveness part of the book (e.g. the externalities chapters, the monopoly chapters, some of the production side details, consumer choice details etc.). As an instructor, it would be easy to assign them in different order to students or combine the relevant information from some of the chapters. However for students who are looking to improve their economic knowledge and use the book outside of a class structure, it might prove a little more challenging to keep some of these related chapters and concepts organized.

There was only one issue that I encountered with the PDF version of the book. The links from the “Link it Up” section are not easily followed directly from the text (or copy/pasted in a browser). This is not an issue for the online version of the book.

There were only very few (very minor) errors spotted throughout the book, but nothing that would distract or keep students from using the textbook.

The textbook does not seem culturally insensitive or offensive, even if it covers some topics that could be considered controversial. However as I mentioned before, they are presented as facts in a relevant discussion surrounding the concepts covered, not as opinions, so it does not qualify as culturally offensive or insensitive. Many of the examples are focused on the US economy, however there are also international aspects and examples presented.

Overall, the textbook is a very pleasant surprise, with all relevant Microeconomics topics covered and in a comprehensive and clear manner. I especially like the approachable style and the structure that I think will keep students engaged and enthusiastic about the material, which is no small feat to accomplish from an introductory economics text.

Table of Contents

• Chapter 1: Welcome to Economics!
• Chapter 2: Choice in a World of Scarcity
• Chapter 3: Demand and Supply
• Chapter 4: Labor and Financial Markets
• Chapter 5: Elasticity
• Chapter 6: Consumer Choices
• Chapter 7: Cost and Industry Structure
• Chapter 8: Perfect Competition
• Chapter 9: Monopoly
• Chapter 10: Monopolistic Competition and Oligopoly
• Chapter 11: Monopoly and Antitrust Policy
• Chapter 12: Environmental Protection and Negative Externalities
• Chapter 13: Positive Externalities and Public Goods
• Chapter 14: Poverty and Economic Inequality
• Chapter 15: Issues in Labor Markets: Unions, Discrimination, Immigration
• Chapter 16: Information, Risk, and Insurance
• Chapter 17: Financial Markets
• Chapter 18: Public Economy
• Chapter 19: International Trade
• Chapter 20: Globalization and Protectionism

Ancillary Material

About the book.

Principles of Economics 2e  covers the scope and sequence of most introductory economics courses. The text includes many current examples, which are handled in a politically equitable way. The outcome is a balanced approach to the theory and application of economics concepts. The second edition has been thoroughly revised to increase clarity, update data and current event impacts, and incorporate the feedback from many reviewers and adopters.

Changes made in  Principles of Economics 2e  are described in the preface and the transition guide to help instructors transition to the second edition. The first edition of  Principles of Economics by OpenStax is available in web view in the ancillaries

About the Contributors

Senior Contributing Author

Timothy Taylor , Macalester College

Senior Content Expert

Steven A. Greenlaw , University of Mary Washington

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Eric Dodge , Hanover College

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Microeconomics: A Very Short Introduction

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Microeconomics — individuals' choices of where to live and work, how much to save, what to buy, and firms' decisions about location, hiring, firing, and investment — involves issues that concern us on a daily basis. But when people think about economics, they tend to place importance on the bigger picture — macroeconomics — including issues such as unemployment, inflation, and the competitiveness of nations. Microeconomics: A Very Short Introduction argues that the microeconomy has a large impact on the economic world. Using real-life examples from around the world, this VSI provides insights into economics from psychology and sociology to explain economic behaviour and rational choice.

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1 Welcome to Economics

1.1 introduction, the complexity of the economy.

The economy is complex.

A simple sentence to start the semester, but something that is important to remember as we move through this semester. Even if you take both introductory microeconomics and macroeconomics, you will only scratch the surface of how complex the economy is. Consider this scenario below.

Pretend that you intend to construct a regular yellow pencil. What do you need? You will need some wood (cedar wood to be specific), graphite (which comprises the “lead” in the pencil), rubber for the eraser, and metal for the ferrule (the band on the top that connects the eraser to the rest of the pencil.) But, where will you find the wood? Will you need to cut down a tree? If so, where will you find the resources needed to do that like a saw, goggles, gasoline for the saw, etc. Already you are seeing the sheer number of connections before we even have a felled tree. To create something as simple as a pencil, we require the assistance of thousands, or more likely tens of thousands, of others. Now, consider an iPhone or a Galaxy tablet and the sheer increase in complexity with these goods.

The scenario above is not something I came up with. Instead, it is a scenario that countless students have been exposed to over the past half-century. In 1958, Leonard Read published I, Pencil which is the story of the life of a pencil. If you would like to read the short story, you can visit the Foundation for Economic Education  or you can also watch a short movie adapted from the book by the Competitive Enterprise Institute .

The Central Problem of Economics

Many students come into economics not really knowing what they will learn. Some students think issues like taxes and the stock market will be discussed. Others believe this is a course about money. None of those things are true. Instead, economics is the study of decision-making due to scarcity of resources.

As humans, our wants are unlimited. While we all have basic needs like food, water, and shelter, it is our desire for wants that puts a strain on the economy. Therefore, we need to decide how to best use our scarce resources. This is the crux of the study of economics.

Over the next several sections we will discuss the ways that individuals make decisions and the way those decisions impacts groups of people. These pillars of economic thought will guide us through the rest of the semester.

1.2 The Individual and the Decisions they Make

In this section, we will discuss the ways that individuals make decisions. This will be our first set of the pillars of economic thought.

Trade-offs and their Costs

Pillar 1: we all face trade-offs..

From  Wikipedia: Trade-off

A  trade-off  (or trade-off ) is a situational decision that involves diminishing or losing one quality, quantity or property of a set or design in return for gains in other aspects. In simple terms, a trade-off is where one thing increases and another must decrease. Trade-offs stem from limitations of many origins, including simple physics – for instance, only a certain volume of objects can fit into a given space, so a full container must remove some items in order to accept any more, and vessels can carry a few large items or multiple small items. Trade-offs also commonly refer to different configurations of a single item, such as the tuning of strings on a guitar to enable different notes to be played, as well as allocation of time and attention towards different tasks.

The concept of a trade-off suggests a tactical or strategic choice made with full comprehension of the advantages and disadvantages of each setup. An economic example is the decision to invest in stocks, which are risky but carry great potential return, versus bonds, which are generally safer but with lower potential returns.

Every decision we make comes with lost opportunity. If you choose to attend Penn State, that means that you cannot attend West Virginia University. If you choose to have a hamburger for lunch, you are also choosing to not have pizza or chicken tenders for lunch (unless you are really hungry, of course!) If you spend $1 on one item, you are also losing the ability to spend that dollar on another item.

The same thing goes for businesses and the government. If a company has a scare number of resources, they have to decide how to best use them. Suppose that a restaurant has a surplus of $2,000 to spend to introduce new items. They can either buy a new ice cream machine or a new salad bar. If they choose to buy the ice cream machine, that means they have also decided not to get a salad bar.

Similarly, when the government decides to spend an additional $100 million on highways, it also means that said money is no longer available for education, veteran’s affairs, or environmental protection.

Pillar 2: A cost is more than just money.

From Wikipedia: Trade Off and Wikipedia: Opportunity Cost

In  economics , a trade-off is expressed in terms of the  opportunity cost  of a particular choice, which is the loss of the most preferred alternative given up. A trade-off, then, involves a sacrifice that must be made to obtain a certain product, service or experience, rather than others that could be made or obtained using the same required resources. For example, for a person going to a basketball game, their opportunity cost is the loss of the alternative of watching a particular television program at home. If the basketball game occurs during her or his working hours, then the opportunity cost would be several hours of lost work, as she/he would need to take time off work.

The  New Oxford American Dictionary   defines it as “the loss of potential gain from other alternatives when one alternative is chosen.” Opportunity cost is a key concept in  economics , and has been described as expressing “the basic relationship between  scarcity  and  choice .” [2]  The notion of opportunity cost plays a crucial part in attempts to ensure that scarce resources are used efficiently. [3] Opportunity costs are not restricted to  monetary  or financial costs: the  real cost  of  output forgone , lost time, pleasure or any other benefit that provides  utility  should also be considered an opportunity cost.

Costs can take two forms: explicit costs and implicit costs.

Explicit costs are opportunity costs that involve direct monetary payment by producers. The explicit opportunity cost of the  factors of production  not already owned by a producer is the price that the producer has to pay for them. For instance, if a firm spends $100 on electrical power consumed, its explicit opportunity cost is $100. [5] This cash expenditure represents a lost opportunity to purchase something else with the $100.

Implicit costs  (also called implied, imputed or notional costs) are the opportunity costs that are not reflected in cash outflow but implied by the failure of the firm to allocate its existing (owned) resources, or  factors of production  to the best alternative use. For example: a manufacturer has previously purchased 1000 tons of steel and the machinery to produce a widget. The implicit part of the opportunity cost of producing the widget is the revenue lost by not selling the steel and not renting out the machinery instead of using it for production.

Example:  Suppose you bought two tickets for a total of $100 for a sold out sporting event. You will also spend $70 on gas/parking/food/etc. By going to the sporting event, you must call off of 8 hours of work where you make $10/hour. What is/are the explicit costs? What is/are the implicit costs?

Answer: The explicit cost is the total amount of money you actually paid. This is the $100 on the tickets and the $70 on the other goods. Thus, the explicit costs total $170. The implicit cost is what you gave up or sacrificed. This is going to work. By going to the sporting event, you did not go to work. Therefore, you missed 8 hours of work where you could have earned $80. Thus, the total implicit cost is $80. Note that you did not have to pay $80; instead, it was simply money you did not make (that you could have.)

Example:  You have to decide whether to work tomorrow or go to a party with your friend. If you work, you will earn $200. What is the opportunity cost of going to work?

Answer: If you go to work, you will miss out on going to the party (since that is your next best option.) Therefore, the implicit cost here is non-monetary. The implicit cost is the enjoyment you would have received by going to the party.

The Value of a Good or Service

Pillar 3: the value of a good or service is subjective.

From Wikipedia: Value (Economics) E conomic value  is a measure of the benefit provided by a  good  or  service  to an economic  agent . It is generally measured relative to units of  currency , and the interpretation is therefore “what is the maximum amount of money a specific actor is willing and able to pay for the good or service”?

Among the competing schools of economic theory, there are differing theories of value .

Economic value is  not  the same as market price, nor is economic value the same thing as  market value . If a consumer is willing to buy a good, it implies that the customer places a higher value on the good than the market price. The difference between the value to the consumer and the market price is called “consumer surplus” [1] . It is easy to see situations where the actual value is considerably larger than the market price: purchase of  drinking water  is one example. We will discuss consumer surplus later this semester.

Personal Decision-Making

Pillar 4: we assume that people are rational.

From Wikipedia: Rationality

Rationality plays a key role and there are several strands to this. [14] Firstly, there is the concept of instrumentality—basically the idea that people and organizations are instrumentally rational—that is, adopt the best actions to achieve their goals. Secondly, there is an axiomatic concept that rationality is a matter of being logically consistent within your preferences and beliefs. Thirdly, people have focused on the accuracy of beliefs and full use of information—in this view, a person who is not rational has beliefs that don’t fully use the information they have.

We will discuss the idea of information later this semester.

Pillar 5: We assume that rational people think marginally

One term that you will hear about a lot this semester is ‘marginal.’ Whether it is marginal benefit, marginal cost, marginal revenue, or marginal utility, this term is not going away. When we make decisions, we think incrementally. For instance, when looking to buy a new car, you typically set a price range. Let us say that you have found two cars: one costs $10,000 and the other costs $11,000. You will compare what  additional  features you get for the  additional  $1,000. At the same time, you are probably not going to decide between a $5,000 used Toyota Camry and a brand-new $325,000 Bentley Mulsanne. Again, we make decisions in increments.

Some examples of marginal variables are:

Marginal Utility Wikipedia: Marginal utility :

In  economics , the utility is the satisfaction or benefit derived by consuming a product; thus the marginal utility  of a  good  or  service  is the change in the utility from an increase in the  consumption  of that good or service.

Marginal Cost Wikipedia: Marginal cost :

In economics,  marginal cost  is the change in the total cost that arises when the quantity produced is incremented by one unit, that is, it is the  cost  of producing one more unit of a good. [1] Intuitively, the marginal cost at each level of production includes the cost of any additional inputs required to produce the next unit. At each level of production and time period being considered, marginal costs include all costs that vary with the level of production, whereas other costs that do not vary with production are considered  fixed . For example, the marginal cost of producing an automobile will generally include the costs of labor and parts needed for the additional automobile and not the  fixed costs  of the factory that have already been incurred. In practice, marginal analysis is segregated into short and long-run cases, so that, over the long run, all costs (including fixed costs) become marginal.

Marginal Revenue Wikipedia: Marginal revenue :

In  microeconomics ,  marginal revenue  is the additional revenue that will be generated by increasing product sales by one unit. [1] [2] [3] [4] [5]  It can also be described as the  unit revenue  the last item sold has generated for the firm. [3] [5]

Pillar 6: Incentives matter

From Wikipedia: Incentive

An  incentive  is a contingent motivator. [1]  Traditional incentives are extrinsic motivators which reward actions to yield a desired outcome. The effectiveness of traditional incentives has changed as the needs of Western society have evolved. While the traditional incentive model is effective when there is a defined procedure and goal for a task, Western society started to require a higher volume of critical thinkers, so the traditional model became less effective. [1]  Institutions are now following a trend in implementing strategies that rely on  intrinsic motivations  rather than the extrinsic motivations that the traditional incentives foster.

Some examples of traditional incentives are  letter grades in the formal school system and  monetary bonuses  for increased productivity in the workplace. Some examples of the promotion of  intrinsic motivation  are Google allowing their engineers to spend 20% of their work time exploring their own interests, [1]  and the  competency-based education system .

Incentive structures, however, are notoriously more tricky than they might appear to people who set them up. Incentives do not only increase motivation, but they also contribute to the self-selection of individuals, as different people are attracted by different incentive schemes depending on their attitudes towards risk, uncertainty, competitiveness. [9]  Human beings are both finite and creative; that means that the people offering incentives are often unable to predict all of the ways that people will respond to them. While the promotion of intrinsic motivation is sometimes is employed to avoid this uncertainty, using short term incentives can yield similar results.

For example, decision-makers in for-profit firms often must decide what incentives they will offer to employees and managers to encourage them to act in ways beneficial to the firm. But many  corporate  policies – especially of the “extreme incentive” variant popular during the 1990s – that aimed to encourage productivity have, in some cases, led to failures as a result of unintended consequences. For example,  stock options  were intended to boost  CEO  productivity by offering a remunerative incentive (profits from rising stock prices) for CEOs to improve company performance. But CEOs could get profits from rising stock prices either (1) by making sound decisions and reaping the rewards of a long-term price increase, or (2) by fudging or fabricating accounting information to give the illusion of economic success, and reaping profits from the short-term price increase by selling before the truth came out and prices tanked. The  perverse incentives  created by the availability of option (2) have been blamed for many of the falsified earnings reports and public statements in the late 1990s and early 2000s.

Also there is the trade-off of short term gains at the expense of long term gains or even long term company survival. It is easy to plunder the assets of a previously successful company and show spectacular short term gains only to have the enterprise collapse after those responsible have gotten their incentives and left the organization or industry. Although long term incentives could be part of the incentive system, they have been abandoned in the past 20 years. An example of an organization that used long term incentive programs was  Hughes Aircraft  and was highly successful until the government forced its divestiture from the  Howard Hughes Medical Institute . Recently there has been movement on adopting the  benefit corporation or B-Corporation as a way to change the trend away from short term financial incentives to long term financial and non-financial incentives. [10]

Not all for-profit companies used short term financial incentives at levels below the president or very top executive levels. The trend to move financial incentives down the organization hierarchy started in the 1980s as a way to boost what was considered low productivity. Prior to that time the incentives were associated more with customer satisfaction and producing high-quality products. Moving financial incentives down the corporate chain had the unintended consequences of subverting internal processes to save short term costs, forcing obsolescence at the lower levels as investment was deferred or abandoned, and lowering quality. Some of these issues are explored in the British documentary The Trap . This idea of financial incentives and pushing them to the lowest level common denominator has led to a new company structure or  organizational ecology  where essentially everything is a standalone profit center with the only incentive being short term financial incentives.

1.3 How Our Decisions Affect Others

Society can produce only so much.

From Wikipedia: Rationing

Pillar 7: Rationing is necessary

Because society can only produce so much with our scarce resources, we must ration.

Rationing  is the controlled distribution of scarce resources, goods, or services, or an artificial restriction of demand. Rationing controls the size of the  ration , which is one’s allowed portion of the resources being distributed on a particular day or at a particular time. There are many forms of rationing, and in western civilization, people experience some of them in daily life without realizing it. [1]

Rationing is often done to keep the price below the equilibrium ( market-clearing ) price determined by the process of  supply and demand  in an  unfettered market . Thus, rationing can be complementary to  price controls . An example of rationing in the face of rising prices took place in the various countries where there was rationing of gasoline during the  1973 energy crisis .

A reason for setting the price lower than would clear the market may be that there is a shortage, which would drive the market price very high. High prices, especially in the case of necessities, are undesirable with regard to those who cannot afford them. Traditionalist economists argue, however, that high prices act to reduce waste of the scarce resource while also providing an incentive to produce more.

Rationing using  ration stamps  is only one kind of non-price rationing. For example,  scarce  products can be rationed using queues. This is seen, for example, at  amusement parks , where one pays a price to get in and then need not pay any price to go on the rides. Similarly, in the absence of  road pricing , access to roads is rationed in a  first-come, first-served   queueing  process, leading to  congestion .

Authorities which introduce rationing often have to deal with the rationed goods being sold illegally on the  black market .

Rationing has been instituted during wartime for civilians. For example, each person may be given “ration coupons” allowing him or her to purchase a certain amount of a product each month. Rationing often includes  food and other necessities for which there is a shortage, including materials needed for the war effort such as rubber tires,  leather   shoes ,  clothing , and  fuel .

Rationing of food and water may also become necessary during an emergency, such as a  natural disaster  or  terror attack . In the U.S., the  Federal Emergency Management Agency  (FEMA) has established guidelines for civilians on rationing food and water supplies when replacements are not available. According to FEMA standards, every person should have a minimum of 1 US quart (0.95 L) per day of water, and more for children, nursing mothers and the ill. [2]

Trade and Markets

From Wikipedia: Trade

Pillar 8: Trade Can Improve Everyone’s Circumstances

Trade  involves the transfer of  goods or services  from one person or entity to another, often in exchange for  money . A  system  or network that allows trade is called a  market .

Trade is meaningful because it is a mutual agreement. We do not voluntarily enter into a trade if we believe it will make us worse off. You will not always be made better off, as we take risks anytime we enter into a trade, but we believe that, on average, we will make ourselves better off.

Trade exists due to specialization and the  division of labor , a predominant form of  economic activity  in which individuals and groups concentrate on a small aspect of production, but use their output in trades for other products and needs. [2] Trade exists between regions because different regions may have a  comparative advantage  (perceived or real) in the production of some trade-able  commodity —including the production of natural resources scarce or limited elsewhere, or because different regions’ sizes may encourage mass production . [3]  In such circumstances, trade at  market prices  between locations can benefit both locations.

We will discuss trade-in more depth in chapter 2.

Pillar 9: There are many different ways to organize markets…some better than others

Planned economies.

From Wikipedia: Planned Economy

A  planned economy  is a type of  economic system  where  investment  and the allocation of  capital goods  take place according to economy-wide economic and production  plans .

Planned economies are usually associated with  Soviet-type central planning , which involves centralized state planning and administrative decision-making. [5]  In command economies, important allocation-decisions are made by government authorities and are imposed by law. [6]  Planned economies contrast with  unplanned economies , specifically  market economies , where autonomous firms operating in markets make decisions about production, distribution, pricing, and investment. Market economies that use indicative planning  are sometimes referred to [ by whom? ]  as “planned market economies”.

The traditional conception of  socialism  involves the integration of  socially-owned  economic enterprises via some form of planning with direct calculation substituting  factor markets . As such, the concept of a planned economy is often associated [ by whom? ]  with socialism and with  socialist planning . [7] [8] [9]  More recent approaches to socialist planning and allocation have come from some economists and computer scientists proposing planning mechanisms based on advances in computer science and information technology. [10]

Market economies

From Wikipedia: Market economy

A  market economy  is an  economic system  in which the decisions regarding  investment ,  production , and  distribution  are guided by the  price signals  created by the forces of  supply and demand . The major characteristic of a market economy is the existence of factor markets that play a dominant role in the allocation of  capital  and the  factors of production . [1] [2]

Market economies range from minimally regulated “ free market ” and laissez-faire systems—where state activity is restricted to providing  public goods  and services and safeguarding private ownership [3] —to  interventionist  forms where the government plays an active role in correcting  market failures  and promoting  social welfare . State-directed or  dirigist  economies are those where the state plays a directive role in guiding the overall development of the market through  industrial policies  or  indicative planning —which guides but does  not  substitute the market for  economic planning —a form sometimes referred to as a  mixed economy . [4] [5] [6]

Market economies are contrasted with  planned economies  where investment and production decisions are embodied in an integrated economy-wide economic plan by a single organizational body that owns and operates the economy’s  means of production .

Pillar 10: Market Economies are Driven by the Invisible Hand

From Wikipedia: Invisible hand and Wikipedia: Spontaneous order

The  invisible hand  is a term used by  Adam Smith to describe the unintended social benefits of an individual’s self-interested actions. The phrase was employed by Smith with respect to income distribution (1759) and production (1776). The exact phrase is used just  three times in Smith’s writings  but has come to capture his notion that individuals’ efforts to pursue their own interest may frequently benefit society more than if their actions were directly intending to benefit society.

The idea of trade and market exchange automatically channeling self-interest toward socially desirable ends is a central justification for the  laissez-faire  economic philosophy, which lies behind  neoclassical economics . [3]  In this sense, the central disagreement between economic ideologies can be viewed as a disagreement about how powerful the “invisible hand” is. In alternative models, forces which were nascent during Smith’s lifetime, such as large-scale industry,  finance , and advertising, reduce its effectiveness. [4]

Spontaneous order , also named  self-organization  in the  hard sciences , is the spontaneous  emergence  of order out of seeming chaos. It is a process in  social networks  including  economics , though the term “self-organization” is more often used for  physical changes  and  biological processes , while “spontaneous order” is typically used to describe the emergence of various kinds of social orders from a combination of self-interested individuals who are not intentionally trying to create order through  planning . The  evolution of life on Earth ,  language ,  crystal structure , the  Internet  and a  free market   economy  have all been proposed as examples of systems which evolved through spontaneous order. [1]

Spontaneous orders are to be distinguished from organizations. Spontaneous orders are distinguished by being  scale-free networks , while organizations are hierarchical networks. Further, organizations can be and often are a part of spontaneous social orders, but the reverse is not true. Further, while organizations are created and controlled by humans, spontaneous orders are created, controlled,  and controllable by no one. In economics and the social sciences, spontaneous order is defined as “the result of human actions, not of human design”. [2]

Spontaneous order is an equilibrium behavior between self-interested individuals, which is most likely to evolve and survive, obeying the natural selection process “survival of the likeliest”. [3]

Many economic classical liberals, such as Hayek, have argued that  market economies  are a spontaneous order, “a more efficient allocation of societal resources than any design could achieve.” [7]  They claim this spontaneous order (referred to as the  extended order  in Hayek’s  The Fatal Conceit ) is superior to any order a human mind can design due to the specifics of the information required. [8]  Centralized statistical data cannot convey this information because the statistics are created by abstracting away from the particulars of the situation. [9]

In a market economy, price is the aggregation of information acquired when the people who own resources are free to use their  individual knowledge . Price then allows everyone dealing in a commodity or its substitutes to make decisions based on more information than he or she could personally acquire, information not statistically conveyable to a centralized authority. Interference from a central authority which affects price will have consequences they could not foresee because they do not know all of the particulars involved.

According to Barry, this is illustrated in the concept of the invisible hand  proposed by  Adam Smith  in  The Wealth of Nations . [1]  Thus in this view by acting on information with greater detail and accuracy than possible for any centralized authority, a more efficient economy is created to the benefit of a whole society.

Lawrence Reed , president of the  Foundation for Economic Education , describes spontaneous order as follows:

Spontaneous order is what happens when you leave people alone—when entrepreneurs… see the desires of people… and then provide for them. They respond to market signals, to prices. Prices tell them what’s needed and how urgently and where. And it’s infinitely better and more productive than relying on a handful of elites in some distant bureaucracy. [10]

The Role of Government

Pillar 11: government can fix economic problems.

The government can, in the broadest of terms, improve market outcomes in the following three ways:

• The government can create and enforce rules to protect institutions.
• The government can promote efficiency in order to minimize market failures.
• The government can promote equity by creating policies to reduce gaps in economic well-being.

Property rights will be discussed in the next pillar, but let us look at efficiency and equity first.

From Wikipedia: Equity (economics)

Equity  or  economic equality  is the concept or idea of fairness in  economics , particularly in regard to  taxation  or welfare economics. More specifically, it may refer to  equal life chances  regardless of identity, to provide all citizens with a basic and equal minimum of income, goods, and services or to increase funds and commitment for redistribution. [1]

Inequality and inequities have significantly increased in recent decades, possibly driven by the worldwide economic processes of globalization, economic liberalization, and integration. [2]  This has led to states ‘lagging behind’ on headline goals such as the  Millennium Development Goals  (MDGs) and different levels of inequity between states have been argued to have played a role in the impact of the  global economic crisis of 2008–2009 . [2]

Equity is based on the idea of  moral equality . [2]  Equity looks at the distribution of capital, goods, and access to services throughout an economy and is often measured using tools such as the  Gini index . Equity may be distinguished from  economic efficiency in the overall evaluation of social welfare. Although ‘equity’ has broader uses, it may be posed as a counterpart to  economic inequality  in yielding a “good”  distribution  of wealth. It has been studied in  experimental economics  as  inequity aversion . Low levels of equity are associated with life chances based on inherited wealth, social exclusion and the resulting poor access to basic services and intergenerational poverty resulting in a negative effect on growth, financial instability, crime, and increasing political instability. [2]

The state often plays a central role in the necessary redistribution required for equity between all citizens, but applying this in practice is highly complex and involves contentious choices.

From Wikipedia: Productive efficiency

Productive efficiency  is a situation in which the  economy could not produce any more of one good without sacrificing the production of another good. In other words, productive efficiency occurs when a good or service is produced at the lowest possible cost. The concept is illustrated on a production possibility frontier  (PPF), where all points on the curve are points of productive efficiency. [1]  An equilibrium may be productively efficient without being  allocatively efficient — i.e. it may result in a distribution of goods where  social welfare  is not maximized. It is one type of  economic efficiency .

Productive efficiency requires that all firms operate using best-practice technological and managerial processes. By improving these processes, an  economy  or business can extend its  production possibility frontier  outward, so that efficient production yields more output than previously.

Productive inefficiency, with the economy operating below its production possibilities frontier, can occur because the productive inputs  physical capital  and labor are underutilized—that is, some capital or labor is left sitting idle—or because these inputs are allocated in inappropriate combinations to the different industries that use them.

Due to the nature and culture of monopolistic companies, they may not be productively efficient because of  X-inefficiency , whereby companies operating in a monopoly have less of an incentive to maximize output due to lack of competition. However, due to economies of scale, it can be possible for the profit-maximizing level of output of monopolistic companies to occur with a lower price to the consumer than perfectly competitive companies.

The Trade-off Between Efficiency and Equity

One issue that the modern economy faces is that of uneven economic growth. As the world continues to grow, some people, countries, and groups grow slower than others. When that growth is compounding over many years, the difference becomes staggering. Therefore, the following trade-off persist. If we promote policies focused on equity, we need to remove resources from the most successful and redistribute them to the least successful. But this is removing resources from those that are able to do the most with them. On the other hand, policies that are only concerned with efficiency allow for increasing inequality which also poses its own threat to the economy.

As an analogy, we can think of economics as the size of a pie and equity as the distribution of the pie.

Pillar 12: Property rights have the ability to increase economic activity

From Wikipedia: Property rights (economics)

Property rights  are theoretical socially-enforced constructs in  economics  for determining how a resource or economic good is used and  owned . [1]  Resources can be owned by (and hence be the  property  of) individuals, associations or governments. [2]  Property rights can be viewed as an attribute of an economic good. This attribute has four broad components [3]  and is often referred to as a  bundle of rights : [4]

• the right to use the good
• the right to earn income from the good
• the right to transfer the good to others
• the right to enforce property rights

In economics, the property is usually considered to be ownership ( rights to the proceeds generated by the property ) and control over a resource or good. Many economists effectively argue that property rights need to be fixed and need to portray the relationships among other parties in order to be more effective. [5]

1.4 Pitfalls to Avoid in Economic Thinking

Good intentions do not guarantee desirable outcomes.

From Wikipedia: Unintended consequences

In the  social sciences ,  unintended consequences  (sometimes  unanticipated consequences  or  unforeseen consequences ) are outcomes that are not the ones foreseen and intended by a purposeful action. The term was popularised in the twentieth century by American  sociologist   Robert K. Merton . [1]

Unintended consequences can be grouped into three types:

• Unexpected benefit : A positive unexpected benefit (also referred to as  luck ,  serendipity  or a  windfall ).
• Unexpected drawback : An unexpected detriment occurring in addition to the desired effect of the policy (e.g., while irrigation schemes provide people with water for agriculture, they can increase  waterborne diseases  that have devastating health effects, such as  schistosomiasis ).
• Perverse result : A perverse effect contrary to what was originally intended (when an intended solution makes a problem worse). This is sometimes referred to as ‘backfire’.

Examples of Unexpected Drawbacks

The implementation of a profanity filter by  AOL  in 1996 had the unintended consequence of blocking residents of  Scunthorpe ,  North Lincolnshire ,  England  from creating accounts due to a  false positive . [24]  The accidental  censorship  of innocent language, known as the  Scunthorpe problem , has been repeated and widely documented. [25] [26] [27]

The objective of microfinance initiatives is to foster micro-entrepreneurs but an unintended consequence can be informal intermediation: That is, some entrepreneurial borrowers become informal intermediaries between microfinance initiatives and poorer micro-entrepreneurs. Those who more easily qualify for microfinance split loans into smaller credit to poorer borrowers. Informal intermediation ranges from casual intermediaries at the good or benign end of the spectrum to ‘loan sharks’ at the professional and sometimes criminal end of the spectrum. [28] [ clarification needed ]

In 1990, the Australian state of  Victoria  made  safety helmets  mandatory for all bicycle riders. While there was a reduction in the number of head injuries, there was also an unintended reduction in the number of juvenile cyclists—fewer cyclists obviously leads to fewer injuries, assuming  all else being equal . The risk of death and serious injury per cyclist seems to have increased, possibly due to  risk compensation . [29]  Research by Vulcan,  et al.  found that the reduction in juvenile cyclists was because the youths considered wearing a bicycle helmet unfashionable. [30]  A health-benefit model developed at  Macquarie University  in Sydney suggests that, while helmet use reduces “the risk of head or brain injury by approximately two-thirds or more”, the decrease in exercise caused by reduced cycling as a result of helmet laws is counterproductive in terms of net health. [31]

Prohibition in the 1920s United States , originally enacted to suppress the alcohol trade, drove many small-time alcohol suppliers out of business and consolidated the hold of large-scale  organized crime over the illegal alcohol industry. Since alcohol was still popular, criminal organizations producing alcohol were well-funded and hence also increased their other activities. Similarly, the  War on Drugs , intended to suppress the  illegal drug trade , instead of increased the power and profitability of drug cartels who became the primary source of the products. [32] [33] [34] [35]

In  CIA   jargon , “ blowback ” describes the unintended, undesirable consequences of covert operations, such as the funding of the  Afghan Mujahideen  and the destabilization of Afghanistan contributing to the rise of the  Taliban  and  Al-Qaeda . [36] [37] [38]

The introduction of  exotic  animals and plants for food, for decorative purposes, or to control unwanted species often leads to more harm than good done by the introduced species.

• The introduction of  rabbits in Australia  and  New Zealand for food was followed by explosive growth in the rabbit population; rabbits have become a major  feral pest  in these countries. [39] [40]
• Cane toads , introduced into Australia to control canefield pests, were unsuccessful and have become a major pest in their own right.
• Kudzu , introduced to the US as an ornamental plant in 1876 [41]  and later used to prevent erosion in earthworks, has become a major problem in the Southeastern United States. Kudzu has displaced native plants and has effectively taken over significant portions of land. [42] [43]

The protection of the steel industry in the United States reduced the

production of steel in the United States, increased costs to users, and increased unemployment in associated industries. [44] [45]

Examples of Perverse Results

In 2003,  Barbra Streisand  unsuccessfully sued Kenneth Adelman and Pictopia.com for posting a photograph of her home online. [46]  Before the lawsuit had been filed, only 6 people had downloaded the file, two of them Streisand’s attorneys. [47]  The lawsuit drew attention to the image, resulting in 420,000 people visiting the site. [48] The  Streisand effect  was named after this incident, describing when an attempt to censor or remove a certain piece of information instead draws attention to the material being suppressed, resulting in the material instead becoming widely known, reported on, and distributed. [49]

Passenger-side  airbags  in motorcars were intended as a safety feature, but led to an increase in child fatalities in the mid-1990s as small children were being hit by deploying airbags during collisions. The supposed solution to this problem, moving the child seat to the back of the vehicle, led to an increase in the number of children forgotten in unattended vehicles, some of whom died under extreme temperature conditions. [50]

Risk compensation, or the  Peltzman effect , occurs after implementation of safety measures intended to reduce injury or death (e.g. bike helmets, seatbelts, etc.). People may feel safer than they really are and take additional risks which they would not have taken without the safety measures in place. This may result in no change, or even an increase, in morbidity or mortality, rather than a decrease as intended.

The British government, concerned about the number of venomous cobra snakes in Delhi,  offered a bounty for every dead cobra . This was a successful strategy as large numbers of snakes were killed for the reward. Eventually, enterprising people began breeding cobras for the income. When the government became aware of this, they scrapped the reward program, causing the cobra breeders to set the now-worthless snakes free. As a result, the wild cobra population further increased. The apparent solution for the problem made the situation even worse, becoming known as the  Cobra effect .

Theobald Mathew ‘s temperance campaign in 19th-century  Ireland  resulted in thousands of people vowing never to drink  alcohol  again. This led to the consumption of  diethyl ether , a much more dangerous intoxicant — due to its high flammability — by those seeking to become intoxicated without breaking the letter of their pledge. [51] [52]

It was thought that adding south-facing  conservatories  to British houses would reduce energy consumption by providing extra insulation and warmth from the sun. However, people tended to use the conservatories as living areas, installing heating and ultimately increasing overall energy consumption. [53]

A reward for  lost nets  found along the Normandy coast was offered by the French government between 1980 and 1981. This resulted in people vandalizing nets to collect the reward. [54]

Beginning in the 1940s and continuing into the 1960s, the Canadian federal government gave the Catholic Church in Quebec $2.25 per day per psychiatric patient for their cost of care, but only $0.75 a day per orphan. The perverse result is that the orphan children were diagnosed as mentally ill so the church could receive a larger amount of money. This psychiatric misdiagnosis affected up to 20,000 people, and the children are known as the Duplessis Orphans . [55] [56] [57]

There have been attempts to curb the consumption of sugary beverages by imposing a tax on them. However, a study found that reduced consumption was only temporary. Also, there was an increase in the consumption of beer among households. [58]

The  New Jersey Childproof Handgun Law , which was intended to protect children from accidental discharge of firearms by forcing all future firearms sold in  New Jersey  to contain  “smart” safety features , has delayed, if not stopped entirely, the introduction of such firearms to New Jersey markets. The wording of the law caused significant public backlash, [59]  fuelled by  gun rights lobbyists , [60] [61]  and several shop owners offering such guns received death threats and stopped stocking them [62] [63]  In 2014, 12 years after the law was passed, it was suggested the law be repealed if gun rights lobbyists agree not to resist the introduction of “smart” firearms. [64]

Drug prohibition  can lead  drug traffickers  to  prefer  stronger, more dangerous substances, that can be more easily smuggled and distributed than other, less concentrated substances. [65]

Televised drug prevention advertisements may lead to increased drug use. [66]

Abstinence-only sex education has been shown to increase teenage pregnancy rates, rather than reduce them, when compared to either comprehensive sex education or no sex education at all. [67]

Increasing usage of  search engines , also including recent  image search features, has contributed to the ease of which media is consumed. Some  abnormalities  in usage may have shifted preferences for pornographic film actors, as the producers began using  common search queries or tags  to label the actors in new roles. [68]

The passage of the  Stop Enabling Sex Traffickers Act  has led to a reported increase in risky behaviors by sex workers as a result of quashing their ability to seek and screen clients online, forcing them back onto the streets or into the  dark web . The ads posted were previously an avenue for advocates to reach out to those wanting to escape the trade. [69]

Association is not Causation

From Wikipedia: Correlation does not imply causation

In  statistics , many  statistical tests  calculate correlations between  variables  and when two variables are found to be  correlated , it is tempting to assume that this shows that one variable  causes  the other. [1] [2]  That “correlation proves causation” is considered a  questionable cause   logical fallacy  when two events occurring together are taken to have established a cause-and-effect relationship. This fallacy is also known as  cum hoc ergo propter hoc , Latin for “with this, therefore because of this”, and “false cause”. A similar fallacy, that an event that followed another was  necessarily a consequence  of the first event, is the  post hoc ergo propter hoc  ( Latin  for “after this, therefore because of this.”) fallacy.

For example, in a widely studied case, numerous  epidemiological studies  showed that women taking combined  hormone replacement therapy  (HRT) also had a lower-than-average incidence of  coronary heart disease  (CHD), leading doctors to propose that HRT was protective against CHD. But  randomized controlled trials  showed that HRT caused a small but  statistically significant   increase  in risk of CHD. Re-analysis of the data from the epidemiological studies showed that women undertaking HRT were more likely to be from higher  socio-economic groups  ( ABC1 ), with better-than-average diet and exercise regimens. The use of HRT and decreased incidence of coronary heart disease were coincident effects of a common cause (i.e. the benefits associated with a higher socioeconomic status), rather than a direct cause and effect, as had been supposed. [3]

As with any logical fallacy, identifying that the reasoning behind an argument is flawed does not imply that the resulting conclusion is false. In the instance above, if the trials had found that hormone replacement therapy does in fact have a negative incidence on the likelihood of coronary heart disease the assumption of causality would have been correct, although the logic behind the assumption would still have been flawed. Indeed, a few go further, using correlation as a basis for testing a hypothesis to try to establish a true causal relationship; examples are the  Granger causality  test,  convergent cross-mapping , and Liang-Kleeman information flow [4] . [ clarification needed ]

Fallacy of Composition

From Wikipedia: Fallacy of composition

The  fallacy of composition  arises when one infers that something is true of the  whole  from the fact that it is true of some  part  of the whole (or even of  every   proper part ). For example: “This tire is made of rubber, therefore the vehicle to which it is a part is also made of rubber.” This is fallacious because vehicles are made with a variety of parts, many of which may not be made of rubber.

This  fallacy  is often confused with the fallacy of  hasty generalization , in which an unwarranted inference is made from a statement about a sample to a statement about the population from which it is drawn.

The fallacy of composition is the  converse  of the  fallacy of division ; it may be contrasted with the case of  emergence , where the whole possesses properties  not  present in the parts.

Slippery Slope

From Wikipedia: Slippery slope

A  slippery slope argument  ( SSA ), in  logic ,  critical thinking , political  rhetoric , and  caselaw , is a  consequentialist  logical device [1]  in which a party asserts that a relatively small first step leads to a  chain of related events  culminating in some significant (usually negative) effect. [2]  The core of the slippery slope argument is that a specific decision under debate is likely to result in  unintended consequences . The strength of such an argument depends on the  warrant , i.e. whether or not one can demonstrate a process that leads to the significant effect. This type of argument is sometimes used as a form of  fear mongering , in which the probable consequences of a given action are exaggerated in an attempt to scare the audience. The fallacious sense of “slippery slope” is often used synonymously with  continuum fallacy , in that it ignores the possibility of middle ground and assumes a discrete transition from category A to category B. In a non-fallacious sense, including use as a legal principle, a middle-ground possibility is acknowledged, and reasoning is provided for the likelihood of the predicted outcome.

There is no such thing as a free lunch

From Wikipedia: There ain’t no such thing as a free lunch

“ There ain’t no such thing as a free lunch ” (alternatively, “ There is no such thing as a free lunch ” or other variants) is a popular adage communicating the idea that it is impossible to get something for nothing. The  acronyms   TANSTAAFL ,  TINSTAAFL , and  TNSTAAFL  are also used. The phrase was in use by the 1930s, but its first appearance is unknown. [1]  The “free lunch” in the saying refers to the nineteenth-century practice in American bars of offering a “ free lunch ” in order to entice drinking customers.

The phrase and the acronym are central to  Robert Heinlein’s  1966  science-fiction  novel  The Moon Is a Harsh Mistress , which helped popularize it. [2] [3]  The  free-market economist  Milton Friedman  also increased its exposure and use [1]  by paraphrasing it as the title of a 1975 book, [4]  and it is used in  economics  literature to describe  opportunity cost . [5]  Campbell McConnell writes that the idea is “at the core of economics”. [6]

In economics, TANSTAAFL demonstrates  opportunity cost .  Greg Mankiw  described the concept as follows: “To get one thing that we like, we usually have to give up another thing that we like. Making decisions requires trading off one goal against another.” [17]  The idea that there is no free lunch at the societal level applies only when all resources are being used completely and appropriately – i.e., when  economic efficiency  prevails. If not, a ‘free lunch’ can be had through a more efficient utilization of resources. Or, as  Fred Brooks  put it, “You can only get something for nothing if you have previously gotten nothing for something.” If one individual or group gets something at no cost, somebody else ends up paying for it. If there appears to be no direct cost to any single individual, there is a  social cost . Similarly, someone can benefit for “free” from an  externality  or from a  public good , but someone has to pay the cost of producing these benefits. (See  Free rider problem  and  Tragedy of the commons ).

1.5 Introductory Wrap-up

Economics as a social science.

From Wikipedia: Scientific method

The Scientific Method

The  scientific method  is an  empirical  method of knowledge acquisition which has characterized the development of  science since at least the 17th century. It involves careful observation, which includes rigorous skepticism  about what is observed, given that  cognitive assumptions  about how the world works influence how one interprets a  percept . It involves formulating  hypotheses , via  induction , based on such observations;  experimental  and measurement-based testing of  deductions  drawn from the hypotheses; and refinement (or elimination) of the hypotheses based on the experimental findings. These are  principles  of the scientific method, as opposed to a definitive series of steps applicable to all scientific enterprises. [1] [2] [3]

How Economists (Try to) Use the Scientific Method

From: Openstax: Principles of Microeconomics

John Maynard Keynes (1883–1946), one of the greatest economists of the twentieth century, pointed out that economics is not just a subject area but also a way of thinking. Keynes famously wrote in the introduction to a fellow economist’s book: “[Economics] is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor to draw correct conclusions.” In other words, economics teaches you how to think, not what to think.

Economists see the world through a different lens than anthropologists, biologists, classicists, or practitioners of any other discipline. They analyze issues and problems using economic theories that are based on particular assumptions about human behavior. These assumptions tend to be different than the assumptions an anthropologist or psychologist might use. A theory is a simplified representation of how two or more variables interact with each other. The purpose of a theory is to take a complex, real-world issue and simplify it down to its essentials. If done well, this enables the analyst to understand the issue and any problems around it. A good theory is simple enough to understand, while complex enough to capture the key features of the object or situation you are studying.

Sometimes economists use the term model instead of theory. Strictly speaking, a theory is a more abstract representation, while a model is a more applied or empirical representation. We use models to test theories, but for this course we will use the terms interchangeably.

For example, an architect who is planning a major office building will often build a physical model that sits on a tabletop to show how the entire city block will look after the new building is constructed. Companies often build models of their new products, which are more rough and unfinished than the final product, but can still demonstrate how the new product will work.

Economists carry a set of theories in their heads like a carpenter carries around a toolkit. When they see an economic issue or problem, they go through the theories they know to see if they can find one that fits. Then they use the theory to derive insights about the issue or problem. Economists express theories as diagrams, graphs, or even as mathematical equations. (Do not worry. In this course, we will mostly use graphs.) Economists do not figure out the answer to the problem first and then draw the graph to illustrate. Rather, they use the graph of the theory to help them figure out the answer. Although at the introductory level, you can sometimes figure out the right answer without applying a model, if you keep studying economics, before too long you will run into issues and problems that you will need to graph to solve. We explain both micro and macroeconomics in terms of theories and models. The most well-known theories are probably those of supply and demand, but you will learn a number of others.

Realism versus Understanding

As with many concepts, what you are taught in this class is incomplete. That does not mean it is incorrect; rather, it simply means that we will be excluding pieces of the story. This is done because economists face a trade-off between realism and understanding. What this means is that the more realistic a model is, the more complex it is. On the other hand, if we try to make a model easier to understand, we accomplish this by simplifying certain components therefore making it less realistic (but again, not incorrect.)

For example, say we want to investigate the role of a price increase in the quantity of gasoline purchased. For our purposes, we are interested in the fact that the law of demand would say that an increase in the price of gas will reduce the consumption of gasoline. But in reality, there are other factors at play. For instance, how will an increase in the price of gas impact the availability of alternative fuels (and how will their availability impact the price and consumption of gasoline)? In reality, a change in the price of one good will have impacts on many, many other goods and those impacts have the ability to influence the original good. But, we need not worry about it. Instead, our goal is to study the main relationships, so we simply ignore the other components. If you progress further through the economics courses, you will start to move from understanding to realism.

Ceteris Paribus

From Wikipedia: Ceteris paribus

Ceteris paribus  or  caeteris paribus  is a  Latin  phrase meaning “other things equal”. English translations of the phrase include “ all other things being equal ” or “ other things held constant ” or “ all else unchanged “. A prediction or a statement about a  causal ,  empirical , or  logical  relation between two states of affairs is  ceteris paribus if it is acknowledged that the prediction, although usually accurate in expected conditions, can fail or the relation can be abolished by intervening factors. [1]

A  ceteris paribus  assumption  is often key to scientific inquiry, as scientists seek to screen out factors that perturb a relation of interest. Thus,  epidemiologists  for example may seek to control  independent variables  as factors that may influence  dependent variables —the outcomes or effects of interest. Likewise, in  scientific modeling , simplifying assumptions permit illustration or elucidation of concepts thought relevant within the sphere of inquiry.

There is ongoing debate in the philosophy of science concerning  ceteris paribus  statements. On the  logical empiricist  view,  fundamental physics  tends to state universal laws, whereas other sciences, such as biology, psychology, and economics, tend to state laws that hold true in normal conditions but have exceptions,  ceteris paribus laws  (cp laws). [2]  The focus on universal laws is a criterion distinguishing fundamental physics as  fundamental science , whereas cp laws are predominant in most other sciences as  special sciences , whose laws hold in special cases. [2]  This distinction assumes a  logical empiricist view of science. It does not readily apply in a mechanistic understanding of scientific discovery. There is reasonable disagreement as to whether mechanisms or laws are the appropriate models, though mechanisms are the favored method. [3]

One of the disciplines in which  ceteris paribus  clauses are most widely used is  economics , in which they are employed to simplify the formulation and description of economic outcomes. When using  ceteris paribus  in economics, one assumes that all other variables except those under immediate consideration are held constant. For example, it can be predicted that if the price of  beef   increases — ceteris paribus —the quantity of beef demanded by buyers will  decrease . In this example, the clause is used to operationally describe everything surrounding the relationship between both the  price  and the  quantity demanded  of an  ordinary good .

This operational description intentionally ignores both known and unknown factors that may also influence the relationship between price and quantity demanded, and thus to assume  ceteris paribus  is to assume away any interference with the given example. Such factors that would be intentionally ignored include: a change in the price of substitute goods, (e.g., the price of pork or lamb); a change in the level of  risk aversion  among buyers (e.g., due to an increase in the fear of  mad cow disease ); and a change in the level of overall demand for a good regardless of its current price (e.g., a societal shift toward  vegetarianism ).

The clause is often loosely translated as “holding all else constant.” It does not imply that no other things will in fact change; rather, it isolates the effect of one particular change.

Making Economic Statements

Positive economic statements.

From Wikipedia: Positive economics

Positive economics  (as opposed to  normative economics ) is the branch of  economics  that concerns the description and explanation of economic phenomena. [1]  It focuses on facts and cause-and-effect behavioral relationships and includes the development and testing of  economics theories . [2]  An earlier term was value-free ( German :  wertfrei ) economics.

Positive economics as  science , concerns analysis of economic  behavior . [3]  A standard theoretical statement of positive economics as  operationally meaningful theorems is in  Paul Samuelson ‘s  Foundations of Economic Analysis  (1947). Positive economics as such avoids economic  value judgments. For example, a positive economic  theory  might describe how  money supply  growth affects  inflation , but it does not provide any instruction on what policy   ought to  be followed.

Still, positive economics is commonly deemed necessary for the ranking of economic policies or outcomes as to acceptability, [1]  which is  normative economics . Positive economics is sometimes defined as the economics of “what is”, whereas normative economics discusses “what ought to be”. The distinction was exposited by  John Neville Keynes  (1891) [4]  and elaborated by  Milton Friedman  in an influential 1953  essay . [5]

Positive economics concerns  what is . To illustrate, an example of a positive economic statement is as follows: “The unemployment rate in France is higher than that in the United States.”

Normative Economic Statements

From Wikipedia: Normative economics

Normative economics  (as opposed to  positive economics ) is a part of  economics  that expresses  value  or  normative  judgments about economic  fairness  or what the outcome of the economy or goals of  public policy   ought to be . [1]

Economists commonly prefer to distinguish normative economics (“what ought to be” in economic matters) from  positive economics  (“what is”). Many normative (value) judgments, however, are held conditionally, to be given up if facts or knowledge of facts changes, so that a change of values may be purely scientific. [2]  On the other hand, welfare economist  Amartya Sen  distinguishes  basic (normative) judgments , which do not depend on such knowledge, from  nonbasic  judgments, which do. He finds it interesting to note that “no judgments are demonstrably basic” while some value judgments may be shown to be nonbasic. This leaves open the possibility of fruitful scientific discussion of value judgments. [3]

Positive and normative economics are often synthesized in the style of  practical idealism . In this discipline, sometimes called the “art of economics,” positive economics is utilized as a practical tool for achieving normative objectives.

An example of a normative economic statement is as follows:

This is a normative statement because it reflects value judgments. This specific statement makes the judgment that farmers deserve a higher living standard and that family farms ought to be saved. [1]

Subfields of normative economics include social choice theory, cooperative game theory, and mechanism design.

Some earlier technical problems posed in  welfare economics  and the  theory of justice  have been sufficiently addressed as to leave room for consideration of proposals in applied fields such as  resource allocation ,  public policy , social indicators, and  inequality and poverty measurement . [4]

• The government should provide healthcare to all of its citizens.
• If the government provides healthcare, total healthcare expenditures will increase.
• Higher interest rates will increase home purchases.
• Penn State Behrend should ban tobacco on its entire campus.
• Pennsylvania should raise its minimum wage to $15 per hour.
• A car scrapping rebate will reduce the price of used cars.
• Normative. This is an opinion. There is nothing to test.
• Positive. If the government begins to provide healthcare we could compare expenditures before and after the change in healthcare provision to determine whether the statement is true or false.
• Positive. This statement is false, but it is still testable. When interest rates increase, it makes getting a loan more expensive. This is part of the cause of the housing market failure leading up to 2008. But none of that matters to this question. We can see that when interest rates go up, housing sales fall. So we can state that the above statement is false. Whenever we can state whether something is true or false, it is positive (regardless of the answer.)
• Normative. This is also an opinion. If the statement were “raising minimum wage to $15/hour would increase employment,” then the statement would be positive. But, in the given statement, there is nothing to test.
• Positive. This was actually done in 2008 in a program called Cash for Clunkers. This ended up increasing the price of used cars because many of them (the fuel inefficient ones) were taken off the road. A lower supply means a higher price. But, like #3, this does not matter. We can state whether the statement would be true or false, thereby making it a positive statement.

Microeconomics versus Macroeconomics

Microeconomics.

From Wikipedia: Microeconomics

Microeconomics  (from Greek prefix  mikro-  meaning “small” +  economics ) is a branch of  economics  that studies the behaviour of individuals and  firms  in making decisions regarding the allocation of  scarce resources  and the interactions among these individuals and firms. [1] [2] [3]

One goal of microeconomics is to analyze the  market mechanisms  that establish  relative prices  among goods and services and allocate limited resources among alternative uses. Microeconomics shows conditions under which free markets lead to desirable allocations. It also analyzes  market failure , where markets fail to produce  efficient  results.

Microeconomics stands in contrast to  macroeconomics , which involves “the sum total of economic activity, dealing with the issues of  growth ,  inflation , and  unemployment  and with national policies relating to these issues”. [2]  Microeconomics also deals with the effects of economic policies (such as changing  taxation  levels) on the aforementioned aspects of the economy. [4]  Particularly in the wake of the  Lucas critique , much of modern macroeconomic theory has been built upon  microfoundations —i.e. based upon basic assumptions about micro-level behavior.

Macroeconomics

From: Wikipedia: Macroeconomics

Macroeconomics  (from the Greek prefix  makro-  meaning “large” +  economics ) is a branch of  economics  dealing with the performance, structure, behavior, and decision-making of an  economy  as a whole. This includes regional, national, and global economies. [1] [2]

Macroeconomists  study aggregated indicators such as  GDP ,  unemployment rates ,  national income ,  price indices , and the interrelations among the different sectors of the economy to better understand how the whole economy functions. They also develop models that explain the relationship between such factors as  national income ,  output ,  consumption ,  unemployment ,  inflation ,  savings ,  investment ,  international trade , and  international finance .

While macroeconomics is a broad field of study, there are two areas of research that are emblematic of the discipline: the attempt to understand the causes and consequences of short-run fluctuations in national income (the  business cycle ), and the attempt to understand the determinants of long-run  economic growth  (increases in national income).  Macroeconomic models  and their forecasts are used by governments to assist in the development and evaluation of  economic policy .

Macroeconomics and  microeconomics , a pair of terms coined by  Ragnar Frisch , are the two most general fields in economics. [3]  In contrast to macroeconomics, microeconomics is the branch of economics that studies the behavior of individuals and firms in making decisions and the interactions among these individuals and firms in narrowly-defined markets.

Introduction to Microeconomics Copyright © 2019 by J. Zachary Klingensmith is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License , except where otherwise noted.

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ECON101: Principles of Microeconomics

Course introduction.

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When discussing the economy, we refer to the marketplace or economic system where the choices of all economic agents interact. This course explores how and why we make economic decisions and how our choices affect the economy. Each unit is a building block. By the end of this course, you will be able to grasp the major issues microeconomists face, including consumer and producer behavior, supply and demand, how different markets function, and the welfare outcomes of consumers and producers. We also examine how formal principles and concepts apply to real-world issues.

Course Syllabus

First, read the course syllabus. Then, enroll in the course by clicking "Enroll me". Click Unit 1 to read its introduction and learning outcomes. You will then see the learning materials and instructions on how to use them.

Unit 1: Introduction to Economics

This unit sets the stage for our journey into the principles of microeconomics. We begin by defining economics and its foundations, emphasizing the concepts of scarcity, choice, and opportunity cost and the need for economic models and theories. Next, we delve into the trade-offs economic agents face when confronting scarcity and applying marginal analysis in their decision-making processes. Once we have discussed the introductory economic toolbox, we finish this unit by introducing basic economic models.

Completing this unit should take you approximately 5 hours.

Unit 2: Supply and Demand

In this unit, we introduce the demand and supply model and the resulting market equilibrium for price and quantity. We will explore how markets are constantly affected by changes that affect prices and quantities. If the market is unaffected by failures or government intervention, we will see that prices and quantities tend to move toward the equilibrium benchmark.

"During the last decades, several challenges have significantly affected the egg industry, such as the increasing consumer demand for animal welfare, the need for more sustainable food production, and the growing human health and food security issues related to egg consumption." (Agnese Rondoni et al., Trends in Food Science & Technology, 2020)

When you finish this unit, you will be able to analyze how these changes affect the prices of eggs and the quantity of eggs available in the market.

Unit 3: Elasticity and its Applications

In this unit, we delve into the concept of elasticity and its practical applications for how firms make pricing decisions and how governments analyze and make policy decisions. Put simply, elasticity measures responsiveness. It helps us understand why Netflix increases their prices for their Standard and Premium tiers more frequently, compared to their entry-level Basic plan. Government analysts also rely on elasticity to determine the extent of tax increases.

We can apply elasticity to demand and supply analysis. Elasticity measures how quantity responds to changes in the price of the product, the price of related goods, income, advertising, and more. Once you grasp the concept and its basic calculations, applications of elasticity in economic analysis are nearly limitless.

Completing this unit should take you approximately 4 hours.

Unit 4: Markets and Maximizing Individual Behavior

You are now familiar with the workings of the market. You understand how changes in demand or supply affect prices and quantities for firms and consumers. In this unit, we revisit the demand and supply model to explore economic efficiency. Economic efficiency occurs if "the optimal amount of each good and service is produced and consumed."

We introduce the concepts of consumer and producer surplus to analyze how free markets increase overall welfare. Then, we apply these concepts to analyze the effects of price controls on prices, quantities, and market efficiency.

The market, on its own, does not always allocate resources efficiently. Economists talk about market failure when it falls short. We analyze how the government can alleviate these market failures.

This unit concludes with an introduction to the causes and ramifications of income inequality. While much debate exists on long-term inequality, economists can objectively measure the problem's scope and offer options to manage this economic phenomenon. Protracted poverty and inequality can cause long-term harm to an economy's development.

Unit 5: Introduction to Consumer Choice

As you know, consumers are driven by their unique preferences when they seek to maximize their satisfaction (utility) while considering their limited budgets. Despite the subjectivity of preferences, choices are also influenced by income and prices. This Unit introduces the economic theories behind consumer decision-making. We build upon the budget constraint concept from Unit 1 and demonstrate how economic theory helps predict consumption responses to price and income changes.

Completing this unit should take you approximately 3 hours.

Unit 6: The Producer

In this unit, we dive into the world of production. Our focus is on understanding the behavior of producers and the costs associated with their operations in the short and long run. In other words, we explore the relationship between the quantity of output a firm produces and the cost of producing that output. We also analyze the relationship between various cost functions and identify the production function's characteristics in different timeframes. This chapter lays the foundation for a deeper understanding of how businesses operate and make crucial production-related decisions.

Unit 7: Market Structure: Competitive and Non-Competitive Markets

In this unit, we study how firms operate and compete within different market environments defined by the degree of competition. We introduce the concept of perfect competition, an ideal model that serves as a benchmark economists use to analyze real-world market structures. The model of perfect (or pure) competition results in an efficient allocation of resources. However, unregulated markets (which are central to perfect competition) often fail to create desired outcomes in the real world. Economists refer to these situations as examples of imperfect competition.

Keeping the perfect competition model as the analytical benchmark, we transition to its polar opposite, the monopoly model. Following that, we venture into the realm of imperfect competition, encompassing two distinct models: monopolistic competition and oligopoly. Within the context of oligopoly, we introduce some concepts of game theory, such as the prisoner's dilemma model and the Nash Equilibrium.

Unit 8: The Role of the Government in a Market Economy

In this unit, we delve into how government intervention can address market failures, such as the existence of public goods, externalities, and income and wealth inequality. We analyze decision-making in the public sector, comparing public interest theory with public choice theory. Finally, we explore the Coase Theorem to determine whether private bargaining is preferable to government intervention when dealing with external effects.

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• Introduction to microeconomics
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This article provides a broad overview of microeconomics. It is intended to introduce key topics to those who have not studied microeconomics, and to offer a revision to those who have done so

What is microeconomics?

Microeconomics is the branch of economics that considers the behaviour of decision takers within the economy, such as individuals, households and firms. The word ‘firm’ is used generically to refer to all types of business. Microeconomics contrasts with the study of macroeconomics, which considers the economy as a whole.

Scarcity, choice and opportunity cost

The platform on which microeconomic thought is built lies at the very heart of economic thinking – namely, how decision takers choose between scarce resources that have alternative uses. Consumers demand goods and services and producers offer these for sale, but nobody can take everything they want from the economic system. Choices have to be made, and for every choice made something is forgone. An individual may choose to buy a car, but in doing so may have to give up a holiday which they might have used the money for, if they had not chosen to buy the car.  In this example, the holiday is the opportunity cost of the car. Just as individuals and households make opportunity cost decisions about what they consume, so too do firms take decisions about what to produce, and in doing so preclude themselves from producing alternative goods and services.

Producers also have to decide how much to produce and for whom. A simple answer to the first question might be: ‘As much as possible of course, using all the resources we can’. However, classical economists teach us that if we combine all of the factors of production – land, labour, capital and the entrepreneur – in different ways, we can get some surprising results. One of the most famous of these is confirmed by the law of diminishing returns. This law states that if we keep on adding variable factors of production (such as labour) to fixed factors (such as land), we will get proportionally less output from each additional unit of factor added until, eventually, overall output will start to decrease with each additional unit of factor added.

The price mechanism

Much of the study of microeconomics is devoted to analysis of how prices are determined in markets. A market is any system through which producers and consumers come together. In early subsistence economies, markets were usually physical locations where people would come together to trade. In more complex economic systems, markets do not depend on humans actually meeting one another, so many markets today arise when producers and consumers come together less directly, such as by post and on the internet.

Producers and consumers generate forces that we call supply and demand respectively, and it is their interaction within the market that creates the price mechanism. This mechanism was once famously described as the ‘invisible hand’ that guides the actions of producers and consumers.

Markets are essential to produce the goods and services required for everyday life. Even if an individual can produce all the food needed to survive, that person will still need clothes, shelter and other necessities. Therefore, from very early times, communities learned that they would benefit from exchange. The crudest form of exchange was barter, but the evolution of money as a medium of exchange and unit of account accelerated the development of the process.

But how would people know what they could charge, or what they should pay, for goods and services? Before any formal thought was given to this, traders soon discovered that if they fixed their prices too low they would soon run out of inventory, while if they set their prices too high they would not sell what they had produced. In physical markets there would often be perfect knowledge, as traders would be able to check the prices of those who had similar goods and services to trade, simply by walking around the stalls. Once markets became more remote, less perfect knowledge of prices was inevitable and the process became less certain. Alfred Marshall, whose Principles of Economics was published in 1890, drew heavily on the writings of Jevons and Mill. However, much of what you read today about supply and demand, elasticity, revenues and costs and marginal utility are based on Marshall’s thoughts. Marshall provided a base upon which formal analysis of supply and demand, and consequently the determination of prices in markets, could be built.

Demand is created by the needs of consumers, and the nature of demand owes much to the underpinning worth that consumers perceive the good or service to have. We all need necessities, such as basic foodstuffs, but other products may be highly sought after by some and regarded as worthless by others. The level of demand for a good or service is determined by several factors, including:

• the price of the good or service
• prices of other goods and services, especially substitutes and complements
• tastes and preferences
• expectations.

In orthodox economic analysis, these determinants are analysed by testing the quantity demanded against one of these variables, holding all others to be constant (or ceteris paribus).

The most common way of analysing demand is to consider the relationship between quantity demanded and price. Assuming that people behave rationally, and that other determinants of demand are constant, the quantity demanded has an inverse relationship with price. Therefore, if price increases, the quantity demanded falls, and vice versa. Figure 1 portrays the conventional demand curve.

Figure 1: Demand curve

For any change in price, there is an inverse change in quantity demanded. The price increase from OP1 to OP1 results in a reduction in quantity demanded from OQ1 to OQ2 .

A change in price will cause a movement along the curve. When the price increases, the quantity demanded will reduce. This happens with most types of goods, with some bizarre exceptions. Demand for what are known as ‘Giffen goods’ actually rises with an increase in the price for such goods. For example, when the price of rice increases in some regions of China, more rice will be purchased, as there is not enough income left over to some  consumers to purchase higher value food items. If we then relax the assumption that other variables (such as income and tax rates, etc) are constant, what happens then? An increase in income will often cause the demand for a good or service to increase, and this will shift the whole curve away from the origin. Likewise, a reduction in the price of a substitute good will move the demand curve towards the origin as the good in question will then be less attractive to the consumer.

While these generalisations are useful, it is important to remember that economic behaviour is based on human decisions, and so we can never predict fully how people will act. For example, some very basic foodstuffs will become less popular as incomes increase and when consumers find that they no longer have to subsist on basic diets.

Supply refers to the quantity of goods and services offered to the market by producers. Just as we can map the relationship between quantity demanded and price, we can also consider the relationship between quantity supplied and price. Generally, suppliers will be prepared to produce more goods and services the higher the price they can obtain. Therefore, the supply curve – when holding other influences constant – will slope upwards from left to right, as illustrated in Figure 2.

Figure 2: Supply curve

There is a direct relationship between price and quantity supplied. An increase in price from OP1 to OP2 results in an increase in quantity supplied from OQ1 to OQ2.

The determinants of supply are:

• prices of other goods and services
• relative revenues and costs of making the good or service
• the objectives of producers and their future expectations
• technology.

Generally, a firm will maximise profit when its marginal revenue (the revenue arising from selling one extra unit of production) equals its marginal cost (the cost of producing that one extra unit of production). However, a firm may continue to produce as long as the marginal revenue exceeds its average variable costs, as in doing so it will be making a contribution towards covering its fixed costs.

Following the same rationale as applied earlier, a movement along the supply curve will be brought about by a change in price, but a movement of the whole curve will be caused by a determinant other than price.

The concept of elasticity is concerned with the responsiveness of quantity demanded or quantity supplied to a change in price. If a small change in price brings about a massive change in quantity demanded, the price elasticity of demand is said to be highly elastic. Conversely, if a change in price has little or no effect on the quantity demanded, the demand is said to be highly inelastic. This concept is obviously very important to producers, who have to estimate the potential effects of their pricing strategies over time. It is also important to government finance departments, which have to model the implications of imposing sales taxes on goods and services in order to predict tax revenues.

Price elasticity of demand is measured by dividing the change in quantity demanded by the change in price and, conversely, price elasticity of supply is measured by dividing the change in quantity supplied by the change in price. Price elasticity of demand occurs when an increase in price leads to a reduction in total revenue (p x q) between those two points on the demand curve, and price inelasticity occurs when an increase in price leads to an increase in total revenue. Unitary elasticity occurs when the change in price causes no change in total revenue.

In addition to price elasticity, there are similar concepts of relevance to your study:

• Income elasticity is the responsiveness of quantity demanded or supplied to a change in income.
• Cross elasticity is the responsiveness of quantity demanded or supplied of good X to a change in price of good Y.

Equilibrium

Assuming all determinants of supply and demand are to be constant except price, a firm will produce where the supply curve intersects the demand curve. By definition, this is the point at which the quantity supplied equals the quantity demanded (Figure 3).

Price is determined at the intersection of the supply and demand curves.

If the price is set above the equilibrium price, this will result in the quantity supplied exceeding the quantity demanded. Therefore, in order to clear its inventory, the company will need to reduce its price.

Conversely, if the price is set below the equilibrium price, this will result in an excess demand situation, and the only way to eliminate this is to increase the price.

Market intervention

In capitalist systems, allowing markets to operate freely is considered to be desirable, but it is generally accepted that market forces cannot be permitted to operate for all the goods and services required by society. Some goods and services are ‘public goods and services’, which means that they can only be provided adequately by intervention. These include law and order and the military. For this reason, the government or supra-national organisations may choose to introduce and maintain systems that will ensure that such goods and services are produced, and may fix prices either above or below the equilibrium price.

A maximum price is sometimes imposed in order to protect consumers. This will result in a situation in which the quantity demanded will exceed the quantity supplied, provided the maximum price is struck below the equilibrium price (Figure 4).  There are numerous examples of this in real life. During World War 2, the UK government intervened in this way in order to ensure that families could obtain adequate supplies of goods such as bread, butter and petrol. One consequence of this is that there was excess demand in the system, and this led to an illegal market developing.

Figure 4: Maximum price

Maximum price is OP1. At this point, the quantity demanded (OQ1) exceeds quantity supplied (OQ2). The 'black market' price is OP2.

A minimum price is sometimes imposed in order to protect producers. Here, the quantity supplied will exceed the quantity demanded, provided the minimum price is struck at a level above the equilibrium price. One of the goals of the European Union (EU) has been to protect the agricultural sector, and the common agricultural policy is a minimum price system. As a consequence of this, the agricultural sector of the EU has periodically generated surpluses.

The impact of intervention in the price system should not be seen as undesirable in all cases. However, one of the contributions that microeconomic analysis makes is that it teaches us that there will be consequences of such interventions, and society has to manage those consequences.

Theory of the firm

The theory of the firm is a branch of microeconomics that examines the different ways in which firms within an industry may be structured, and seeks to derive lessons from these alternative structures. Perfect competition A perfectly competitive market is one in which:

• there are many firms producing homogeneous goods or services
• there are no barriers to entry to the market or exit from the market
• both producers and consumers have perfect knowledge of the market place.

Under such conditions, the price and level of output will always tend towards equilibrium as any producer that sets a price above equilibrium will not sell anything at all, and any producer that sets a price below equilibrium will obtain 100% market share. The demand ‘curve’ is perfectly elastic, which means that it will be horizontal.

As these conditions imply, there are few if any examples of perfectly competitive markets in real life. However, some financial markets approximate to this extreme model, and there is no doubt that in some fields of commerce the development of the internet as a trading platform has made the markets for some products, if not perfectly competitive, then certainly less imperfect.

Monopoly A monopoly arises when there is only one producer in the market.  It should be noted the laws of many countries define a monopoly in less extreme terms, usually referring to firms that have more than a specified share of a market.

Unlike perfect competition, monopolies can and do arise in real life. This may be because the producer has a statutory right to be the only producer, or the producer may be a corporation owned by the government itself.

A monopoly enjoys a privilege in that it can strike its own price in the market place, which can give rise to what economists call ‘super-normal profits’. For this reason, monopolies are usually subject to government control, or to regulation by non-governmental organisations.

Oligopoly An oligopoly arises when there are few producers that exert considerable influence in a market. As there are few producers, they are likely to have a high level of knowledge about the actions of their competitors, and should be able to predict responses to changes in their strategies.

The minimum number of firms in an oligopoly is two, and this particular form of oligopoly is called a duopoly. There are several examples of duopolies, including the two major cola producers and, for several product lines, Unilever and Procter & Gamble. However, markets dominated by perhaps up to six producers could be regarded as oligopolistic in nature. Where a few large producers dominate a market, the industry is said to be highly concentrated. Although it is difficult to make generalisations across all oligopolistic markets, it is frequently noted that their characteristics include complex use of product differentiation, significant barriers to entry and a high level of influence on prices in the market place.

Monopolistic competition Monopolistic competition arises in markets where there are many producers, but they will tend to use product differentiation to distinguish themselves from other producers in the market.  Therefore, although their products may be very similar, their ability to differentiate means that they can act as monopolies in the short-run, irrespective of the actions of their competitors.

For monopolistic competition to exist, consumers must know of – or perceive – differences in products sold by firms. There tend to be fewer barriers to entry or exit than in oligopolistic markets.

Conclusions

Those embarking on their studies for BT/FBT will quickly become aware that the syllabus is broad but shallow. It is essential to cover a wide range of topics, without necessarily having to study each component part in depth. The purpose of this article has therefore been to provide basic information on the most important areas of microeconomics without any intention of exploring any individual topic in detail. Awareness of key principles is important, but candidates should not assume that they have to be experts in order to deal with the objective test questions in the exam.

Written by a member of the BT/FBT examining team

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Microeconomics: Essay on Microeconomics

Microeconomics studies the economic actions and behaviour of individual units and small groups of individual units.

In microeconomic theory we discuss how the various cells of economic organism, that is, the various units of the economy such as thousands of consumers, thousands of producers or firms, thousands of workers and resource suppliers in the economy do their economic activities and reach their equilibrium states.

“Microeconomics consists of looking at the economy through a microscope, as it were, to see how the millions of cells in the body economic-the individuals or households as consumers, and the individuals or firms as producers—play their part in the working of the whole economic organism.”- Professor Lerner.

In other words, in microeconomics we make a microscopic study of the economy. But it should be remembered that microeconomics does not study the economy in its totality. Instead, in microeconomics we discuss equilibrium of innumerable units of the economy piecemeal and their inter-relationship to each other.

For instance, in microeconomic analysis we study the demand of an individual consumer for a good and from there go on to derive the market demand for the good (that is, demand of a group of individuals consuming a particular good). Likewise, microeconomic theory studies the behaviour of the individual firms in regard to the fixation of price and output and their reactions to the changes in the demand and supply conditions. From there we go on to establish price-output fixation by an industry (Industry means a group of firms producing the same product).

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Thus, microeconomic theory seeks to determine the mechanism by which the different economic units attain the position of equilibrium, proceeding from the individual units to a narrowly defined group such as a single industry or a single market. Since microeconomic analysis concerns itself with narrowly defined groups such as an industry or market.

However it does not study the totality of behaviour of all units in the economy for any particular economic activity. In other words, the study of economic system or economy as a whole lies outside the domain of microeconomic analysis.

Microeconomic Theory Studies Resource Allocation, Product and Factor Pricing :

Microeconomic theory takes the total quantity of resources as given and seeks to explain how they are allocated to the production of particular goods. It is the allocation of resources that determines what goods shall be produced and how they shall be produced. The allocation of resources to the production of various goods in a free-market economy depends upon the prices of the various goods and the prices of the various factors of production.

Therefore, to explain how the allocation of resources is determined, microeconomics proceeds to analyse how the relative prices of goods and factors are determined. Thus the theory of product pricing and the theory of factor pricing (or the theory of distribution) falls within the domain of microeconomics.

The theory of product pricing explains how the relative prices of cotton cloth, food grains, jute, kerosene oil and thousands of other goods are determined. The theory of distribution explains how wages (price for the use of labour), rent (payment for the use of land), interest (price for the use of capital) and profits (the reward for the entrepreneur) are determined. Thus, the theory of product pricing and the theory of factor pricing are the two important branches of microeconomic theory.

Prices of the products depend upon the forces of demand and supply. The demand for goods depends upon the consumers’ behaviour pattern, and the supply of goods depends upon the conditions of production and cost and the behaviour pattern of the firms or entrepreneurs. Thus the demand and supply sides have to be analysed in order to explain the determination of prices of goods and factors. Thus the theory of demand and the theory of production are two subdivisions of the theory of pricing.

Microeconomics as a Study of Economic Efficiency:

Besides analysing the pricing of products and factors, and the allocation of resources based upon the price mechanism, microeconomics also seeks to explain whether the allocation of resources determined is efficient. Efficiency in the allocation of resources is attained when the resources are so allocated that maximises the satisfaction of the people.

Economic efficiency involves three efficiencies; efficiency in production, efficiency in distribution of goods among the people (This is also called efficiency in consumption) and allocative economic efficiency, that is, efficiency in the direction of production. Microeconomic theory shows under what conditions these efficiencies are achieved. Microeconomics also shows what factors cause departure from these efficiencies and result in the decline of social welfare from the maximum possible level.

Economic efficiency in production involves minimisation of cost for producing a given level of output or producing a maximum possible output of various goods from the given amount of outlay or cost incurred on productive resources. When such productive efficiency is attained, then it is no longer possible by any reallocation of the productive resources or factors among the production of various goods and services to increase the output of any good without a reduction in the output of some other good.

Efficiency in consumption consists of distributing the given amount of produced goods and services among millions of the people for consumption in such a way as to maximize the total satisfaction of the society. When such efficiency is achieved it is no longer possible by any redistribution of goods among the people to make some people better off without making some other ones worse off. Allocative economic efficiency or optimum direction of production consists of producing those goods which are most desired by the people, that is, when the direction of production is such that maximizes social welfare.

In other words, allocative economic efficiency implies that pattern of production (i.e., amounts of various goods and services produced) should correspond to the desired pattern of consumption of the people. Even if efficiencies in consumption and production of goods are present, it may be that the goods which are produced and distributed for consumption may not be those preferred by the people.

There may be some goods which are more preferred by the people but which have not been produced and vice versa. To sum up, allocative efficiency (optimum direction of production) is achieved when the resources are so allocated to the production of various goods that the maximum possible satisfaction of the people is obtained.

Once this is achieved, then by producing some goods more and others less by any rearrangement of the resources will mean loss of satisfaction or efficiency. The question of economic efficiency is the subject-matter of theoretical welfare economics which is an important branch of microeconomic theory.

That microeconomic theory is intimately concerned with the question of efficiency and welfare is better understood from the following remarks of A. P. Lerner, a noted American economist. “In microeconomics we are more concerned with the avoidance or elimination of waste, or with inefficiency arising from the fact that production is not organised in the most efficient possible manner.

Such inefficiency means that it is possible, by rearranging the different ways in which products are being produced and consumed, to get more of something that is scarce without giving up any part of any other scarce item, or to replace something by something else that is preferred. Microeconomic theory spells out the conditions of efficiency (i.e., for the elimination of all kinds of inefficiency) and suggests how they might be achieved. These conditions (called Pareto-optimal conditions) can be of the greatest help in raising the standard of living of the population.”

The four basic economic questions with which economists are concerned, namely:

(1) What goods shall be produced and in what quantities,

(2) How they shall be produced,

(3) How the goods and services produced shall be distributed, and

(4) Whether the production of goods and their distribution for consumption is efficient fall within the domain of microeconomics.

The whole content of microeconomic theory is presented in the following chart:

Microeconomics and the Economy as a whole:

It is generally understood that microeconomics does not concern itself with the economy as a whole and an impression is created that microeconomics differs from macroeconomics in that whereas the latter examines the economy as a whole; the former is not concerned with it. But this is not fully correct. That microeconomics is concerned with the economy as a whole is quite evident from its discussion of the problem of allocation of resources in the society and judging the efficiency of the same.

Both microeconomics and macroeconomics analyse the economy but with two different ways or approaches. Microeconomics examines the economy, so to say, microscopically, that is, it analyses the behaviour of individual economic units of the economy, their inter-relationships and equilibrium adjustment to each other which determine the allocation of resources in the society. This is known as general equilibrium analysis.

No doubt, microeconomic theory mainly makes particular or partial equilibrium analysis, that is, the analysis of the equilibrium of the individual economic units, taking other things remaining the same. But microeconomic theory, as stated above, also concerns itself with general equilibrium analysis of the economy wherein it is explained how all the economic units, various product markets, various factor markets, money and capital markets are interrelated and interdependent to each other and how through various adjustments and readjustments to the changes in them, they reach a general equilibrium, that is, equilibrium of each of them individually as well as collectively to each other.

Professor A. P. Lerner rightly points out, “Actually microeconomics is much more intimately concerned with the economy as a whole than is macroeconomics, and can even be said to examine the whole economy microscopically. We have seen how economic efficiency is obtained when the “cells” of the economic organism, the households and firms, have adjusted their behaviour to the prices of what they buy and sell. Each cell is then said to be in equilibrium.’ But these adjustments in turn affect the quantities supplied and demanded and therefore also their prices. This means that the adjusted cells then have to readjust themselves. This in turn upsets the adjustment of others again and so on. An important part of microeconomics is examining whether and how all the different cells get adjusted at the same time. This is called general equilibrium analysis in contrast with particular equilibrium or partial equilibrium analysis. General equilibrium analysis is the microscopic examination of the inter-relationships of parts within the economy as a whole. Overall economic efficiency is only a special aspect of this analysis.”

Importance and Uses of Microeconomics:

Microeconomics occupies a vital place in economics and it has both theoretical and practical importance. It is highly helpful in the formulation of economic policies that will promote the welfare of the masses. Until recently, especially before Keynesian Revolution, the body of economics consisted mainly of microeconomics. In spite of the popularity of macroeconomics these days, microeconomics retains its importance, theoretical as well as practical.

It is microeconomics that tells us how a free-market economy with its millions of consumers and producers works to decide about the allocation of productive resources among the thousands of goods and services. As Professor Watson says, “microeconomic theory explains the composition or allocation of total production, why more of some things are produced than of others.”

He further remarks that microeconomic theory “has many uses. The greatest of these is depth in understanding of how a free private enterprise economy operates.” Further, it tells us how the goods and services produced are distributed among the various people for consumption through price or market mechanism. It shows how the relative prices of various products and factors are determined, that is, why the price of cloth is what it is and why the wages of an engineer are what they are and so on.

Moreover, as described above, microeconomic theory explains the conditions of efficiency in consumption and production and highlights the factors which are responsible for the departure from the efficiency or economic optimum. On this basis, microeconomic theory suggests suitable policies to promote economic efficiency and welfare of the people.

Thus, not only does microeconomic theory describe the actual operation of the economy, it has also a normative role in that it suggests policies to eradicate “inefficiency” from the economic system so as to maximize the satisfaction or welfare of the society. The usefulness and importance of microeconomics has been nicely stated by Professor Lerner.

He writes, “Microeconomic theory facilitates the understanding of what would be a hopelessly complicated confusion of billions of facts by constructing simplified models of behaviour which are sufficiently similar to the actual phenomena to be of help in understanding them. These models at the same time enable the economists to explain the degree to which the actual phenomena depart from certain ideal constructions that would most completely achieve individual and social objectives.

They thus help not only to describe the actual economic situation but to suggest policies that would most successfully and most efficiently bring about desired results and to predict the outcomes of such policies and other events. Economics thus has descriptive, normative and predictive aspects.”

We have noted above that microeconomics reveals how a decentralised system of a free private enterprise economy functions without any central control. It also brings to light the fact that the functioning of a complete centrally directed economy with efficiency is impossible. Modern economy is so complex that a central planning authority will find it too difficult to get all the information required for the optimum allocation of resources and to give directions to thousands of production units with various peculiar problems of their own so as to ensure efficiency in the use of resources.

To quote Professor Lerner again, “Microeconomics teaches us that completely ‘direct’ running of the economy is impossible—that a modern economy is so complex that no central planning body can obtain all the information and give out all the directives necessary for its efficient operation.

These would have to include directives for adjusting to continual changes in the availabilities of millions of productive resources and intermediate products, in the known methods of producing everything everywhere, and in the quantities and qualities of the many items to be consumed or to be added to society’s productive equipment.

The vast task can be achieved, and in the past has been achieved, only by the development of a decentralised system whereby the millions of producers and consumers are induced to act in the general interest without the intervention of anybody at the centre with instructions as to what one should make and how and what one should consume.

Microeconomic theory shows that welfare optimum of economic efficiency is achieved when there prevails perfect competition in the product and factor markets. Perfect competition is said to exist when there are so many sellers and buyers in the market so that no individual seller or buyer is in a position to influence the price of a product or factor.

Departure from perfect competition leads to a lower level of welfare, that is, involves loss of economic efficiency. It is in this context that a large part of microeconomic theory is concerned with showing the nature of departures from perfect competition and therefore from welfare optimum (economic efficiency). The power of giant firms or a combination of firms over the output and price of a product constitutes the problem of monopoly.

Microeconomics shows how monopoly leads to misallocation of resources and therefore involves loss of economic efficiency or welfare. It also makes important and useful policy recommendations to regulate monopoly so as to attain economic efficiency or maximum welfare. Like monopoly, monopsony (that is, when a single large buyer or a combination of buyers exercises control over the price) also leads to the loss of welfare and therefore needs to be controlled.

Similarly, microeconomics brings out the welfare implications of oligopoly (or oligopsony) whose main characteristic is that individual sellers (or buyers) have to take into account, while deciding upon their course of action, how their rivals react to their moves regarding changes in price, product and advertising policy.

Another class of departure from welfare optimum is the problem of externalities. Externalities are said to exist when the production or consumption of a commodity affects other people than those who produce, sell or buy it. These externalities may be in the form of either external economies or external diseconomies. External economies prevail when the production or consumption of a commodity by an individual benefits other individuals and external diseconomies prevail when the production or consumption of a commodity by him harms other individuals.

Microeconomic theory reveals that when the externalities exist free working of the price mechanism fails to achieve economic efficiency, since it does not take into account the benefits or harms made to those external to the individual producers and the consumers. The existence of these externalities requires government intervention for correcting imperfections in the price mechanism in order to achieve maximum social welfare.

Several Practical Applications of Microeconomics for Formulating Economic Policies :

Microeconomic analysis is also usefully applied to the various applied branches of economics such as Public Finance, International Economics. It is the microeconomic analysis which is used to explain the factors which determine the distribution of the incidence or burden of a commodity tax between producers or sellers on the one hand and the consumers on the other.

Further, microeconomic analysis is applied to show the damage done to the social welfare or economic efficiency by the imposition of a tax. If it is assumed that resources are optimally allocated or maximum social welfare prevails before the imposition of a tax, it can be demonstrated by microeconomic analysis that what amount of the damage will be caused to the social welfare.

The imposition of a tax on a commodity (i.e., indirect tax) will lead to the loss of social welfare by causing deviation from the optimum allocation of resources the imposition of a direct tax (for example, income tax) will not disturb the optimum resource allocation and therefore will not result in loss of social welfare. Further, microeconomic analysis is applied to show the gain from international trade and to explain the factors which determine the distribution of this gain among the participant countries.

Besides, microeconomics finds application in the various problems of international economics. Whether devaluation will succeed in correcting the disequilibrium in the balance of payments depends upon the elasticity’s of demand and supply of exports and imports. Furthermore, the determination of the foreign exchange rate of a currency, if it is free to vary, depends upon the demand for and supply of that currency. We thus see that microeconomic analysis is a very useful and important branch of modern economic theory.

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Introduction to Microeconomics

Checked : Soha K. , Vallary O.

Latest Update 20 Jan, 2024

13 min read

Table of content

What is Microeconomics?

Pricing mechanisms, equilibrium, market intervention, the concept of a firm.

Economics is one of the most debated subjects in the world. And that is why it is an umbrella covering different subjects. In the article, we look at microeconomics. It seeks to offer an essential understanding of microeconomics to those who have not studied and a revision opportunity to those who have.

Many people wonder why economics and why they should study the subject. There are many other subjects one would invest their time in more than this. Well, consider this:

In the information age, specifically media times, people are often faced with decisions. You are online and have written a long post, but should you post or should not. What should you have for breakfast? Which route should you follow in your next class? Should you postpone the semester or take extra classes to finish earlier?

Decisions, decisions, and decisions! We must make a decision. The way we respond to these choices depends on the information we have at any given moment. Economists call this information ‘imperfect’ because we never have enough data to make the right decisions. And even though we don’t have the perfect information, making a decision is a must.

Today, technology has made it easier to gather information. Social media outlets like Facebook, Twitter, and many others are affecting the way people make decisions. It determines how we spend our time, which activities to get involved, which movies to watch, what to buy, and many others. When you want to join a University, you will probably check out their page on Facebook first.

This course emphasizes the fact that everything that happens in economics is affected by how efficient information is disseminated. It is all about how information travels through different media. And it is often the joy of economists when perfect information influences deep and liquid markets.

Hence, microeconomics introduces us to the world of making decisions at an individual level. Economics, as a whole, determines how the world of making decisions, processing information, and understanding behavior in markets operates. Making decisions is the nature of every economics. So if you are still wondering why you should the subject, then you have a reason already.

It is important to understand the difference between microeconomics and macroeconomics. Macro means an overall approach to markets. It studies how the aggregate economy behaves, referring to inflation, price levels, rate of growth, national growth, and more general aspects. Micro focuses on individuals.

Many people think economics is all about money and finance. It is vital to understand economics as more than primarily business or mathematics. It is a general way of viewing the world.

Based on this, we can define microeconomic as a branch of economics that observes the behavior of individual decision-makers. Such parties include individuals, households, and firms (all types of businesses). It is the complete opposite of macroeconomics, which looks at economics as a wide subject.

In other words, micro is all about what motivates households to consider buying a new car instead of going on a fancy vacation. It describes why you should watch a certain movie, go for a specific class, or follow a chosen route. Microeconomics affects everyone daily.

Scarcity is a problem that faces humanity at all levels. The world has resources, but human wants often exceed the available resources. Hence, microeconomics is built on the foundation of economic thinking. Consumers demand goods and services, which are offered by producers. In the economic system, nobody can take anything they want when they want it. There must be a choice. And in order to make this choice, you have to give up something else. There is nothing like a ‘free lunch.’

A good example is when one chooses to buy a new car at the expense of going on a vacation. Individuals in households must make decisions, and so do firms about what they want to produce. Hence, firms can preclude themselves from manufacturing alternative products.

Again a producer must decide the number of goods and services they want to give out and for which market. It would be simple to say a company will just produce as much as possible. But that is never the case in economics. Classical economics teaches than you have to look at all the factors of production. The law of diminishing returns states that “ if we keep on adding variable factors of production (like labor) to the fixed elements (like land), the output becomes proportionally less from each additional unit of the factor added, until, eventually, the entire out will begin diminishing with every addition of a unit factor.

How do markets determine prices for their products? This is often the foundational question for the study of microeconomics. A market system brings together producers and consumers. In traditional settings, a market was a physical location where people with different needs would meet to trade. Today technology has made things much simpler in that humans no longer have to meet.

Producers and consumers create a system called   supply and demand . And their interaction based on these specific roles creates a price mechanism. It was once known as the ‘invisible hand’ because it guided the actions of producers and consumers from the background. Markets are essential determinants of everyday life. In other words, human beings interact with demands at all levels. If, for instance, an individual would produce all the food in the world, the same would still need clothes, shelter, and other basic needs. This is why communities have learned to benefit from exchanges. It was first through barter trade before the evolution of money too charges.

It is critical for people to know what they could charge, or pay for goods and services. There was initially no formal thought on this, but the trader discovered that they would run out of inventory if they kept a fixed price on their goods. It was easier to know what others were charging in a physical market. However, things have changed with remote markets whereby there is less perfect knowledge of prices. Based on the thought of Alfred Marshall, “Principles of Economics,” everything you read today on supply and demand, elasticity, revenues, and costs come from this thought. In other words, Marshall established the foundation for an analysis of supply and demand, hence, determining prices in the markets.

All human beings have needs. And these needs create demand, which is often founded on the perceived worth in the given good or service. Necessities such as good food, clothes, and other products are all necessary. But there are several factors that fuel the demand for a specific product, including:

• Prices of substitutes and compliment goods and service
• Individual’s income
• Personal preferences and
• Expectations

The economic analysis employs the testing of the quantity demanded against these variables, where all others are constant. In most cases, economists use the relationship between quantity demands and prices to analyze demand. In this case, demand quantity is inversely proportional to price, assuming people are rational consumers, and other demands determining factors are constant. This means where the quantity of demand falls, price surges, and vise versa.

When there is an increase in price, expect a certain decrease in demand. This case is true for most goods. But for “Giffen goods” demand rises with an increase in price. For instance, a high price tag on a piece of designer cloth will increase its demand because it is perceived as a high-quality product.

What about when other variables change. Consider this, when there is an increase in income, and a decrease in tax rates, the demand for goods and services will surge. And the opposite is also true. All these show that human decisions influence economic behavior.

Whereas consumers purchase goods, it is the job of manufacturers to supply the said goods and services. Similar to the case above, where demand has a proportional relationship to quantity demanded and price, supply goes through the same rough. In general, higher prices lead to the production of more goods and services. On a graph, the supply curve, when other factors remain constant, slopes upwards from left to right. The other factors influencing supply include:

• Price of alternative goods and services
• Relative revenues and production cost
• Objective and expectations of the producer
• Involved technology

A company gets maximum profits when its marginal revenue is on a straight line with margin cost. But, as long as the marginal revenue keeps about the variable costs, a firm may continue with productions.

Elasticity is based on the responsiveness of demand or supply to price changes. We say demand price elasticity is high, where a small change in price massively affects the quantity of demand. But if there is little or no effect on demand quantity, then demand is termed as highly inelastic. This is a very vital factor for producers. They have to consider the effects of their   pricing strategies   over time and adjust appropriately. Also, the government needs to impose fiscal and monetary policies that impose sales taxes so that they can predict tax revenues.

Firms find price elasticity by dividing the change in demand quantity with the price change, or alteration in supply but the price difference. There is price elasticity in demand when price increment reduces the total revenue, and price inelasticity is when price leads to more revenue generated.

While studying price elasticity, it is also vital to look at income elasticity in relation to demand quantity or supply to income changes. Also, you may come across cross elasticity – the responsiveness of demand or supply quantity to the changes in cost.

A state of equilibrium is where the quantity supplied is equal to the quantity of supply. If the set price gets above the equilibrium, it will cause supply to exceed demand. In this case, the company will have to reduce the price to clear the inventory. On the other hand, where the price set is below the equilibrium, demand increases; consequently, the price.

Markets operate freely in a capitalist system. Such is considered desirable. However, market forces are not allowed to operate for all goods and services society needs. There must be such goods and services considered as ‘public,’ – an intervention can adequately supply them. Such services include law and order, and military. And this is why governments may choose to introduce and sustain a process that keeps such goods and services produced and priced either above or below the equilibrium.

A government, for instance, may order minimum prices to protect the producers; hence, supply quantity will be above the demand quantity as long as the minimum price is above the equilibrium price. For instance, the EU has been there to protect the agricultural sector through agricultural policy on minimum prices.

Price intervention is desirable. However, according to microeconomic analysis, such interventions come with consequences, and society must be ready to face them.

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The theory of the firm, in microeconomics, seeks to understand the structure of a firm in a specific industry. It also seeks to discover lesions from these alternative structures.

The first thing one must understand in this subject is a perfect competition. This means:

• There is a substantial number of producers for homogeneous goods or services.
• Market entry and exit face no barriers.
• There is perfect knowledge among producers and consumers in a specific market.

Under perfect competition, prices tend to lean towards equilibrium. A producer will not sell anything if they price anything above this.

When there is only one producer in the market, they form a monopoly. Note that most countries define a monopoly in terms of a firm that has more than a specified number of capitalizations in the market.

In a case where few producers influence a market, it is called an oligopoly. Here, the producers are likely to have a higher level of knowledge about their competitors. And when there are many producers, the market creates a monopolistic competition. They may have similar products but with the ability to differentiate. A consumer must be aware of these differences.

Those studying this subject will discover it is a broad subject. It is important to look at a broad range of issues, even if they don’t dig deeper. As such, this article was intended to offer more general and basic information on the most vital topics of microeconomics. Understanding the principle discussed above is vital for students, not only of objective tests in the exam but for general life application.

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Basics of Microeconomics and Macroeconomics Essay

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Introduction

Fundamentals of macroeconomics.

Bibliography

Microeconomics can be defined as a subdivision of economics that deals with the routine, structure, and behavior of a national or regional economy. It puts more emphasis on the overall output of a nation and how the nation allocates its limited resources, i.e., land, labor, and capital, so as to maximize production and uphold trade and economic growth of that nation for future generations (Case & Fair 46-89). Additionally, macroeconomics tries to predict the economic conditions of a country/nation so as to assist consumers, firms, and governments make informed decisions. For instance, consumers may want to know the best time to find work, prices of goods and services in the market, and the cost of borrowing money; businesses will make a decision on the best time to expand production, and the government will use macroeconomics when budgeting, spending, creating taxes, deciding on interest rates and making policy decisions (Gordon & Solow 219-230).

Macroeconomic pointers such as Gross Domestic Product (GDP), unemployment rates, and price indices are employed to appreciate how the economy of a nation works. Moreover, relationships between national income, production output, consumption, unemployment, inflation, savings, and international trade and finance dynamics are pointed out by macroeconomics functions. However, macroeconomics is a broad field and cannot be studied as a whole. Therefore, it is divided into two areas; one that tries to explain the causes and consequences of short-run variation in the national income (business cycle), and the other tries to explain the determinants of long-run economic growth, i.e., national income growth (Case & Fair 110-119).

Macroeconomics has three major fundamentals, which include: National output (measured by the gross domestic product), unemployment, and inflation.

National output/ Gross Domestic Product

Gross Domestic Product (GDP), as a basis of macroeconomics, refers to the full amount of goods and services that a nation creates. Moreover, the GDP being the fundamental gauge of the economy’s fiscal routine, it can be defined as the market value of all the goods and services produced in a country within the country’s financial year (Case & Fair 120-145). GDP is equal to all expenses of all goods and services produced in a country, equal to the total of value-added during the production of the goods and services by all industries within a country plus taxes and minus subsidies on the products, and finally, GDP is equal to a total of all the income created by the production of the goods and services in a particular country within a specific span of time.

Gross Domestic Product has three components which include: Consumption in the market and includes personal expenditure of the citizens of that particular country in their households (food, rent, medical, clothing) excluding the cost incurred when relocating to a new house; Investment which refers to the acquisition of new assets by businesses and household. For instance, the purchase of new machinery, software, and pieces of equipment. In investment expenses incurred by the household on new houses is included. However, buying of financial products like bonds and share is not considered as an investment but as savings; Government Spending which is referred to as the amount of money the government spends on final goods and services. These expenses include all the payments to the public servants, purchase of military weapons and all ventures by the government; Export of goods and services produced by the country and include all goods and services produced by the particular country for another country’s consumption; Imports which include all goods and services that a country import from another country for use in their country. However, all imports to a country are subtracted (Gordon & Solow 250- 273). Therefore, Gross Domestic Product to the sum of consumption, investment, government expenditure, and export minus imports

That is; GDP= Consumption + investment +Government expenditure + (Export –imports).

Unemployment

Unemployment as a fundamental of macroeconomics refers to a situation where people lose their jobs unwillingly while there are other workers in the country looking for work. Unemployment in a country means that the country does not fully utilize its resources, leading to some people who are willing to work jobless. Unemployed people exclude all those people who are not looking for a job or are unwilling to work (Case & Fair 300-390).

Unemployment is divided into four categories, namely: frictional unemployment, which occurs due to the time required to match the employment seeker requirements with the job opening on hand. This kind of unemployment is voluntary as the jobseeker fights back and forth between the available job choices and thus ends up being unemployed. Structured unemployment occurs when a large number of job seekers do not qualify for a large amount of labor force required, for instance, when a group of job seekers does not have the skills required by the employer. Structured unemployment is caused by a shift in consumer preference, technological changes, tax, and geographical location, among others; Seasonal unemployment occurs when demand and supply of goods and services fluctuate, thus affecting the amount of labor required. For instance, during summer, the demand for harvesting workers increases, and cyclical unemployment is caused by the business cycle where during low production, a firm lays off some workers only to reemploy them when production rises (Gordon & Solow 305 -307).

Unemployment is measured as a percentage of the total labor force available in a particular country. Unemployment /labor force *100 Where labor force refers to both unemployed people and the employed people of that particular country

According to Fair and Case (420-440), unemployment in a country affects the Gross Domestic product in that it affects the consumption of a household. This is so because, with less income, a household will reduce its consumption. Moreover, unemployment lowers the total yield of a country in terms of goods and services as the unemployed are not engaged in production.

Inflation as an essential of macroeconomics refers to a state where there is a continued increase in the general price level leading to a reduction in purchasing power and monetary value. The rate of inflation is measured by the yearly percentage variation in the level of prices against the consumer index, which measures the cost of living of a typical household. Inflation is caused by increased domestic inflation where the government may increase the VAT leading to high prices of commodities and thus domestic inflation, fluctuation in the exchange rate where a currency of a certain country fluctuates over the other currencies (Gordon & Solow 308-313). This makes the imports expensive, and the export become lowly priced. Moreover, the sudden rise of prices in crude oil and other imports may lead to inflation in a country. Inflation causes increased prices of commodities of a country, making it unaffordable to the citizens, and this affects the gross domestic product of that country.

Microeconomics which tends to look at the output of an individual and firms within an economy is a scientific strategy that emphasizes all parts that constitute a country’s economy. Both micro and macroeconomics are conjoined, and thus their understanding would help countries and firms make informed decisions (Case & Fair 110-105). The fundamentals of macroeconomics help in evaluating the national output; the gross domestic product measure the total value of country goods and services, thus the income of the country within a financial year. On the other hand, unemployment measure the rate of dependence of the citizens of a country, i.e., the dependence of the unemployed on the employed citizens. Inflation as a fundamental of macroeconomics helps to gauge whether there is a lot of money circulation in a nation or a country as this affects borrowing and the prices of a country’s commodities in the international market. When a country is allocating resources to the various sectors of the economy in a country, they must take into consideration the command economy (forces within a competitive market, i.e., invisible hand that influence the allocation of resources) and the market economy.

• Case K. & Fair R.: Principles of Macroeconomics. Pearson Prentice Hall 2006, pg. 46 – 105, 110-390, 410-500
• Gordon J. & Solow R.: Productivity Growth, Inflation, and Unemployment. Cambridge University Press. 2004, pg. 219-273, 305- 313
• Keizō Nagatani. Macroeconomic dynamics. Cambridge University Press, 1981, pg. 150-200
• Fischer, Stanley. Macroeconomics. McGraw-Hill, 1990, pg. 750- 800
• Baumol, William & Blinder, Alan. Macroeconomics: principles and policy. 7th Edition. Dryden Press, 1997, pg. 350-400
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