Microeconomics For Dummies

Lynne Pepall, Peter Antonioni, Manzur Rashid

• Publisher: For Dummies
• Year: 2016
• ISBN:
  9781119184409
• Edition: 1
• Topic: Volkswirtschaftslehre
• Subtopic: Mikroökonomie

Your no-nonsense guide to microeconomics

The study of microeconomics isn't for the faint of heart. Fortunately, Microeconomics For Dummies is here to help make this tough topic accessible to the masses. If you're a business or finance major looking to supplement your college-level microeconomics coursework—or a professional who wants to expand your general economics knowledge into the microeconomics area—this friendly and authoritative guide will take your comprehension of the subject from micro to macro in no time! Cutting through confusing jargon and complemented with tons of step-by-step instructions and explanations, it helps you discover how real individuals and businesses use microeconomics to analyze trends from the bottom up in order to make smart decisions.

Snagging a job as an economist is fiercely competitive—and highly lucrative. Having microeconomics under your belt as you work toward completing your degree will put you head and shoulders above the competition and set you on the course for career advancement once you land a job. So what are you waiting for?

• Analyze small-scale market mechanisms
• Determine the elasticity of products within the market systems
• Decide upon an efficient way to allocate goods and services
• Score higher in your microeconomics class

Everything you need to make microeconomics your minion is a page away!

Part I

Getting Started with Microeconomics

For Dummies can help you get started with lots of subjects. Visit www.dummies.com to learn more.

In this part …

See how microeconomics looks at firms and individuals.

Discover how microeconomics builds on people’s choices.

Understand how consumers choose.

Look at the ways firms make their decisions.

Chapter 1

Discovering Why Microeconomics Is a Big Deal

In This Chapter

Introducing the areas that are the focus of microeconomics

Understanding the key roles of rational decision-making, competition, and cooperation

Seeing that markets don’t always work

As we’re sure you know, micro as a prefix often indicates something very small, such as a microchip or a microcosm. Micro can also mean something that isn’t small itself but that is used to examine small things, such as a microscope.

Microeconomics is the area of economics that studies the decisions of individual consumers and producers and how they come together to make markets. It explores how people decide to do what they do and what happens when interests conflict. It also considers how people can improve markets through their actions, the effects of laws, and other outside interventions. So despite the name, microeconomics is in fact a huge subject.

Traditionally, people contrasted microeconomics with macroeconomics — the study of national economies and weighty topics such as growth, unemployment, inflation, national debt, and investments. But over the years, the scope of microeconomics has grown; today economists analyze topics in macroeconomics using microeconomic tools.

Microeconomists employ those tools to look at things that form from the bottom up, because markets build on the actions of individual companies and consumers. This approach involves starting with an account of how companies and consumers make decisions and building on that to investigate more complex things that “emerge” from those decisions — such as how a market is structured.

In general, microeconomics works by building models of these situations. Models are mathematical — or graphical — pictures of how the world works given some basic assumptions. Models aren’t reality; they’re a description of something that resembles reality. Like an architect’s model of a house, models don’t have to stand up to reality; they just have to provide a feeling for what the real world looks like. Microeconomists also test models against real data to see how well the models work — the answer is often variably.

This chapter introduces you to microeconomics and its core areas of interest, and we touch on the fact that markets don’t always work.

Peering into the Economics of Smaller Units

Microeconomics is fundamentally about what happens when individuals and companies make decisions. The idea is to understand how those decisions are made and explore their consequences.

What happens, for example, when prices of houses go up? Well, on the one hand, people are likely to buy fewer or smaller houses. On the other hand, developers may want to build more houses so that they can get more revenue. The result could be a lot of unsold houses! Then there will be pressure to get rid of those stocks of unsold houses, and that leads to lower prices.

When does that process stop? At the limit, the only logical place to stop cutting the price is when exactly as much is sold as is available to sell. This point is called an equilibrium in the housing market — a place where supply and demand are equal. Chapter 9 discusses equilibria more fully.

When people talk about market forces, they’re talking about the outcome of all these decisions taken together. No vast impersonal power called “market forces” exists, just a lot of smaller entities — consumers and companies — making a lot of simple decisions based on signals that come from prices. That’s really all market forces means.

The way markets work seems so impersonal because every one of the smallest units — small companies and individuals — makes up just a tiny fraction of all the decisions taken. Even the biggest corporations or most powerful governments have limitations on their ability to influence the world. Microeconomics also looks at the exception to the rule when a decision-maker — a buyer or seller — is not so small and can influence market forces.

All these small decision-makers do the best they can, given that ultimately they’re acting with imperfect knowledge of a complicated world. People and companies can’t know exactly how much they’ll be earning next year or exactly how much they’ll sell. They just look for ways of making decisions that give them the best chance of doing the best they can — which is about all anyone can ask for in an uncertain world.

Making Decisions, Decisions, and More Decisions!

One word that’s central to microeconomics is decision. Microeconomics is ultimately about making decisions: whether to buy a house, how much ice cream to make, what price to sell a bicycle at, or whether to offer a product to this or that market, and so on.

This is one reason why economists center their models on choice. After all, when you don’t have options to choose from, you can’t make a decision. Deciding to make something or to buy something is the starting point for microeconomics.

To a microeconomist, decisions aren’t right or wrong. Instead, they’re one of the following:

• 

  Optimal: Getting the best of what you want, given what’s available.
• Sub-optimal: Getting less than the best.

Of course, a model of decisions needs two sides:

• Consumers base their decisions on the value they get from choosing one option as opposed to another.
• Companies base their decisions on a measure of monetary benefit — revenue against costs.

This book presents a few ways that microeconomists look at these decisions. Chapters 2–8 use a framework for making the best decision given some kind of constraint — budget, time, or whatever else constrains you — to show you how microeconomists look at individuals and companies separately. In Chapters 9–15, the famous supply and demand model shows you how different types of markets lead to different results. And Chapters 16–19 introduce you to game theory, which looks at how individuals or companies (or even other entities, such as governments) strategically interact with each other.

Addressing how individuals and companies make decisions

Economists look at decisions in a slightly different way from how you might expect. They...