This course is designed to extend your knowledge of the basic microeconomic principles that will provide the foundation for your future work in economics and give you insight into how economic models can help us think about important real world phenomena. Topics include supply and demand interaction, utility maximization, profit maximization, elasticity, perfect competition, monopoly power, imperfect competition, and game theory.
Microeconomics is the study of rational choice behavior on the part of individual consumers and firms. In general, economists are interested in how market mechanisms solve extremely complex resource allocation problems. This course presents a logical and coherent framework in which to organize observed economic phenomena. Several economic "models" are developed and analyzed in order to help explain and predict a wide variety of economic (and sometimes, seemingly non-economic) phenomena. Microeconomic theory is based on the notion that individuals (and firms) have well defined objectives (e.g., maximizing utility or profits) and behave systematically according to the incentives and constraints of their economic environment. It is this framework which allows the economist to gain a fundamental understanding of the choices people make in an economic setting.
- This unit provides an overview of basic economic concepts. We begin with a definition of economics and then move to apply its basic tools of analysis. Next, supply and demand is considered from a theoretical standpoint and then is quantified. The unit closes with a discussion of government intervention and how it affects the market.
As you work through this unit, consider the economic objectives of individuals, firms, and the government. Think about how the three interact in a shared economic space. Remember to maintain an objective viewpoint about all economic analysis and reflect on the quantitative methods developed to support economic theory.
- Trade theory forms part of the bedrock of economic analysis. The concept of specialization is key to understanding how to maximize an individual's or country's wellbeing. Skills, resources, and knowledge are unequally distributed; it is the relative differences which drive trade.
The free market is not always the optimal way to allocate scarce goods and resources. Actions and choices can have unintended effects which can harm or benefit others. How to best manage these effects, known as externalities, depends on the specifics of each problem. Economists have a variety of tools to redress misallocation.
Public goods are a unique consideration, because they are a common resource which cannot be assessed an individual economic cost. Without proper management, public goods may be over-consumed and lead to degradation of resources. Geography pays an important part in public good analysis.
- Every firm faces one primary constraint: a budget. The balance between costs and revenues will determine a firm's profit. Firms will seek to minimize costs; this implies that they are a profit maximizer. Every firm also has long and short run decisions. Remember that short run decisions allow for changing one of the factors of production, usually labor. Long run analysis is far more complex, because multiple factors of production are adjustable.
Economic and market conditions change over time. A firm must carefully weigh expected changes in the future when making decisions today. Risk can vary over time and can be anticipated and insured against. Uncertainty is more difficult to model and can significantly change the overall environment.
- This unit addresses the other main agent in microeconomics--the individual consumer. Similar to firms, individuals face constraints in the form of a budget. Time, available resources, and options are not static and make individual economic analysis challenging. Individuals also have unique preferences, and there is no one direct path to utility maximization.
Microeconomists make a number of underlying assumptions about consumer behavior and choices to construct mathematically elegant models. As each of the assumptions is relaxed, a more realistic paradigm of individual behavior emerges. When learning an economic model, first accept the assumptions and then consider how they might be modified.
General equilibrium brings together the problems of the firm and the individual. Equilibrium answers the questions at what price and quantity will consumers and firms make exchanges. Of note, an equilibrium may not always exist; alternative allocation mechanisms can be considered.
- Economists organize firms into various categories known as market structures. A monopoly is a single firm in an industry which, even in the absence of competition, still needs consumer demand to reach equilibrium. Unregulated monopolies are not efficient and charge higher prices than in a competitive market structure.
Oligopolies have only a handful of firms in an industry and may either cooperate or compete. Cooperative oligopolies can work together to charge higher prices and limit choices. Competitive oligopolies have lower prices and offer more, although limited, choices. The choice to cooperate or compete can be described using game theory, which is a set of rules and assumptions about how firms make choices.
Knowledge is power. Information is not equally and perfectly distributed to all economic agents. Firms and individuals must make choices with the limited amount of data and information available. Asymmetrical information can lead to unequal and inefficient outcomes.
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