Microeconomic Theory

© 1999-2020, Douglas A.Ruby (06-02-2020)

Economics is a social science concerned with the study of how a given society allocates scarce resources to meet the unlimited wants and needs of its members.This study is about decision-making, alternatives and choices by individuals, business-firms, as well as governments that represent group preferences.

The moment we focus on individual behavior, we place our study in the realm of Microeconomic analysis and it can be argued that all economics follows the microeconomic branch. Microeconomics provides the analytical tools to help us understand the how and why individuals make the decisions that they make, how business firms can shephard resources and materials to efficiently produce desired goods and services. In a market-based economy, Microeconomics and also be referred to as Price Theory -- the study of how prices act as signals and the decisions that individuals (and business firms) make in reaction to these signals.

But these price signals can get distorted and markets can fail. Microeconomic analysis can provide guidance about how to create policy responses to these failures, provide the correct incentives for market participation, and promote efficiency in the product and distribution of goods and services.


1. Economics as a Social Science
2. Microeconomics, the Price System and Relative Prices
3. The Optimization Principle
4. Markets and Prices
5. Exogenous Shocks to the Demand-side of the Market
6. Exogenous Shocks to the Supply-side of the Market
7. Exogenous Shocks to both-sides of the Market
Practice: Markets and Prices
8. The Price Elasticitiy of Demand
9. Other Demand Elasticities
10. The Price Elasticitiy of Supply
Practice: Price Elasticity

Consumer Theory (Demand)

11. Consumer Preferences and Indifference Curves
12. A Consumer Optimum
Practice: Consumer Theory
13. The Utility Surface
14. Consumer Surplus
15. Excise Taxes and Surplus Measures
Practice: Consumer Surplus
16. Market Demand Curve Derivation

Theory of the Firm (Supply)

17. Production and Production Possibilities
18. A Producer Optimum
19. Costs of Production (in the Short-run)
Practice: Producer Theory
20. Producer Surplus
21. Excise Taxes and Total Surplus Measures
22. Production in the Long Run
23. Long Run Costs of Production
Practice: Production in the Long Run

Markets, Exchange and the Competitive Spectrum

24. Specialization and Trade
25. The Edgeworth Box and Exchange
Practice: Specialization, Trade and Exchange
26. Profit Maximization
27. Markets and Competition
Practice: Competitive Markets
28. Monopoly
29. Price Discrimination
Practice: Monopoly and Pricing Power
30. Strategic Behavior

Factor Input Markets

31. Labor Markets
32. Savings and the Supply of Funds
33. Investment Decisions and the Demand for Funds
Practice: Factor Input Markets

Glossary: Microeconomics

The Circular Flow Diagram

The Circular Flow diagram represents the relationship between the primary economic agents in market-based economies. These agents (business firms / producers) and (households / consumers) interact via three types of markets: output markets, financial markets, and input markets.

The inner ring of arrows represents the flow of goods and services from producer to consumer and the flow of factor inputs between households and business firms. The outer ring represents the flow of expenditure and payments -- the expenditure made by consumers becomes the sales revenue of business firms. The payment for factor services (land, labor, capital, and entrepreneurship) represent costs for the business firms and income (in the form of rents, wages, interest, and profits) to households.

The arrows via financial markets represent the flow of savings (loanable funds) typically from households to businesses (to facilitate the capital expenditure needs of the latter) and the flow of interest payments from borrower to lender.