I. What is microeconomics?
Microeconomics is the study of how scarce resources are allocated to satisfy competing ends in a market economy.
Three key concepts:
• SCARCITY: the economy only has a limited amount of resources. If resources weren’t scarce, allocating them would not be a problem.
• CHOICE: if allocation were done by government fiat, economics would have nothing to say. Economics is the study of how individuals and firms make choices in an environment of limited resources.
• MARKET: the market is what determines the allocation of goods in the economy.
II. Introduction to DEMAND
A DEMAND FUNCTION maps out the quantity of a good that will be bought at each price.
• Quantity demanded falls as prices rise, so the demand curve slopes DOWNWARD.
• An INDIVIDUAL DEMAND FUNCTION maps out the quantity of a good that an individual would buy at each price.
• A MARKET DEMAND FUNCTION maps out the total quantity of a good that would be bought in a market at each price. It is the horizontal sum of the individual demand functions.
Changes in tastes, income, and the price of other goods SHIFT the demand function. That is, when tastes, income or the price of other goods changes, the amount of the good that the consumer is willing to buy at each price changes.
Examples:
• The price of coffee beans increased so much due to the bad weather in Brazil that worldwide coffee bean consumption is down 10% this year. (This describes movement along the demand curve for coffee