1. Microeconomic Analysis

Consumer Behavior and Utility

• Utility: The satisfaction one gets from consuming a good or service. Consumers make choices to maximize their utility.
• Diminishing Marginal Utility: The satisfaction gained from consuming each successive unit of a good tends to decrease. This principle helps explain the downward slope of the demand curve.
• Consumer Surplus: The difference between the maximum price a consumer is willing to pay for a good and the actual market price they do pay.

Production Costs and Firm Behavior

• Costs of Production:
  • Explicit Costs: Direct monetary payments for resources (e.g., wages, rent).
  • Implicit Costs: The opportunity costs of using self-owned resources (e.g., forgone salary, forgone interest).
  • Economic Profit: Total revenue minus both explicit and implicit costs.
• Short Run vs. Long Run:
  • Short Run: A period where at least one input (like factory size) is fixed. The law of diminishing marginal returns applies, stating that as more variable input (like labor) is added to a fixed input, the marginal product will eventually decline.
  • Long Run: A period where all inputs are variable. Firms experience economies of scale (long-run average total cost falls as output increases), constant returns to scale, and diseconomies of scale (long-run average total cost rises as output increases).
• Profit Maximization: All firms maximize profit by producing at the quantity where Marginal Revenue (MR) equals Marginal Cost (MC).

Market Structures and Competition

Government Intervention and Market Failures

• Market Failure: The inability of a market to allocate resources efficiently. This occurs when the full costs or benefits of a transaction are not borne by the producers and consumers involved.
• Externalities: A cost or benefit imposed on a third party outside of a market transaction.
  • Negative Externality (Spillover Cost): An uncompensated cost imposed on others (e.g., pollution). The market overproduces the good. Government can correct this with taxes or regulation.
  • Positive Externality (Spillover Benefit): An uncompensated benefit conferred on others (e.g., vaccinations). The market underproduces the good. Government can correct this with subsidies.
• Public Goods: Goods that are non-rival (one person’s use doesn’t diminish another’s) and non-excludable (people cannot be prevented from using them), such as national defense. The private market fails to provide them due to the “free-rider” problem.
• Income Inequality: The Lorenz curve illustrates the distribution of income in a society. A perfectly straight 45-degree line represents perfect equality. The government addresses inequality through progressive taxation and transfer payments.
• Taxation Types:
  • Progressive: Tax rate increases as income increases.
  • Proportional: Tax rate remains constant regardless of income.
  • Regressive: Tax rate decreases as income increases.