MICROECONOMICS_1.
Introduction
Microeconomics is the study of how individuals make decisions and how these choices
collectively affect the allocation of limited resources in society. Microeconomists use
scientific methods, models, and data analysis to understand these choices and their
impacts on markets and public policy.
Decentralization vs.Centralization
Economies can be decentralized or centralized. (most economies is a mix of both systems)
In a decentralized economy (Capitalism), private individuals own businesses and
make economic decisions through voluntary trade.
In a centralized economy (Communism), the resources and production are controlled
by a central institution, such as the government or the State.
The role of markets
Markets play an essential role in allocating resources. Indeed, they are economic
institutions that provide a place where people can buy and sell goods, whose prices are
determined by supply and demand, representing the rate at which someone can swap
money for a good. In a market economy, production and consumption decisions are
mostly driven by these interactions on the markets.
A property rights is the enforceable and transferable claim on a good or resource,
essential for trades and for the correct functioning of a market economy.
In a free market system, the government allows market to operate with limited
government intervention or regulation.
Economic Motives
Microeconomists assume that individuals act in their own self-interest. Ex: consumers try to
get the most satisfaction from their purchases, workers seek a good balance between work and leisure, and
businesses aim to maximize profits. But there are other motivations beyond financial gain.
Economic Analysis
There are two main approaches to economic analysis.
Positive economics deals with facts and measurable outcomes.
Ex: predicting how a price change will affect sales.
Normative economics addresses questions involving value judgments.
Ex: deciding whether free trade is better than trade restrictions.
The principle of individual sovereignty holds that each person knows what’s best for them.
Methods used in microeconomics
Economists use the scientific method, mathematical models, assumptions and data
analysis to study economic behavior. Models simplify reality to better understand
decision-making, while data is used to test theories and make predictions.
Scientific method
The scientific method involves 5 steps: 1. observing an economic phenomenon,
2.developing a theory, 3.identifying additional implications, 4. testing predictions with
data, 5. refining the theory if necessary.
Mathematical modeling
Economists create simplified models to represent real-world economic behavior.
These models include variables, which can be either exogenous (given from outside the
model) or endogenous (determined within the model).
The relationship between these variables helps economists analyze how changes in one
factor affect another, a method known as comparative statics. An equilibrium is a point
of balance characterized by feasibility and stability, at which there is no tendency for a
model’s endogenous variables to change, given fixed values of the exogenous variables.
Simplifying assumptions
Since social phenomena are complex, the simplified representations of the real world
(models) require many simplifying assumptions to focus on the most important factors
influencing decision-making.
However, assumptions that are reasonable in one case may not be applicable in another.
Data analysis
Economists test their theories by using different types of data: financial records,
surveys, administrative data, and experiments, natural or laboratory-based.
Econometrics is the application of statistical methods to analyze this data and draw
conclusions about economic behavior.
Economic themes
Since resources are limited, every choice involves giving up something else, known as a trade-off.
Good decision-making focuses on small changes, or marginal decisions, to improve outcomes.
People provide and respond to incentives, and prices influence their behavior by encouraging or
discouraging certain actions.
Trade can benefit everyone.
The competitive market price reflects both value to consumers and cost to producers.
Compared to other methods of resource allocation, markets have advantages.
Government intervention
Markets generally allocate resources efficiently, but in some cases, government policies
can improve outcomes. For example, regulations or subsidies may help correct market failures.
Microeconomics helps individuals and policymakers make better decisions by evaluating
the costs and benefits of different actions.
