Microeconomics

Microeconomics is a sub-section of economics that places attention on the behavior of individuals within a market. Unlike macroeconomics, which focuses on broadly applied regulations and trends, microeconomics is concerned with the decisions that consumers or firms make, and the factors that may determine their behavior.

Microeconomics also engages with the idea of scarcity quite often, scarcity meaning the limited availability of resources. Microeconomics assumes that, under the conditions of scarcity, actors behave such that their desires are balanced with a finite supply of goods.

Microeconomics seeks to determine a set of patterns which explain consumers’ behavior or firms based on the constraints of scarcity.

Latest posts

Microeconomics
Externalities

Externalities are a form of market failure. Externalities are defined as the spillover effects of the consumption or production of a good that is not reflected in the price of the good.

Prateek Agarwal
April 21, 2020
Microeconomics
Price Elasticity of Demand (PED)

Price Elasticity of Demand (PED) is defined as the responsiveness of quantity demanded to a change in price. The demand for a product can be elastic or inelastic, depending on the rate of change in the demand with respect to the change in the price.

Prateek Agarwal
April 19, 2020
Microeconomics
Economies of Scope

When there are economies of scope, the long-run marginal and average costs for a given actor (whether a firm or, on a larger scale, an economy) lessen with the production of complementary goods/services.

Prateek Agarwal
April 09, 2020
Microeconomics
Deadweight Loss

A deadweight loss is a cost to society as a whole that is generated by an economically inefficient allocation of resources within the market. Deadweight loss can also be referred to as “excess burden.”

Prateek Agarwal
March 18, 2020
Microeconomics
Allocative Efficiency

Allocative efficiency is the level of output where the price of a good or service is equal to the marginal cost (MC) of production. Allocative efficiency is achieved when goods and/or services are distributed optimally in response to consumer demands (that is, wants and needs), and when the marginal cost and marginal utility of goods and services are equal.

Prateek Agarwal
March 10, 2020
Microeconomics
Price Discrimination

Price discrimination is a kind of selling strategy that involves a firm selling a good or service to different buyers at two or more different prices, for reasons not necessarily associated with cost. Price discrimination results in greater revenue for the firm.

Prateek Agarwal
February 14, 2020
Microeconomics
Moral Hazard

Moral hazard is a set of circumstances in which one individual or entity has the ability to take a risk because another individual or entity we’ll have to deal with any negative outcomes. Moral hazard specifically refers to the risk that exists when two parties lack equal knowledge of actions taken following an existing agreement.

Prateek Agarwal
February 14, 2020
Microeconomics
Natural Monopoly

Most of us are well-acquainted with the idea of a monopoly: when there is only one firm prevailing in a particular industry. However, from a regulatory view, monopoly power exists when a single firm controls 25% or more of a specific market.

Prateek Agarwal
February 07, 2020
Microeconomics
Price Ceiling

A price ceiling (in other words, a maximum price) is put into effect when the government believes the price is too high and sets a maximum price that producers can charge; this price must lie below the equilibrium price in order for the price ceiling to have an effect.

Prateek Agarwal
February 03, 2020
Cost Theory Microeconomics
Marginal Cost

The marginal cost of production is an economic concept that describes the increase in total production cost when producing one more unit of a good. It is highly useful to decision-making in that it allows firms to understand what level of production will allow them to have economies of scale.

Prateek Agarwal
January 27, 2020
Microeconomics
Consumer Surplus

Consumer Surplus is the area under the demand curve (see the graph below) that represents the difference between what a consumer is willing and able to pay for a product, and what the consumer actually ends up paying.

Prateek Agarwal
January 26, 2020
Cost Theory Microeconomics
Total Revenue

Total revenue is the amount of money that a company earns by selling its goods and/or services during a period of time (e.g. a day or a week).

Prateek Agarwal
January 14, 2020
Microeconomics
Marginal Analysis

In the field of economics, marginal analysis entails the examination of the final or next unit of cost or of consumption. It involves a cost-benefit analysis of business decisions—that is, understanding whether a particular decision provides enough benefits to be worth the cost of that decision.

Prateek Agarwal
January 07, 2020
Microeconomics
Marginal Utility

The concept of utility measures the satisfaction consumers derive from the consumption of goods and services. Marginal utility is specifically the utility that consumers derive from the consumption of additional units of goods and services.

Prateek Agarwal
January 01, 2020
Microeconomics
Price Floor

A price floor or a minimum price is a regulatory tool used by the government. More specifically, it is defined as an intervention to raise market prices if the government feels the price is too low. In this case, since the new price is higher, the producers benefit. For a price floor to be effective, the minimum price has to be higher than the equilibrium price.

Prateek Agarwal
January 01, 2020
Cost Theory Microeconomics
Average Variable Cost

In the field of economics, the term “average variable cost” describes the variable cost for each unit. Variable costs are those that vary with changes in output. Examples of variable costs, otherwise known as direct costs, include some forms of labor costs, raw materials, fuel, etc.

Prateek Agarwal
December 28, 2019
Microeconomics
Equimarginal Principle

The equimarginal principle is an important idea in the economic subfield of managerial economics. It is otherwise known as the “equal marginal principle” or the “principle of maximum satisfaction.” The equimarginal principle states that consumers choose combinations of various goods in order to achieve maximum total utility.

Prateek Agarwal
December 07, 2019
Microeconomics
Subsidies

Subsidies are defined as a form of support given to producers of a product that helps to reduce the cost of production. This has the intended effect of increasing the production and consumption of that product. Goods that governments want to increase the use of are subsidized; these include important services and institutions like education and healthcare, among others.

Prateek Agarwal
November 18, 2019
Microeconomics
Producer Surplus

The producer surplus is the area under the supply curve (see the graph below) that represents the difference between what a producer is willing and able to accept for selling a product, on the one hand, and what the producer can actually sell it for, on the other hand.

Prateek Agarwal
November 10, 2019
Microeconomics
Supply

Supply is quite a straightforward concept, understood by non-economists and economists alike. The term “supply” refers to the amount of a good or service that a firm is willing and able to offer for sale for a given period of time.

Prateek Agarwal
October 28, 2019
Microeconomics
Negative Externalities

Externalities are defined as those spillover effects of the consumption or production of a good that is not reflected in the price of the good. More specifically, negative externalities are the costs or harmful consequences experienced by a third party when an economic transaction takes place (i.e. when a good is either produced or consumed).

Prateek Agarwal
October 07, 2019
Microeconomics
Positive Externalities

Whether positive or negative, externalities are the effects of a good’s consumption or production on third parties; these effects are not accounted for in the price of said goods. Externalities are otherwise known as “spill-over effects.”

Prateek Agarwal
October 07, 2019
Microeconomics
Income Elasticity of Demand (YED)

Income Elasticity of Demand (YED) is defined as the responsiveness of demand when a consumer’s income changes. It is defined as the ratio of the change in quantity demanded over the change in income.

Prateek Agarwal
August 29, 2019
Microeconomics
Cross Price Elasticity of Demand

Cross Price Elasticity of Demand (XED) measures the responsiveness of demand for one good to the change in the price of another good. It is the ratio of the percentage change in quantity demanded of Good X to the percentage change in the price of Good Y.

Prateek Agarwal
August 27, 2019
Microeconomics
Determinants of Demand

The determinants of demand are factors that cause fluctuations in the economic demand for a product or a service. A shift in the demand curve occurs when the curve moves from D to D₁, which can lead to a change in the quantity demanded and the price. There are six determinants of demand.

Prateek Agarwal
July 21, 2019
Microeconomics
Budget Constraint

When consumers’ income limits their consumption behaviors, this is known as a budget constraint. In other words, it’s all of the many combinations of goods/services that consumers are able to purchase in light of their particular income as well as the current prices of these particular goods/services.

Prateek Agarwal
July 08, 2019
Microeconomics
Derived Demand

The term Derived Demand refers to the demand for a good or service that itself arises out of the demand for a related or intermediate good or service. Thus the dependent demand often has a notable effect on the market price of the derived good.

Prateek Agarwal
June 24, 2019
Microeconomics
The Substitution Effect

The Substitution Effect is the effect of a change in the relative prices of goods on consumption patterns. It is the economic idea that as either prices rise or income decreases, consumers substitute cheaper alternatives for more expensive goods

Prateek Agarwal
June 17, 2019
Microeconomics
Wealth Effect

The wealth effect is the economic phenomenon in which individuals spend more when stock prices increase and, as a result, equity portfolios are increasing in value. They do so because their sense of the reliability of their wealth is increasing. Thus, increases in consumer spending are directly correlated to increases in the value of stock portfolios.

Prateek Agarwal
June 11, 2019
Microeconomics
Regulatory Capture

Regulatory capture is a failure of normal government functions in which regulatory agencies become subservient to the industries they are meant to be monitoring and regulating.

Prateek Agarwal
May 30, 2019
Cost Theory Microeconomics
Variable Cost

Costs can be divided quite simply into two basic categories: variable costs and fixed costs. Variable costs are those that vary with production levels.

Prateek Agarwal
March 21, 2019
Microeconomics
Cornucopia

A cornucopian is a futurist who believes that continued progress and provision of material items for mankind can be met by similarly continued advances in technology.

Prateek Agarwal
March 01, 2019
Cost Theory Microeconomics
Monopsony

A monopsony is a situation of the market wherein only one buyer exists in a particular area, typically along with many sellers. These sellers end up competing for the buyer’s purchases by lowering their prices.

Prateek Agarwal
February 20, 2019
Microeconomics
Peak Oil: Will We Ever Run Out?

Peak Oil is a theoretical point in time after which the production of oil is expected to decline permanently because the industry has reached the maximum rate of extraction.

Prateek Agarwal
January 21, 2019
Microeconomics
Supply and Demand

The result of the interaction between consumers and producers in a competitive market determines Supply and Demand equilibrium, price and quantity.

Prateek Agarwal
September 18, 2018
Microeconomics
Demand

Demand is defined as the amount of good or service a consumer is willing and able to buy per period of time. It is essential to understand the term “willing and able.” Many people want to buy products that they cannot afford at prices they cannot pay.

Prateek Agarwal
August 05, 2018
Microeconomics
Constant Returns to Scale

The concept of “returns to scale” describes the rate of increase in production relative to the associated increase in the factors of production in the long run. In other words, it describes how effectively and efficiently—in other words, profitably—a particular company or business is producing its goods or services.

Prateek Agarwal
July 15, 2018
Microeconomics
The Decoy Effect

The Decoy Effect or the Asymmetric Dominance Effect is a cognitive bias in which consumers will tend to have a specific change in preferences between two options when also presented with a third option that is asymmetrically dominated.

Prateek Agarwal
July 02, 2018
Microeconomics
Price Elasticity of Supply

Price Elasticity of Supply is defined as the responsiveness of quantity supplied when the price of the good changes. It is the ratio of the percentage change in quantity supplied to the percentage change in price.

Prateek Agarwal
June 03, 2018
Microeconomics
Free Rider Problem

The Free Rider Problem occurs when there is a good (likely to be a public good) that everyone enjoys the benefits of without having to pay for the good. The free-rider problem leads to under-provision of a good or service and thus causes market failure.

Prateek Agarwal
May 17, 2018
Microeconomics
Consumer Sovereignty

Consumer sovereignty is the theory that consumer preferences determine the production of goods and services. This means consumers can use their spending power as ‘votes’ for goods. In return, producers will respond to those preferences and produce those goods.

Prateek Agarwal
May 07, 2018
Microeconomics
Marginal Rate of Substitution

The Marginal Rate of Substitution (MRS) is defined as the rate at which a consumer is ready to exchange a number of units good X for one more of good Y at the same level of utility.

Prateek Agarwal
April 02, 2018
Microeconomics
Indifference Curve

An indifference curve depicts a line representing all the combinations of two goods that consumers place equal value. That is to say, they would be indifferent to either good.

Prateek Agarwal
March 05, 2018
Microeconomics
Inheritance Tax

An Inheritance Tax is a tax paid by the individual who inherits a deceased person’s property or money. Keep in mind that an inheritance tax is different from an estate tax. An estate tax is a tax imposed on a deceased individual’s assets.

Prateek Agarwal
February 14, 2018
Microeconomics
Exceptions to the Law of Demand

There are two exceptions to the Law of Demand. Giffen and Veblen goods are exceptions to the Law of Demand. However, they are extreme cases and can be quite difficult to prove. But economists generally agree that there are rare cases where the Law of Demand is violated.

Prateek Agarwal
January 20, 2018
Microeconomics
The Principal Agent Problem

The Principal Agent Problem occurs when one person (the agent) is allowed to make decisions on the behalf of another person (the principal). In this situation, there are issues of moral hazard and conflicts of interest. Politicians and voters is an example of the Principal Agent Problem.

Prateek Agarwal
January 07, 2018
Microeconomics
Decision Fatigue

Decision Fatigue, a term created by social psychologist Roy F. Baumeister, refers to the deteriorating quality of decisions made by an individual, after continuously making decisions. Decision fatigue may also lead to consumers making poor choices with their purchases.

Prateek Agarwal
August 18, 2017
Microeconomics
The Coase Theorem

The Coase Theorem states “that when there are conflicting property right, bargaining between the parties involved will lead to an efficient outcome regardless of which party is ultimately awarded the property rights, as long as the transaction costs associated with bargaining are negligible.”

Prateek Agarwal
August 18, 2017
Microeconomics
Indirect Tax

An indirect tax is a tax applied on the manufacture or sale of goods and services. There are two types of indirect taxes – ad valorem tax and specific tax.

Prateek Agarwal
August 16, 2017
Microeconomics
Intrinsic Value Theory

Intrinsic Value Theory (also known as the Theory of Objective Value) is any theory of value in economics which holds that the value of an object, good or service, is intrinsic or contained in the item itself.

Prateek Agarwal
August 12, 2017
Microeconomics
The Lipstick Effect

The Lipstick Effect is the theory that when facing an economic crisis or the economy is in a recession, consumers will be more willing to buy less costly luxury goods. For example, instead of buying expensive fur coats, women will instead purchase expensive lipstick or luxury cologne.

Prateek Agarwal
August 12, 2017
Microeconomics
Market Failure

Market Failures occur when there is a misallocation of resources, which results in distortions in the market. This distortion creates an inefficiency in the market.

Prateek Agarwal
August 08, 2017
Microeconomics
Introduction to Game Theory

Game theory is the study of rational behavior in situations involving interdependence. Game Theory is a formal way to analyze the interaction among a group of rational individuals who behave strategically.

Prateek Agarwal
August 07, 2017
Microeconomics
Theory of Efficiency

There are three different Theories of Efficiency that we are going to focus on. The first Theory of Efficiency is Pareto efficiency or Pareto optimality. The second is the Kaldor–Hicks improvement, and lastly the Zero-profit condition or Zero Profit Theorem.

Prateek Agarwal
August 02, 2017
Cost Theory Microeconomics
Durable & Non-Durable Goods

Durable goods are those goods that don’t wear out quickly and last over a long period. While non-durable goods or soft goods are those goods that have a short life cycle.

Prateek Agarwal
August 02, 2017