Overview

Microeconomics begins with understanding how individuals and societies face trade-offs due to limited resources. These core principles explain how choices are made, how markets allocate goods and services, and why incentives matter. This foundation supports all other microeconomic analysis.

Key Themes and Concepts

• Scarcity and Opportunity Cost: Resources are finite. Every decision has a cost — the next best alternative given up is the opportunity cost.
• Production Possibilities Curve (PPC): A graph showing the maximum output combinations of two goods. It illustrates efficiency, trade-offs, and the law of increasing opportunity cost.
• Comparative Advantage and Specialization:
  • Absolute advantage: Ability to produce more with the same resources.
  • Comparative advantage: Ability to produce with a lower opportunity cost — the basis for trade.
• Economic Systems:
  • Market economy: Resources allocated by supply and demand.
  • Command economy: Central authority allocates resources.
  • Mixed economy: Combines elements of both systems.
• Property Rights and Incentives: Clearly defined rights encourage investment, innovation, and trade. Poor institutions lead to inefficiency.
• Marginal Analysis: Decisions are made by comparing marginal benefits to marginal costs. Rational agents act when MB ≥ MC.

Quick Tip

Thinking on the margin helps explain almost every economic decision. Whether it’s how many hours to work or how much to consume, choices are made one unit at a time. Understanding comparative advantage shows why trade isn’t a zero-sum game — everyone gains by specializing in what they do best.