Review of the Principles of Microeconomics
Macroeconomics: an Introduction Supplement to Chapter 1
Review of the Principles of Microeconomics
Internet Edition as of Apr. 7, 2006 Copyright © 2006 by Charles R. Nelson All rights reserved. ********
S.1 What is Microeconomics All About?
Microeconomics is the study of how decisions are made by consumers and suppliers, how these decisions determine the allocation of scarce resources in the marketplace, and how public policy can influence market outcomes for better or worse. A basic understanding of microeconomics is essential to the study of macroeconomics because “micro” provides the foundations upon which “macro” is built. It is pointless to try to explain, for example, the demand for money and how it affects interest rates in the economy without a grasp of how suppliers and buyers interact in a market. The objective of this supplement to MACROECONOMICS: An Introduction, Third Edition is to provide a relatively compact overview of microeconomics for use in a course where micro is not a prerequisite for macro, and for students who want to brush up on their micro. Economists think of there being two sides to a market, the demand side and the supply side. The demand side consists of economic agents, households and sometimes firms, who come to the market to buy a specific good or service. The supply side consists of the suppliers of the good or service, generally firms that produce the item. In markets for final goods, which are ready for consumption, the demanders are usually the consumers in the household sector; for example, someone buying a croissant. However, in the case of capital goods, it is a firm that is the buyer of the final good; for example, a bakery buying a new automated oven. There are also markets for intermediate goods where the buyers are firms purchasing a good or 1
service used in the production of another good or service, for example bakeries purchasing flour from millers, or millers purchasing wheat from farmers. We study the
Review of the Principles of Microeconomics
Internet Edition as of Apr. 7, 2006 Copyright © 2006 by Charles R. Nelson All rights reserved. ********
S.1 What is Microeconomics All About?
Microeconomics is the study of how decisions are made by consumers and suppliers, how these decisions determine the allocation of scarce resources in the marketplace, and how public policy can influence market outcomes for better or worse. A basic understanding of microeconomics is essential to the study of macroeconomics because “micro” provides the foundations upon which “macro” is built. It is pointless to try to explain, for example, the demand for money and how it affects interest rates in the economy without a grasp of how suppliers and buyers interact in a market. The objective of this supplement to MACROECONOMICS: An Introduction, Third Edition is to provide a relatively compact overview of microeconomics for use in a course where micro is not a prerequisite for macro, and for students who want to brush up on their micro. Economists think of there being two sides to a market, the demand side and the supply side. The demand side consists of economic agents, households and sometimes firms, who come to the market to buy a specific good or service. The supply side consists of the suppliers of the good or service, generally firms that produce the item. In markets for final goods, which are ready for consumption, the demanders are usually the consumers in the household sector; for example, someone buying a croissant. However, in the case of capital goods, it is a firm that is the buyer of the final good; for example, a bakery buying a new automated oven. There are also markets for intermediate goods where the buyers are firms purchasing a good or 1
service used in the production of another good or service, for example bakeries purchasing flour from millers, or millers purchasing wheat from farmers. We study the