Open in App
Log In Start studying!

Select your language

Suggested languages for you:
StudySmarter - The all-in-one study app.
4.8 • +11k Ratings
More than 3 Million Downloads
Free
|
|
Microeconomics

What if we told you that there exists a story in which you as an individual are the main character? Yes, that's true! The phrase that 'microeconomics' is everywhere around you is overused, we know. You may think so is mathematics, biology, chemistry... But at StudySmarter, we don't just state things. We can actually show you this world! What if we invited you on a journey of storytelling that would show you that microeconomics is around you at all times? If you are one of the adventure-seekers, join us to see how the journey into Microeconomics Land unfolds when you take part in it!

Content verified by subject matter experts
Free StudySmarter App with over 20 million students
Mockup Schule

Explore our app and discover over 50 million learning materials for free.

Microeconomics

Illustration

Lerne mit deinen Freunden und bleibe auf dem richtigen Kurs mit deinen persönlichen Lernstatistiken

Jetzt kostenlos anmelden

Nie wieder prokastinieren mit unseren Lernerinnerungen.

Jetzt kostenlos anmelden
Illustration

What if we told you that there exists a story in which you as an individual are the main character? Yes, that's true! The phrase that 'microeconomics' is everywhere around you is overused, we know. You may think so is mathematics, biology, chemistry... But at StudySmarter, we don't just state things. We can actually show you this world! What if we invited you on a journey of storytelling that would show you that microeconomics is around you at all times? If you are one of the adventure-seekers, join us to see how the journey into Microeconomics Land unfolds when you take part in it!

Microeconomics Topics and Learning Objectives

At StudySmarter, your learning needs are always at the center! That is why we cover all the essential microeconomics topics. From basic principles of consumer rationality to government intervention in markets and much more!

  • Here's a brief summary of the microeconomics topics you can start learning today:- Economic principles- Supply and demand- Firm's production- Factor markets- Perfect and imperfect competition- Market efficiency

And because we promised we would take you on an adventure journey, grab your map, and let's get going! Why did we mention a map? A map is a good analogy that will help you understand the purpose of models used in microeconomics. A map can show you how to get from where you are to where you need to be. Schematically, it makes you understand how to get where you want to go. The models in microeconomics are just like that map! They help guide our thinking and understanding of how the world works, but they don't represent reality perfectly. Rather than complaining when the model doesn't work, we need to try to understand why it doesn't! Ultimately, like the map, microeconomics models help us achieve more extraordinary things in real life!

Microeconomics Microeconomics models are akin to maps StudySmarterFig. 1 - Microeconomics models are akin to maps

Microeconomics: Economic principles

Economic principles are at the heart of microeconomics. But where do they come from? As you are the main character in our journey, let's begin with you! When you get up in the morning, which cereal do you decide to eat? Do you ever mix two or more types of cereal together? Yes, in microeconomics, such questions possibly stood at the very beginning of consumer choice theory. Other decisions such as whether to mix cereal or not, alongside many others you make. How you decide whether to work or not, how much time to dedicate to studying, your health, and how much to the well-being of your household.

As economic resources are scarce, you have developed a set of techniques that helps you identify what choices you make under certain constraints. Although primarily guided by the assumption of consumer rationality, behavioral insights also help in shaping the understanding of how you make your choices when you, for example, are scared to lose something more than you are afraid of not getting something in the first place. This system of choice-making applies to other individual economic agents such as a firm, an industry, or an entire market. And depending on how the resources are allocated between competing uses, different economic systems develop.

If you are reading this and you are based in the U.S., the allocation of scarce resources happens by means of the free market forces guided by supply and demand with minimal government intervention. This is because the U.S. has a mixed economic system. In principle, if the markets are not failing, you should always be able to get what you want when you want it, subject to your budget. However, if you were based in North Korea, then the government would be a decision-maker in how much of which goods were available to you. It is not unthinkable that you may even be severely deprived of some necessities due to the nature of the command economy.

Microeconomics: Supply and demand

Now that you have definitely established your view on whether to mix two or more types of cereal together or not let's take a look at where this cereal comes from. How do the market forces operate? Well, in microeconomics, we start by looking at individual demand. This is a different schedule you have for each type of good that will give the answer to the quantity you would demand at each price point. These individual schedules are then summed up to make a market demand schedule for a particular product! The same is happening on the firm side, where they have their own schedules, but for supply. They decide how much of each product to produce at each price level. When things work out the right way, equilibrium in the market is formed. This happens where demand is equal to supply. There can be changes in equilibrium, of course, based on the relative elasticities of demand and supply and on government intervention in the market. Price ceilings, price floors, taxes, and subsidies would all affect how much is produced and consumed in the end.

Microeconomics Supply and demand StudySmarterFig. 2 - Supply and demand

Microeconomics: Firm's production

Since we have been talking about cereal, which one is your favorite? It may be different from your friends' favorite or your parents' favorite. As individuals have varying tastes, firms try to find out what the consumers want and provide it to them. This firm's production is another aspect that microeconomics studies because the firm is treated as an individual unit. Firms incur costs of production when delivering the product to you. They can experience economies and diseconomies of scale. But just like you want to maximize your utility from consuming that bowl of cereal, firms want to maximize their profits. No one would like to provide you with products at a loss to themselves! Depending on whether the firms are going for profits only in the short-run or planning for a longer horizon, their entry and exit decisions will shape the market structure that they are in. The market for cereal, for example, is a market characterized by the features of monopolistic competition. There are a lot of producers competing for their cereal to be in your bowl! Their products are considered to be only slightly differentiated - it's all cereal, after all!

Microeconomics Increasing returns to scale and economies of scale StudySmarterFig. 3 - Increasing returns to scale and economies of scale

Microeconomics: Factor markets

Imagine now that you were so inspired by a cereal brand that you decided to go and work for that company. You will discover a whole new world there that makes production possible. Scarce resources, when used for supply, are called factors of production in microeconomics. So to make cereals, your company needs these factors of production. In economics, they are classified into four categories: land, labor, capital, and enterprise. Depending on whether more machinery is required to make cereal, more ingredients, or more labor, your firm will adjust its factor demand for those resources. On the other end, there will be firms that are in the business of supplying those production factors, and your firm will try to strike a deal to make their cereal at an optimal cost.

Microeconomics Factors of production StudySmarterFig. 4 - Factors of production

Microeconomics: Labor market

The labor market is one of the factor markets in microeconomics. But it is arguably the most important one because, without humans, nothing would work! That is why it is important for firms to hire and retain labor and manage their productive potential. If you decided to work for your favorite cereal brand, you would make specific considerations with regard to your labor supply. You would, for example, consider whether the compensation that you are getting provides you with enough budget and utility, and you would choose how much time you want to allocate to your job. So does the firm that hires you, but their decision-making involves a bit more factors than simply the cost of hiring you. Using marginal productivity theory, firms can gauge whether an additional employee will bring on an increase or a decrease in the total product. Because labor is not a simple factor of production, as, say, a raw material, such as corn or wheat, for your cereal, a lot of variations can occur. Labor interacts with other factors of production and can have varying degrees of productivity. Because labor is such an essential factor of production, there are specific tools in place that the governments in a lot of countries around the world endorsed to protect worker rights. Trade unions, for example, ensure that the workers' interests are met and that they have appropriate working conditions and are not paid below the national minimum wage.

Microeconomics Labor demand curve StudySmarterFig. 5 - Labor demand curve

Microeconomics: Perfect and imperfect competition

As you are now familiar with how you got that bowl of cereal for breakfast, let's think about what would be the chances of you actually buying it if it was ten times the price? It is likely that you probably would at least reconsider whether it's worth buying that favorite cereal on a regular basis. Since we already mentioned that the cereal market has features of monopolistic competition, does it explain the price that you pay for your product? A lot of it, yes! If there was a more extreme case of imperfect competition, say a monopoly cereal producer, then it would charge a very high price for the product since you wouldn't be able to get it anywhere else. But because there are many firms competing, you get that cereal at an affordable price, which is excellent as it's a daily necessity. The degree of competition in the market is studied in microeconomics to assess the costs and the benefits to society that the market allocation yields. A theoretical framework of perfect competition serves as a benchmark when evaluating various real-world market structures and their effects on consumer welfare.

Microeconomics The spectrum of market structures StudySmarterFig. 6 - The spectrum of market structures

Microeconomics: Market efficiency

We are almost at the end of our journey, and the individual goods markets are as far as we will travel in microeconomics. Beyond this realm is macroeconomics, but this will be a whole different journey! Price and quantity allocation that happens through the market mechanism aims to ensure that there is no deadweight loss to society and that the markets are functioning optimally. And if they don't, there is public policy to back them up. Variations of public policy such as regulation, deregulation, privatization, and nationalization have been used in the past and continue to be used when markets fail to function. In cases of externalities, the government also steps in to bring the markets back to the socially optimal point. Sometimes, when goods can't be provided by the free market, the government provides them, and these are called public goods. Street lighting, defense, and even education are some examples of public goods. This ensures not only that these goods are provided in the first place but also that those who need them the most have access to them at all times.

Microeconomics Optimal Pigouvian tax to correct a negative externality StudySmarterFig. 7 - Optimal Pigouvian tax to correct a negative externality

We have almost reached the end of our journey in Microeconomics Land, and hopefully, you have found it enjoyable! We hope to see you soon on another trip with us at StudySmarter!

How can StudySmarter Support Me in Studying Microeconomics?

StudySmarter can support you in studying microeconomics as no other platform can! It allows you to be organized by keeping all your study materials in one place. No more mess with all those documents, as you can upload them without limits! Our magnificent note-making tool allows you to prepare notes faster than ever before. You can also create your own study materials using our templates without worrying about any formatting. And as we know how precious your time is, you will be able to establish and follow up on your weekly goals. Smart reminders are there to keep you on track in your learning journey! With a personalized study plan reinforced by quizzes and flashcards to test your knowledge, you will rock that microeconomics exam in no time! The study analytics tool will show you the areas you need to focus on. Oh, and did you hear about that magic marker? StudySmarter will not wait for you to pass your exam to reward you. Earn points, unlock badges, and level up while studying! And because we can only reach you virtually, maybe you can turn those virtual rewards into actual rewards for yourself by treating yourself to something nice! Because you deserve it! Don't wait for another opportunity to study microeconomics elsewhere! Join millions of people in learning right now with StudySmarter!

Microeconomics Revision Guide

At this point, you are probably not surprised that StudySmarter can support you with creating your own microeconomics revision guide! Discover the tools that you can start using now to do well in your microeconomics courses and exams below!

Microeconomics summaries

StudySmarter provides you with ready microeconomics summaries that cover all the essential topics! From individual consumer choice to market efficiency, it's all there, so check it out! And if you think you are already comfortable with some of the topics, we've got you covered too! Our deep-dives will provide all these extra peculiar facts and statistics so that you can extend your knowledge even further! And did we mention that you can use this additional knowledge to perk up your exam grades too?

Microeconomics flashcards

Microeconomics flashcards are an interactive way to learn the topics, and they are already waiting for you! From open-ended questions to MCQs - we've got you covered! You will scratch your head a few times before you will be able to answer those, as they are tricky! They will not only help you stay on track with your progress and think about the subject more but also reinforce your knowledge in all those areas you might have struggled with before!

Microeconomics study groups

Can we share with you a little secret? Studying is best with other people. Why? Because it will help you keep up your learning pace, open opportunities for seeking help, and, most importantly, reinforce your memory. Don't you remember the feeling after you try to explain a concept to someone else? It's definitely a feeling of gaining more confidence in your knowledge! From sharing study materials, to access to the whole StudySmarter learning community, microeconomics study groups will open a new window of opportunity and help you learn faster and more efficiently than ever before!

Frequently Asked Questions about Microeconomics

Microeconomics is the branch of economics that studies the decision-making of individuals, households, and firms regarding the allocation of their scarce resources, and the interaction between these agents.

The main difference between microeconomics and macroeconomics is their scope. Microeconomics is a study on a smaller scale, as it focuses on parts of the economy such as individuals, firms, and industries. Macroeconomics has a broader focus and looks at the economy as a whole.

The fields of study in microeconomics are many and varied but the main are:

1. Consumer rationality

2. Price determination in a competitive market

3. Production, cost, and revenues 

4. Market structures 

5. Labour market 

6. Market failure 

7. Distribution of wealth

Some theories of microeconomics include, but are not limited to:

1. Consumer choice theory

2. Production theory

3. Labour market theory

The microeconomic theory objectives are to explain how individual units of the economy make decisions with scarce resources while facing changes.

Final Microeconomics Quiz

Microeconomics Quiz - Teste dein Wissen

Question

What is a firm’s main objective?

Show answer

Answer

Profit maximisation.

Show question

Question

Who are the customers of a firm?


Show answer

Answer

Individual customers, businesses, or governments.

Show question

Question

What are the financial goals of a firm?


Show answer

Answer

Profit maximisation, market share expansion.

Show question

Question

What is a firm's profit?


Show answer

Answer

The difference between the total costs and revenues.

Show question

Question

How to maximise a firm’s profit?


Show answer

Answer

 Profit is maximised when marginal costs equal marginal revenues.

Show question

Question

What are some non-financial objectives of a firm?


Show answer

Answer

Customer satisfaction, job satisfaction, corporate social responsibility.

Show question

Question

How to improve employees’ job satisfaction?


Show answer

Answer

Activities to boost job satisfaction can be taking care of employees’ well-being, offering incentives for good performance, providing an opportunity to learn, and communicating.

Show question

Question

Why is corporate social responsibility important?


Show answer

Answer

Corporate social responsibility (CSR) includes activities taken by companies to create a positive impact on the society and environment.

Show question

Question

Define government intervention.

Show answer

Answer

Government intervention is when a government is involved in the marketplace.

Show question

Question

Why do governments intervene in the marketplace?


Show answer

Answer

To overcome market failure.

Show question

Question

What are the types of government intervention?


Show answer

Answer

Taxes 

Subsidies 

Minimum and maximum prices 

Regulations

Show question

Question

What are subsidies?


Show answer

Answer

Subsidies are financial support to products with positive externalities.

Show question

Question

What are minimum prices?


Show answer

Answer

Setting a lower limit for prices by the government.

Show question

Question

What are the disadvantages of setting minimum prices?


Show answer

Answer

It can be costly for the government and force it to put tariffs on cheap imports – which damages the welfare of farmers in other countries.

Show question

Question

Give an example of maximum prices.


Show answer

Answer

The price for bread cannot be higher than 80p/100g.

Show question

Question

What can create a shortage?


Show answer

Answer

maximum prices

Show question

Question

What are regulations?


Show answer

Answer

Regulations include non-market based ways of intervention in markets.

Show question

Question

Give an example of regulations.


Show answer

Answer

Minimum age laws on alcohol, maximum CO2 emissions for vehicles, ban on diesel cars.

Show question

Question

What are the advantages of government intervention?


Show answer

Answer

The advantages of government intervention are equality, fighting monopolies, public goods, consumer behaviour and environmental protection.

Show question

Question

What are the disadvantages of government intervention?


Show answer

Answer

The disadvantages of government intervention are worsening the situation, limited choice of products, pressure and dicrimination.

Show question

Question

What are public goods?


Show answer

Answer

Some goods and services are not provided in a free market because they do not give any financial benefits. Instead, they can be provided by the government.

Show question

Question

What is government failure?


Show answer

Answer

Government failure is an economic inefficiency caused by government intervention. It is when the government intervenes in the market with good intentions, but in result, creates even more problems by either deepening the market failure or causing a new failure.

Show question

Question

What is monopolistic competition?

Show answer

Answer

Monopolistic competition is the market structure in which many firms compete to sell slightly differentiated products.

Show question

Question

What are the characteristics of monopolistic competition? 


Show answer

Answer

The characteristics are:

  • A large number of firms.
  • Slightly differentiated products.
  • No barriers to entry.
  • Firms are price makers. 

Show question

Question

What does the demand curve for individual firms in monopolistic competition look like?


Show answer

Answer

It is more elastic than the demand curve in monopoly, though not perfectly elastic as in perfect competition.

Show question

Question

Are firms in monopolistic competition price-takers or price-makers? 


Show answer

Answer

Price makers, though they have limited market power.

Show question

Question

How is the barrier to entry for a new firm in a monopolistic competition market?

Show answer

Answer

Low or no barrier to entry. Firms can enter and exit the market any time.

Show question

Question

How can firms in monopolistic competition differentiate their products? 


Show answer

Answer

Products in monopolistic competition can be differentiated with physical attributes such as taste, smell, and sizes, or intangible attributes such as brand reputation, and eco-friendly image.

Show question

Question

When does profit optimization happen in monopolistic competition? 


Show answer

Answer

At output Q where MC = MR.

Show question

Question

How can firms in monopolistic competition enjoy abnormal profit? 


Show answer

Answer

In the short-run, companies in a monopolistic market are able to earn abnormal profits at the output where marginal costs equal marginal revenues. 

Show question

Question

Do the abnormal profits in monopolistic competition last in the long run? 


Show answer

Answer

In the long, due to the increase in the number of firms, the price of the product will drop. Thus, the firms will only make normal profits. 

Show question

Question

What are some examples of fixed costs?

Show answer

Answer

Some examples of fixed costs include the maintenance costs of an office building, rent, salaries, interest on loans, advertising, and business rates.

Show question

Question

What are some examples of variable costs?

Show answer

Answer

 Some examples of variable costs include wage costs, basic raw materials (wood, metal, iron), energy costs, fuel costs, and packaging costs.

Show question

Question

What are total costs?

Show answer

Answer

The total costs (TC) of a company are the fixed costs (FC) and variable costs (VC) added together.

Show question

Question

What are average costs?


Show answer

Answer

The average cost (AC) or unit cost is calculated by dividing the firm’s total cost of production by the quantity (Q) of output produced.

Show question

Question

 What is the definition of market failure?

Show answer

Answer

Market failure is an economic term that describes the situation in which the markets perform inequitably (unfairly or unjustly) or inefficiently.

Show question

Question

What causes market failure?

Show answer

Answer

Market failure is caused by an inefficient allocation of resources which prevents supply and demand curves from meeting at the equilibrium point.

Show question

Question

Give an example of a market failure.

Show answer

Answer

The free-rider problem. This occurs when there are too many non-paying consumers using goods and services. For example, if too many non-paying consumers listen to the public radio station without giving a donation, the radio station should rely on other funds such as the government, to survive. 

Show question

Question

What does non-rival goods mean?


Show answer

Answer

The non-rival goods category means that if one person consumes this good it does not prevent another person from consuming it.

Show question

Question

What is the difference between exclusive and non-exclusive goods?


Show answer

Answer

Exclusive goods prevent non-paying customers from consuming this good. Non-exclusive goods do not prevent non-paying customers from consuming this good or service.

Show question

Question

What is the difference between pure and impure public goods?


Show answer

Answer

Pure public goods have both characteristics non-rival and non-exclusive while impure public goods have only one of those characteristics.

Show question

Question

What are the main types of market failure?


Show answer

Answer


  • Complete
  • Partial


Show question

Question

What does complete market failure mean?


Show answer

Answer

Complete market failure means that there are no goods supplied in the market at all.

Show question

Question

Give an example of a 'missing market'.


Show answer

Answer

If consumers would like to buy pink shoes, but there are no businesses that supply them. These results in missing markets for this good.

Show question

Question

What does a partial market failure mean?


Show answer

Answer

In this situation, the market still functions. However, the number of goods demanded does not equal the supply. This results in a shortage or excess supply and inefficient pricing of the goods.

Show question

Question

What are the main causes of market failure?


Show answer

Answer


  • Public goods

  • Negative externalities

  • Positive externalities 

  • Merit goods

  • Demerit goods

  • monopoly

  • Inequalities in the distribution of income and wealth 

  • Environmental concerns

Show question

Question

Give an example of how negative externalities cause market failure.

Show answer

Answer

Negative externalities are referred to as indirect costs to individuals. For example, production factories may be releasing dangerous chemicals into the air that may be harmful to people's health to lower the cost of production. This will cause market failure as due to lower production costs there will be excessive production that does not reflect the true product's price and an over-polluted environment.

Show question

Question

Give an example of how demerit goods cause a market failure.

Show answer

Answer

Demerit goods are harmful to society, such as alcohol and cigarettes. Market failure happens as smokers do not realize the effect that they have on society such as passing the smell and negatively impacting second-hand smokers. They can also cause long-term health problems for themselves and for others. This is all due to overconsumption of this demerit good.

Show question

Question

What does monopoly mean?


Show answer

Answer

Monopoly means that there is a single or only a few producers in the market which own a vast majority of the market share.


Show question

Question

Give an example of how unequal distribution of income and wealth causes market failure.


Show answer

Answer

The market failure can be caused by the unequal allocation of income and wealth. For example, due to technology someone receives an extremely high salary in comparison to average workers.

Show question

Flashcards in Microeconomics6366

Start learning

What is a firm’s main objective?

Profit maximisation.

Who are the customers of a firm?


Individual customers, businesses, or governments.

What are the financial goals of a firm?


Profit maximisation, market share expansion.

What is a firm's profit?


The difference between the total costs and revenues.

How to maximise a firm’s profit?


 Profit is maximised when marginal costs equal marginal revenues.

What are some non-financial objectives of a firm?


Customer satisfaction, job satisfaction, corporate social responsibility.

60%

of the users don't pass the Microeconomics quiz! Will you pass the quiz?

Start Quiz

How would you like to learn this content?

Creating flashcards
Studying with content from your peer
Taking a short quiz

How would you like to learn this content?

Creating flashcards
Studying with content from your peer
Taking a short quiz

Free microeconomics cheat sheet!

Everything you need to know on . A perfect summary so you can easily remember everything.

Access cheat sheet

Join over 22 million students in learning with our StudySmarter App

The first learning app that truly has everything you need to ace your exams in one place

  • Flashcards & Quizzes
  • AI Study Assistant
  • Study Planner
  • Mock-Exams
  • Smart Note-Taking
Join over 22 million students in learning with our StudySmarter App Join over 22 million students in learning with our StudySmarter App

Sign up to highlight and take notes. It’s 100% free.

Start learning with StudySmarter, the only learning app you need.

Sign up now for free
Illustration