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Essentials of Microeconomics

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Language:  English
In this textbook you can read about how to develop models that describes how an economy works.
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In this textbook you can read about how to develop models that describes how an economy works. The book provides a comprehensive overview of all facets from Microeconomics.

Starting with the market, consumers and producers followed by demand and production. You can also read about Monopoly, Price discrimination and Game theory.

Download the exercise book and test what you have learned.

This free eBook can be read in combination with and in some cases instead of the following textbooks:

  • Microeconomics 19th edition, by Campbell R McConnell, Stanley L Brue, & Sean Masaki Flynn
  • Microeconomics 3rd edition, by Paul Krugman & Robin Wells
  • Microeconomics 4th edition, by R Glenn Hubbard & Anthony Patrick O'Brien/li>
  • Microeconomics 8th edition, by Robert Pindyck & Daniel Rubinfeld
  • Microeconomics 14th edition, by James D Gwartney, Richard L Stroup, Russell S Sobel & David A MacPherson
  • Microeconomics 10th edition, by Michael Parkin
  • Microeconomics 9th edition, by William Boyes & Michael Melvin
  • Microeconomics 12th edition, by William J Baumol & Alan S Blinder
  • Microeconomics 6th edition, by Jeffrey M Perloff
  • Microeconomics 8th edition, by David C Colander & Bradley R Schiller

Economics is often defined as something along the lines of “the study of how society manages its scarce resources.” The starting point of most such studies is that individuals allocate their resources such that they themselves will get the highest possible level of utility. An individual has an idea of what the con-sequences of different actions will be, and she chooses that action she believes will produce the best result for her. She is, in other words, selfish and rational. Note that she is also forward-looking. She acts so that she in the future will get the highest possible level of utility, independently of what she has already done. That she is selfish does not have to mean that she is an egoist. However, it does mean that she will only voluntarily share with others if she believes that she thereby will maximize her own utility. We often call this simplification of human beings Homo Economicus.

Economics: The study of how society manages its scarce resources

Homo Economicus: A model of human beings. She is assumed to maximize her own utility.

The resources that we are talking about here could be labor, capital (such as machines), and raw materials. That they are scarce means there are not enough resources to produce everything we want. That, in turn, means that one has to weight different things against each other. To get more of one thing, one has to give up something else. If you, e.g., want to sleep an extra hour, it is impossible to do so without giving up something else, such as an hour of studying. There is, consequently, a sort of a hidden cost to sleeping longer. This type of cost is called opportunity cost (or alternative cost). A classical saying in economics is that “there is no such thing as a free lunch.” This means that, even if you do not actually pay for the lunch, you always have to give up at least the time when you could have done something else. That is, you always have to pay the opportunity cost.

Resources: Labor, capital and raw materials. The things we use to produce goods and services.

Opportunity/alternative cost: The (hidden) cost of choosing one alternative instead of another.

When we study microeconomics, it is primarily individual human beings and individual firms, agents, that we study. This is in contrast to macroeconomics, where one studies whole economies, and questions such as unemployment and inflation.

Microeconomics: The study of the economic behavior of individual human beings and firms.

Agent: An entity that is capable of making a deci-sion, e.g. a human being or a firm.

Macroeconomics: The study of whole economies.

Roughly speaking, there are three types of decisions that need to be made in an economy: Which goods and services to produce, how to produce them, and who should get them. Often in economic models, the prices of goods (or ser-vices, labor, capital, etc.) automatically coordinate these decisions in a market. A market is any mechanism where buyers and sellers meet. That could be, for example, a market square, a stock exchange, or a computer network where one can buy and sell things.

Market: Meeting place where buyers and sellers are able to trade with each other.

Microeconomics if often based on models. We try to describe a real phenome-non as simply as possible by only highlighting a few central features. Many economic models can be used for predictions and can therefore be tested against reality. Such models are called positive. The opposite kind of models, models that are about values, is called normative. For example, to decide about an economic policy one would first use positive economics to make as-sessments about the consequences of different alternatives. Then one would use one’s opinions about what is desirable and what is not to choose between the different alternatives. That is then a normative decision.

Model: A simplified description of reality.

Positive economics: A testable economic model.

Normative economics: An economic model that includes values (and therefore is not testable).

  1. Introduction
    1. Plan
  2. Supply, Demand, and Market Equilibrium
    1. Demand
    2. Supply
    3. Equilibrium
    4. Price and Quantity Regulations
  3. Consumer Theory
    1. Baskets of Goods and the Budget Line
    2. Preferences
    3. Indifference Curves
    4. Indifference Maps
    5. The Marginal Rate of Substitution
    6. Indifference Curves for Perfect Substitutes and Complementary Goods
    7. Utility Maximization: Optimal Consumer Choice
    8. More than Two Goods
  4. Demand
    1. Individual Demand
    2. Market Demand
    3. Elasticity
  5. Income and Substitution Effects
    1. Normal Good
    2. Inferior Good
  6. Choice under Uncertainty
    1. Expected Value
    2. Expected Utility
    3. Risk Preferences
    4. Certainty Equivalence and the Risk Premium
    5. Risk Reduction
  7. Production
    1. The Profit Function
    2. The Production Function
    3. Production in the Short Run
    4. Production in the Long Run
  8. Costs
    1. Production Costs in the Short Run
    2. Production Cost in the Long Run
    3. The Relation between Long-Run and Short-Run Average Costs
  9. Perfect Competition
    1. Introduction
    2. Conditions for Perfect Competition
    3. Profit Maximizing Production in the Short Run
    4. Short-Run Equilibrium
    5. Long-Run Production
    6. The Long-Run Supply Curve
    7. Properties of the Equilibrium of a Perfectly Competitive Market
  10. Market Interventions and Welfare Effects
    1. Welfare Analysis
  11. Monopoly
    1. Barriers to Entry
    2. Demand and Marginal Revenue
    3. Profit Maximum
    4. The Deadweight Loss of a Monopoly
    5. Ways to Reduce Market Power
  12. Price Discrimination
    1. First Degree Price Discrimination
    2. Second Degree Price Discrimination
    3. Third Degree Price Discrimination
  13. Game Theory
    1. The Basics of Game Theory
    2. The Prisoner’s Dilemma
    3. Nash Equilibrium
    4. A Monopoly with No Barriers to Entry
    5. Backward Induction
  14. Oligopoly
    1. Kinked Demand Curve
    2. Cournot Duopoly
    3. Stackelberg Duopoly
    4. Bertrand Duopoly
  15. Monopolistic Competition
    1. Conditions for Monopolistic Competition
    2. Market Equilibrium
  16. Labor
    1. The Supply of Labor
    2. The Marginal Revenue Product of Labor
    3. The Firm’s Short-Run Demand for Labor
  17. Capital
    1. Present Value
    2. Correction for Risk
    3. CAPM: Pricing Assets
    4. Pricing Business Projects
  18. General Equilibrium
    1. A “Robinson Crusoe” Economy
    2. Efficiency
    3. The Edgeworth Box
    4. Efficient Consumption in an Exchange Economy
    5. The Two Theorems of Welfare Economics
    6. Efficient Production
    7. The Transformation Curve
    8. Pareto Optimal Welfare
  19. Externalities
    1. Definition
    2. The Effect of a Negative Externality
    3. Regulations of Markets with Externalities
  20. Public Goods
    1. Definition of Public and Private Goods
    2. The Aggregate Willingness to Pay
    3. Free Riding
  21. Asymmetric Information
    1. Adverse selection
    2. Moral hazard
  22. Key Words
A Good guide for Graduate Students in Economics. Also, very useful for general theoretical knowledge in economics.
Great book. Useful for economics and finance courses.
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Krister Ahlersten