Principles of Microeconomics

Units

1. 1

   Scarcity, choice and the gains from trade

   4 lessons

   1. Scarcity and opportunity costDefine economics as choice under scarcity, compute the opportunity cost of a choice, and decide how much to do of something by comparing marginal benefit with marginal cost.
   2. The production possibilities frontierDraw a two-good production possibilities frontier (PPF), classify output bundles, calculate opportunity cost, and show economic growth.
   3. Absolute and comparative advantageUse hours-per-unit data to identify absolute and comparative advantage and show how reallocating work can raise combined output.
   4. Specialization and the terms of tradeShow that trade helps both parties when the terms of trade lie between their opportunity costs, and plot each person's consumption after specialization and exchange beyond their own PPF.
2. 2

   Supply and demand

   4 lessons

   1. Demand and the law of demandBuild a demand schedule and a downward-sloping demand curve, and tell a movement along the curve (a price change) from a shift of the curve (income, related prices, tastes, expectations, number of buyers).
   2. Supply and the law of supplyBuild a supply schedule and an upward-sloping supply curve, explain why it slopes up, and separate a price-driven movement along it from a shift caused by input prices, technology, expectations or the number of sellers.
   3. Market equilibrium, surplus and shortageFind the equilibrium price and quantity where supply meets demand, on the graph and with linear equations, and explain how a surplus or a shortage pushes the price back to it.
   4. Shifts in supply and demandUse the three-step method to find how a shift of demand, of supply, or of both changes the equilibrium price and quantity, including the cases where one effect cannot be signed without more information.
3. 3

   Elasticity

   3 lessons

   1. Price elasticity of demandCompute price elasticity of demand with the midpoint formula, classify demand as elastic, inelastic or unit elastic, and name the determinants that make demand more or less responsive.
   2. Elasticity and total revenueShow how total revenue P × Q changes when price changes, depending on whether demand is elastic or inelastic, and why elasticity varies along a straight demand line from elastic at the top to inelastic at the bottom.
   3. Income, cross-price and supply elasticityDefine income elasticity of demand, cross-price elasticity of demand and price elasticity of supply, compute each with the midpoint formula, and read the sign and size as normal, inferior, luxury, substitute, complement, elastic or inelastic supply.
4. 4

   Market efficiency and government policy

   5 lessons

   1. Consumer and producer surplusMeasure consumer surplus as the area below demand and above the price, producer surplus as the area above supply and below the price, and show that total surplus is largest at the market equilibrium.
   2. Price ceilings and price floorsShow that a binding price ceiling causes a shortage and a binding price floor a surplus, measure the deadweight loss each creates, and explain why a shortage brings nonprice rationing.
   3. Taxes and tax incidenceShow a per-unit tax as a wedge between the price buyers pay and the price sellers keep, find both prices, and show that the burden falls more on the less elastic side whoever legally pays.
   4. Deadweight loss of taxationCompute the revenue and the deadweight loss of a per-unit tax, show that deadweight loss grows with elasticity and with the square of the tax, and read the Laffer curve.
   5. Gains from trade and tariffsUse consumer and producer surplus in a small open economy to find who wins and who loses from importing and from exporting, show the net gain from trade, and measure the deadweight loss of a tariff or an import quota.
5. 5

   Consumer choice

   3 lessons

   1. Utility and diminishing marginal utilityCompute marginal utility from total utility, state the law of diminishing marginal utility, and use the equal marginal utility per dollar rule to choose how to spend a budget.
   2. Budget constraints and indifference curvesDraw a budget line with slope equal to minus the price ratio, draw indifference curves with a diminishing marginal rate of substitution, and find the optimum where the MRS equals the price ratio.
   3. Income and substitution effectsSplit the response to a price change into a substitution effect and an income effect on the indifference curve diagram, derive points of the demand curve, and explain Giffen goods as a rare exception.
6. 6

   Production and costs

   4 lessons

   1. The production function and marginal productRead a short-run production function from a table and a graph, compute the marginal product of labour, and explain the law of diminishing marginal returns and why it makes extra output cost more.
   2. Short-run cost curvesDerive fixed, variable and total cost, compute average total, average variable, average fixed and marginal cost from a table, and show that marginal cost crosses average variable and average total cost at their minimum points.
   3. Explicit, implicit costs and economic profitSeparate explicit from implicit costs, including the opportunity cost of the owner's time and capital, compute accounting and economic profit, and show that sunk costs are irrelevant to decisions.
   4. Long-run costs and economies of scaleDraw the long-run average cost curve as the lowest short-run average total cost at each output, identify economies of scale, constant returns and diseconomies of scale, and find the minimum efficient scale.
7. 7

   Perfect competition

   3 lessons

   1. The competitive firm's output decisionExplains price-taking firms where price equals marginal revenue, and profit maximization at P = MC, with profit or loss shown as a rectangle on the cost curve diagram.
   2. Shutdown and exit decisionsDerives the short-run shutdown rule (price below minimum AVC) and long-run exit rule (price below minimum ATC), making the MC curve above AVC the firm's supply curve.
   3. Long-run equilibrium in competitive marketsShows entry and exit driving economic profit to zero, price equal to minimum ATC, and long-run market supply for constant, increasing and decreasing cost industries.
8. 8

   Monopoly

   4 lessons

   1. Sources of monopoly powerExplains barriers to entry: control of key resources, patents and copyrights, government licenses, and natural monopoly where average cost falls over the relevant output range.
   2. Monopoly pricing and outputDerives marginal revenue below the demand curve, profit maximization at MR = MC, the monopoly price from demand, and the resulting profit rectangle.
   3. The welfare cost of monopolyCompares monopoly with competitive output to show the deadweight loss triangle, and surveys policy responses: antitrust law, regulation, average cost pricing and public ownership.
   4. Price discriminationDefines price discrimination, its conditions (market power, no resale, differing willingness to pay), perfect price discrimination capturing all surplus, and examples like airline and student pricing.
9. 9

   Oligopoly and monopolistic competition

   4 lessons

   1. Oligopoly and collusionDescribes oligopoly with few interdependent firms, cartels and collusion like OPEC, and why the incentive to cheat makes cartels unstable, with output between monopoly and competition.
   2. Game theory and the prisoners' dilemmaBuilds a two-firm payoff matrix, identifies dominant strategies and Nash equilibrium, and shows why the prisoners' dilemma leads to noncooperation, with repeated games and tit-for-tat.
   3. Monopolistic competitionAnalyzes many firms selling differentiated products with downward-sloping demand, short-run profits, and long-run zero profit tangency with excess capacity and markup over marginal cost.
   4. Advertising and brand namesWeighs critiques and defenses of advertising and brand names as signals of quality, and their effects on competition and consumer information.
10. 10

    Markets for factors of production

    4 lessons

    1. The demand for laborDerives labor demand from the value of marginal product (VMPL = P x MPL), with the firm hiring until VMPL equals the wage, and shifts from output price and technology.
    2. Labor supply and wage determinationExplains labor supply from the work-leisure tradeoff, labor market equilibrium, and how shifts in supply or demand change wages and employment.
    3. Wage differentials and human capitalExplains earnings differences through compensating differentials, human capital, ability, signaling, superstar effects, unions, efficiency wages and discrimination.
    4. Capital, land and monopsonyCovers rental prices of land and capital set by their marginal products, and monopsony in labor markets where a single employer pays below the competitive wage.
11. 11

    Externalities and public goods

    4 lessons

    1. Negative and positive externalitiesDistinguishes private and social cost or benefit, showing overproduction with negative externalities like pollution and underproduction with positive ones like education, plus the resulting deadweight loss.
    2. Pigouvian taxes and tradable permitsCompares command-and-control regulation with Pigouvian taxes and cap-and-trade permits, showing how each internalizes an externality and why market-based tools cut abatement cost.
    3. The Coase theoremStates the Coase theorem that private bargaining reaches efficiency regardless of property rights when transaction costs are low, and why it often fails in practice.
    4. Public goods and common resourcesClassifies goods by excludability and rivalry, explains the free-rider problem for public goods, cost-benefit analysis, and the tragedy of the commons for common resources.
12. 12

    Inequality and poverty

    3 lessons

    1. Measuring inequalityDraws the Lorenz curve, computes the Gini coefficient, and discusses income versus wealth distribution, the poverty rate, and problems such as in-kind transfers and life-cycle effects.
    2. Political philosophy of redistributionCompares utilitarianism, Rawls's maximin principle behind the veil of ignorance, and Nozick's libertarianism as frameworks for judging income redistribution.
    3. Policies to reduce povertyEvaluates minimum wage, welfare, negative income tax, the earned income tax credit and in-kind transfers, including their effects on work incentives and implicit marginal tax rates.