Principles of Microeconomics Introduction

DiscussEconomics is about to being a series on introductory principles of microeconomics. This is perfect for beginner economists, those looking to brush up on some basic terms, and first year University students. I’m assuming that you can differentiate between the studies of micro and macro economics so don’t expect an explanation here!

Introduction to Microeconomics

There are fundamental assumptions when using microeconomic models while you’re trying to explain consumer and market behaviour. Firstly, firms (businesses) are assumed to operate with the fundamental intention of maximizing profits. Here are some more terms that are useful:

Total Revenue (TR):

    Is the amount that firms receives for the sale of its product
    TR = Price x Quantity
    = P x Q

Recall that a firm’s cost of production include:

    Explicit costs – direct money outlay for factors of production.

    Implicit or “imputed” costs – Do not involve a direct money outlay.

Cost-output relationships

Fundamental point in cost analysis

***A functional relationship exists between the costs of production and the rate of output per period of time (ie. productivity)***

Cost function:

    Indicates what the cost will be at alternative output rates

    Cost = f (output)

But we know from our production analysis that:

    outputs = f (inputs)

***Consequently, the level and behaviour of costs as a firm’s rate of output changes depend on:

    1. The character (shape) of the production function;
    2. The prices the firm must pay for its inputs.

[tags]intro microeconomics, introductory microeconomics, microeconomics, cost production[/tags]


  1. Being an ignorant I decided to look up what the difference between implicit and explicit costs is. So here an example for everybody.

    From Wikipedia:

    Implicit Cost + Explicit Cost = Total Cost. Implicit cost is NOT equal to total cost, but a component of it. A simple example: Paul builds a cabinet. He spends 2 hours building the cabinet. He could have been working instead and normally makes $25/hour at his job. Since he was building a cabinet he wasn’t paid for this time. The materials to make the cabinet cost him $20.

    * His Explicit Costs are: $20 in materials
    * His Implicit Costs are: $25/hr x 2 hrs= $50 of foregone pay
    * His Total Costs are: $20 in materials + $50 of foregone pay = $70 Total Costs


    1. Wikipedia calls implicit costs opportunity costs. There are other implicit costs, apart from opportunity costs. For example, the loss of value in your machine (different than the opportunity cost of your investment in the machine): every year because of the use you have given to it, your machine will have a different value (approximated by its market price)

  2. Why is the slope of supply an unsatisfactory measure of the responsiveness in the quantity supplied of a commodity to a change in its price?

    1. Because it is measured in the units of production and the monetary units… you will obtain a different number if it is grams or pounds or whatever. Elasticities is % per % point, so you can measure your production in grams or pounds or whatever, the number for elasticity should stay the same (same for euros, dollars, etc)

  3. Ahmed: I think you are asking why the slope of the supply curve is different from the elasticity of supply. The slope of the supply curve is calculated as the change in price divided by the change in quantity. Elasticity is calculated by taking the percent change in quantity divided by the percentage change in price.

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