What is difficult about microeconomics? Basically nothing. Microeconomics is one of the most rigorous edifices of thought that has ever been built. The two pillars on which it rests - the theories of supply and demand - are completely symmetrical, which gives this edifice transparency, structure, logic, clarity, even an air of beauty, and above all surprising simplicity.
The symmetry and the aesthetic quality that symmetry always creates were achieved at a high price: Supply theory had to be constructed as the exact mirror image of demand theory. This has disastrous consequences: Any beginner can see that substantial parts of supply theory and some important theories derived from it are wrong. As a result, students feel that some of the theories they are expected to learn are faulty and that most of them are rather complicated.
The best way to escape from this dilemma is to learn the essentials of micro as thoroughly and rapidly as possible. This endeavour takes less than an hour and will reveal how simple microeconomics is. Thereafter you must, of course, put some flesh on this structure with the help of the Crash Course or some other textbook. But the impression that you are expected to master masses of complicated and at times confused theories will be gone for good.
What will also be gone is the feeling of helplessness that often accompanies pontificating instruction in economics. The Chapter-by-Chapter Critique enables you to explain precisely why many of the theories you are taught are simply wrong.
Further support for students comes from the References and Further Reading Sections following the Critique. Introducing you to the critical writings of eminent mainstream economists, they reveal that textbook authors not only conceal the criticism levelled at microeconomics by heterodox - i.e. non-neoclassical - economists but also conceal the critical writings by their mainstream colleagues.
So, let's get going. The first step for newbies and self-styled dummies is to get a sound grasp of the logical structure of supply and demand theory. Below you will find the standard graph that illustrates the fundamentals of microeconomics and a chart that summarises them.
GRAPH
The Standard Graph Illustrates the Fundamentals of Microeconomics
The demand curve slopes downwards. This is due to two laws. (1) The law of demand, which states that more is bought as prices fall. (2) The law of diminishing utility, which states that the utility of additional units diminishes as more is consumed.
The supply curve slopes upwards. This is also due to two laws. (1) The law of supply, which states that more is supplied as prices rise. (2) The law of diminishing returns, which states that marginal costs (costs of additional units) rise as output in expanded because increases in output following increases in some but not all inputs diminish.
The interaction between demand, supply and prices leads to equilibrium at the equilibrium price where the market is cleared.
CHART
The Symmetry between the Theories of Supply and Demand
Quantity Supplied and Demanded
These are the quantities supplied or demanded at particular prices. They are represented by particular points on the respective curves.
Supply and Demand
They are the quantities supplied or demanded at any possible price. They are represented by the respective curves as a whole.
Movements along the Curves
They are changes in quantities supplied or demanded in response to price changes.
Shifts of the Curves
They are changes in supply or demand in response to changes in exogenous variables.
Reasons for the Slopes of the Curves
The slope of the demand curve: The law of demand and diminishing marginal utility.
The slope of the supply curve: The law of supply and diminishing marginal returns.
The Ability to Buy
It is explained by the law of demand.
The Willingness to Buy
It is explained by diminishing marginal utility.
The Ability to Produce
It is explained by diminishing marginal returns.
The Willingness to Produce
It is explained by the law of supply.
Price Elasticity
Price elasticity of supply and demand is measured by a fraction.
Percentage change in quantity supplied/demanded is given in the numerator.
Percentage change in price is given in the denominator.
Supply and demand are elastic if the numerator exceeds the denominator.
Utility/Profit Maximisation
Consumers maximise utility by expanding their purchases until the utility received from the last unit equals the price to be paid for this unit.
Producers maximise profits by expanding output until the price received for the last unit produced equals the cost incurred by producing this unit.
The Equimarginal Principle
Consumer and supplier behaviour is guided by the equimarginal principle.
Consumers buy bundles. Utility has been maximised when the ratio of the marginal utilities of the commodities in their bundles to the market prices of these commodities (MU/P) is equal for all commodities.
Producers employ combinations of factors. Costs have been minimised when the ratio of marginal products (increase in output generated by one additional unit of a factor) to prices of factors (MP/P) is equal for all factors.
These are additional approaches to explain consumer and producer behaviour.
Consumers are indifferent about the contents of the commodity bundles they buy.
Producers are indifferent about the mix of factors they employ.
Consumers buy a bundle when the ratio of their subjective barter prices to actual market prices is equal for all commodities in their bundle.
Producers employ a combination of factors when the ratio of marginal product to the actual price of a factor is equal for all factors.
In either case, the decision on the commodity/factor mix is ultimately determined by budget constraints.
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