Meaning and scope of microeconomics

The essentials

Economics studies how people use scarce resources to satisfy unlimited wants. Because resources have alternative uses, every choice has an opportunity cost: the value of the next best alternative given up.

Microeconomics studies individual economic units, such as a consumer, a firm or the market for one good. It asks how the price of a single commodity is set or how a firm decides its output. Macroeconomics studies the economy as a whole: national income, total employment, the general price level and economic growth.

Key points

• What to produce and in what quantities: which goods (food, clothes, machines) and how much of each.
• How to produce: which technique to use, for example labour-intensive or capital-intensive.
• For whom to produce: how the output is distributed among people.
• Production possibility curve (PPC): shows all combinations of two goods an economy can produce with given resources and technology, using them fully and efficiently.
• A point inside the PPC shows under-utilisation or unemployment of resources; a point outside is unattainable.
• Marginal opportunity cost (MOC): the amount of one good given up to produce one more unit of the other. A PPC is concave to the origin because MOC increases, since resources are not equally suited to every use.
• An outward shift of the PPC shows growth of resources or better technology.
• A centrally planned economy solves the central problems through a government authority; a market economy solves them through prices; a mixed economy combines both.

Exam tips

• Read examples carefully: a single industry or firm points to micro; aggregates like national income or general price level point to macro.
• For PPC numericals, MOC of the nth unit = loss in the other good when moving from (n−1) to n units.

Common mistakes

• Calling the total loss from the origin the marginal opportunity cost. MOC is the loss for one extra unit only.
• Thinking a concave PPC means constant opportunity cost; a straight-line PPC means constant MOC.