Lynne Pepall

Although micro means small, microeconomics covers a wide set of topics. These include how consumers and businesses make choices and how those choices interact through the forces of supply and demand in the marketplace; when market outcomes might be considered good and why monopoly power and information problems can make those outcomes less good; problems of risk and insurance; and the gains from international trade.

Perfect competition is the name economists give to a market with many interchangeable firms, none of which can independently influence the market outcome. This scenario isn't all that likely in the real world, because it depends on a set of conditions that are unlikely to hold. But some markets do get quite close to approximating perfect competition; of course, many others do not come close.

Economists don't take the nature of changing inputs into outputs for granted. Since Adam Smith, economists have been describing in various ways the methods a firm can use to transform inputs into outputs, which they call technologies. A technology is a description of the way a firm transforms inputs into outputs.

Changing income shifts your budget constraint up or down, or if all the prices of the goods you're interested in change at the same rate, your budget constraint shifts up or down in a similar fashion. But suppose that some prices change more than others. It's more likely that some prices go up and others stay the same rather than all prices changing by the same percentage.

Suppose that you want to compare bundles that are on different levels of utility. Easy! You draw a set of indifference curves moving away from the origin. Each individual curve has the same level of utility along the curves, and each curve expresses a higher level of utility the further away from the origin it is!

Many economic activities require rather more than simply buying something and selling it on. These stages of creating the product involve more complex forms of organization than that of the sole trader. Consider, for example, the set of production processes involved in making computers: dealing with contractors; managing international product development; creating the complementary products (software and operating systems); and managing the people and processes involved.

The important difference between the model of an oligopoly and the model of a perfectly competitive market is that firms in oligopoly can influence market outcomes. As a result, firms behave strategically and try to anticipate the strategic interactions among each other. This means that they form beliefs about what their rivals might do in response to their acts.

Economists distinguish between the long- and short-run positions of a firm. They do so because a firm can find itself, in the short run, in a number of positions where it is constrained. It can't fully react to change immediately and therefore makes slightly different decisions than it would if there were no constraints — in other words, different than it would in the long run if it were fully capable of reacting to whatever change (pricing, technological, demand, and so on) was taking place.