Understanding the Key Definitions in Microeconomics
Microeconomics comes complete with its own set of vocabulary, which can sometimes be confusing. To get a true feel for microeconomics, three key terms must be defined and understood. Those terms are:
Utility: Utility is the value people get from making a choice. You can find out how much utility a consumer gains by working it out from the choice they make. Consumers optimise — get the best level of utility they can, given that they have to do so within a budget constraint.
Profits: Profits are what’s left over from a firm’s revenue once all relevant costs have been accounted for. Firms try to make as much profit as they can, and they do this by producing until marginal revenue — the revenue gained from adding an extra unit — equals marginal cost – the cost of producing that extra unit.
Markets: Markets are places where consumers and firms trade. In a model of a market, consumers optimise their utility and firms try to maximise their profits. The price and quantity in the market will be the affected by lots of things — from the number of firms in the market to the income, or valuations of consumers.