Understanding the Key Definitions in Microeconomics

By Peter Antonioni, Manzur Rashid

Part of Microeconomics For Dummies Cheat Sheet, UK Edition

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.