Introduction to Microeconomics Basics

Microeconomics is one of the two core branches of economics, alongside macroeconomics. Its core research focus is the behavior of individual economic agents and the operating rules of single markets. It examines how households, firms, and other microeconomic entities make decisions, and how these decisions influence market supply, demand, prices, and resource allocation.

I. Core Research Objects

Microeconomics centers on individual economic units and single markets, mainly covering three types of agents and their corresponding markets:

1. Consumers (Households)
   It studies how households choose to purchase a combination of goods and services to maximize their own utility (satisfaction) under the constraint of limited income.
2. Producers (Firms)
   It explores how firms select combinations of production factors and output levels to maximize profits under cost constraints.
3. Single Markets
   It analyzes the supply-demand relationship, price formation mechanism of specific goods or services, and the impact of market structures (such as perfect competition, monopoly, oligopoly, etc.) on market efficiency.

II. Basic Assumptions

The theories of microeconomics are built on a set of simplified assumptions, which serve as the premise for analysis:

1. Rationality Assumption
   Also known as the "economic man assumption", this is the core premise of microeconomics. It assumes that both consumers and producers act rationally, with the goals of maximizing utility and profits respectively.
2. Perfect Information Assumption
   It is assumed that both buyers and sellers in the market can obtain all information related to transactions, and there is no information asymmetry.
3. Market Clearing Assumption
   This assumption holds that the supply and demand in the market can automatically reach an equilibrium state, with no excess supply or excess demand.

III. Core Theoretical Sections

1. Demand and Supply Theory

As the foundational theory of microeconomics, it explains the mechanism of market price formation.

• Demand
  It refers to the quantity of a good that consumers are willing and able to buy at different price levels within a certain period. Demand is affected by factors such as the price of the good, consumer income, prices of related goods, preferences, and expectations. It follows the Law of Demand—the higher the price, the lower the quantity demanded, and vice versa.
• Supply
  It refers to the quantity of a good that producers are willing and able to offer at different price levels within a certain period. Supply is influenced by factors including the price of the good, production costs, production technology, and expectations. It complies with the Law of Supply—the higher the price, the higher the quantity supplied, and vice versa.
• Market Equilibrium
  When the quantity demanded in the market equals the quantity supplied, the equilibrium price and equilibrium quantity are achieved, and the market is in a stable state. If supply and demand are imbalanced, prices will adjust automatically until equilibrium is restored.

2. Consumer Behavior Theory

This theory studies how consumers make optimal consumption choices under income constraints, with the core tool being utility theory:

• Cardinal Utility Theory
  It assumes that utility can be measured by specific numerical values. The consumer equilibrium condition is derived through marginal utility analysis—consumers allocate their income such that the marginal utility per unit of money spent on each good is equal.
• Ordinal Utility Theory
  It posits that utility can only be ranked (e.g., the utility of good A is greater than that of good B) rather than quantified. Consumer equilibrium is analyzed by finding the tangent point of indifference curves and the budget line. At this tangent point, the consumer's subjective preferences match the objective income constraints optimally.

3. Producer Behavior Theory

This theory investigates firms' production and cost decisions, divided into production theory and cost theory:

• Production Theory
  It analyzes how firms combine production factors (labor, capital, land, etc.) for production. Core concepts include the production function, the Law of Diminishing Marginal Returns (when other factors are fixed, continuously increasing the input of one factor will eventually lead to a decline in marginal product), and economies and diseconomies of scale.
• Cost Theory
  It examines various costs of production (e.g., explicit and implicit costs, fixed and variable costs, average and marginal costs). The core is to find the profit-maximizing output level—the output at which marginal revenue equals marginal cost (MR = MC).

4. Market Structure Theory

Markets are classified into four types based on the number of firms, product differentiation, barriers to entry, and other factors. It analyzes firms' pricing and output decisions under different structures:

5. Factor Market Theory

Also known as distribution theory, it studies the price determination of production factors, i.e., how wages for labor, interest for capital, and rent for land are formed. The core is the Marginal Productivity Theory—the price of a factor equals the value of its marginal product.

6. Market Failure and Microeconomic Policies

Market failure occurs when the market mechanism fails to achieve optimal resource allocation. Its causes include:

• Monopoly: Monopolistic firms restrict output and raise prices, resulting in efficiency losses.
• Externalities: The impact of an economic activity on third parties that is not reflected in market prices (e.g., negative externality of pollution, positive externality of vaccines).
• Public Goods: Goods with non-excludability and non-rivalry (e.g., national defense, street lamps), which the market cannot provide efficiently.
• Information Asymmetry: Differences in information between buyers and sellers leading to adverse selection and moral hazard (e.g., lemons problem in the used car market).

To address market failure, the government needs to implement microeconomic policies such as antitrust laws, taxes or subsidies, provision of public goods, and strengthening information disclosure.

IV. Core Research Methods

1. Marginal Analysis Method
   As the core analytical tool of microeconomics, it studies the impact of changes in "marginal quantities" (e.g., marginal utility, marginal cost, marginal revenue) on decision-making. The principle of rational decision-making is that marginal revenue is greater than or equal to marginal cost (MR ≥ MC).
2. Equilibrium Analysis Method
   It analyzes the conditions under which economic variables reach a stable state, including partial equilibrium (equilibrium in a single market) and general equilibrium (simultaneous equilibrium in all markets).
3. Positive and Normative Analysis
   • Positive Analysis: Answers the question of "what is", describing the objective laws of economic phenomena without involving value judgments.
   • Normative Analysis: Addresses the question of "what ought to be", putting forward policy recommendations based on value judgments.

V. Differences Between Microeconomics and Macroeconomics

Microeconomics focuses on the "individual", while macroeconomics focuses on the "aggregate". The core differences are as follows: