Professor Yongmin Chen
Topic 1. Introduction to Microeconomic Analysis
What is microeconomics?
Microeconomics studies the behavior of individual economic agents and their
By economic agents we usually mean consumers and firms.
To study the
behavior of consumers and firms is to study how consumers make consumption choices
and how firms make production decisions.
It is the standard approach of
microeconomics, although not without controversy,
to assume that consumers seek to
maximize satisfaction and firms seek to maximize profits.
The mechanism through
which consumers and firms interact with each other is the market.
analyzes the determination of market demand and supply, various forms of market
structures, and how they affect economic efficiency.
To give you an idea the type of questions that microeconomics deals with, let me
start with a simple example.
Consider some of the important decisions a firm, say Dell
Computer, needs to make.
First, Dell needs to decide what kind of computers to produce:
hard disk capacity, RAM, modem, CD-ROM, installed software, monitor, etc.
Second, Dell needs to decide how to produce the computers: in one location or in
different locations; equipment and technologies to use; make or purchase choices, etc.
What may determine Dell’s production decision?
technological feasibility; costs of production; products of other computer producers, and
Third, Dell needs to decide how to price its computers.
This again will depend on
things such as consumer demand and production costs, as well as on the prices of
Now, these decisions are not unique to Dell.
Other computer producers will face
the similar types of decision problems.
In fact, almost all business firms need to make
decisions regarding what to produce, how to produce and how to price their products.