Microeconomics

When we have studied equilibria so far, it has always been so-called partial equilibria. (A partial equilibrium is one where we assume that “everything else is unchanged.”) However, we have also seen that a change in one variable can lead to changes in many other variables, so the restriction that everything else is unchanged may not be very realistic.

At the heart of economics lie three fundamental concepts: supply, demand, and market equilibrium. These forces shape prices, influence consumer behavior, and determine how resources are allocated in an economy. Whether you’re shopping for groceries, investing in stocks, or running a business, understanding these principles can help you make informed decisions.

A producer uses raw materials, capital, and labor to produce goods and services. Here, we will present a simple model for how they decide how much to produce and which technology to use for production. A large part of producer theory is very similar to consumer theory.

Definition of Public and Private Goods

A public good is a good that fulfills both of the following two criteria: Nonrival. One individual’s consumption of the good does not affect any other individual’s consumption of the same unit of the good. Examples include lighthouses, television, parks, military defense, and streets with little traffic.

If the firm rents its capital, the problem of how much to rent is, more or less, the same as the problem of how much labor to use. It rents precisely so much that the rental rate becomes equal to the marginal revenue product of capital (compare to Labor), i.e. until