Supply and Demand and Study Guide

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© University of South Australia 2009
This work was printed from camera-ready copy submitted by the Unit Coordinator. The Flexible Learning Centre of the University of South Australia was not involved in its production.


An introduction to the economic perspective13
Demand and supply17
Market applications25
The behaviour of firms and costs31
Perfect competition37
Monopolistic competition47
Economic performance, market failure and government intervention55 Appendix: Guide to working successfully through the unit63


Welcome to Microeconomics 1. In this unit of study, we intend to introduce you to the particular principles, language, techniques and insights associated with an economic perspective of the modern world. The following quotation by John Galbraith underlines the ubiquitous relevance of economics: “To have a working understanding of economics is to understand the largest part of life. We pass our years, most of us, contemplating the relationship between the money we earn and the money we need, our thoughts suspended, as it were, between the two. Economics is about what we earn and what we get for it. So an understanding of economics is an understanding of life’s principal preoccupation”. as well as its role in keeping us abreast of policy issues of relevance: “There’s another thing it can do for you. The newspaper headlines, when they escape from sex and the Middle East, are largely concerned with the economic decisions of governments. If people make no effort to understand these decisions, do not have an intelligent position and do not make that position known, they obviously surrender all power to those who do understand, pretend to understand or believe they understand. And you can be sure that the decisions so made will rarely be damaging to those who make them or to the people they represent”. Source: Galbraith J. and N. Salinger (1978) Almost everyone’s guide to economics, Boston: Houghton Mifflin, p. 2 Economics is concerned with what is termed the economic problem. This fundamental problem, which is faced by all individuals and communities, centres on the inability of available resources to produce the goods and services that are required to satisfy all the material needs and wants of individuals and communities and that choices must be made between alternatives.


The aim of this unit is to help you to develop the understanding, knowledge and practical decision-making skills expected of professionals in the modern economy. Microeconomics will introduce you to the meaning and applications of fundamental economic principles and analytical techniques.

Learning objectives

This unit is designed to introduce students to the meaning and application of fundamental economic principles, and techniques, within a market context. On completion of this unit, students should be able to: • describe some of the fundamental methods and tools of economics • describe the scientific method of analysis

• explain the economic factors affecting individuals and firms in modern market economies • analyse the market mechanism for allocation and distribution • describe the impact of incentives on individual and firm behaviour and simple models of how actors respond to incentives in a variety of situations • analyse simple market relationships in a variety of individual, firm–based and international contexts • identify the limitations of the market mechanism and the role of government in markets • identify elementary economic principles, models and data in a range of contexts • apply elementary microeconomic principles in new contexts

Overview of the unit

“The ideas of economists and political philosophers, both when they...
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