Lecture Notes 
                                        on the 
                             Principles of 
                       Microeconomics
                              Eric Doviak 
                                3rd Edition, June 2005 
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                                 Preface
      Microeconomics is the study of the behavior of individual households, firms and industries as well as the 
      supply and demand relationships between producers and consumers.  
      You might think of a household as a consumer, but households are also producers. For example, take a 
      look at your kitchen: you take raw materials (meat, cheese, vegetables, eggs, salt and pepper) as well as 
      capital (stove and frying pan) and your own labor to produce an omelet, which is demanded by you and 
      members of your family. They may not pay you in money, but you’re compensated in other ways.  
      Cooking an omelet for your family is a very simple example of an economic problem. So what’s the 
      point? The point is that economics isn’t “all about money.” It’s about life. It’s about human behavior. In 
      fact, economic analysis can be applied to almost any problem imaginable.  
      For example, there is a branch of economics that studies the production of health and the demand for 
      health. Notice that I wrote “health” and not “health care.” 
      To take another example, economic analysis can also be used to analyze the war on drugs without ever 
      mentioning the word “price.” Instead what is important is “opportunity cost” – what we have to give up 
      when we make a choice. In some American cities, police officers are so busy preparing prosecutions that 
      they don’t have time to respond to 911 calls. Why? Because the politicians chose to put as many people in 
      jail as possible, they actually had to forgo law and order. 
      Studying economics will help you understand the nature of trade-offs that you face in everyday life. If you 
      spend more time studying economics, you’ll be less likely to make decisions that are as stupid as the ones 
      our politicians have made and more likely to make rational decisions. 
                                   Page 2
                                    Lecture Notes on the 
                            Principles of Microeconomics 
                                             Eric Doviak 
                                              3rd Edition, June 2005 
                                           Table of Contents 
            4    Lecture 1:   Introduction and Math Review 
           10       Ƈ Homework #1A 
           11       Ƈ  Homework #1B – More Math Review Problems 
           13       Ƈ  What’s the difference between Marginal Cost and Average Cost? 
           17       Ƈ Calculus Tricks 
           22       Ƈ Homework #1C 
           23    Lecture 2:   Production, Opportunity Cost and Relative Price 
           32       Ƈ Homework #2 
           34    Lecture 3:   Supply, Demand and Equilibrium 
           43       Ƈ Homework #3 
           45    Lecture 4:   Elasticity 
           54       Ƈ Homework #4 
           57    Review for the Mid-term Exam 
           61    Lecture 5:   Household Behavior and Consumer Choice 
           69       Ƈ  Examples of Income and Substitution Effects 
           78       Ƈ Homework #5 
           81       Ƈ  A Microeconomic Critique of the War on Drugs 
           86    Lecture 6:   The Production Process: The Behavior of Profit-Maximizing Firms 
           93       Ƈ  Economic Thought on Land Value Taxation 
           98       Ƈ  Notes on Isoquants, Isocosts and the Memo on Land Value Taxation 
          102       Ƈ Homework #6 
          104    Lecture 7:   Short-Run Costs and Output Decisions 
          111       Ƈ  Why does a Firm Maximize its Profit where Marginal Revenue equals Marginal Cost? 
          113       Ƈ Homework #7 
          114    Lecture 8:   Costs and Output Decisions in the Long Run 
          120       Ƈ  Notes on the Zero Profit Result 
          122       Ƈ Homework #8 
          124    Review for the Final Exam
                                                     Page 3
                                        Lecture 1 
                                 Introduction  
                            and Math Review 
                                       Eric Doviak 
                          Principles of Microeconomics
                                 Helpful hints 
              x  Economics doesn’t have to      x   Most important part of any 
                 be difficult                       economic model are the: 
              x  BUT... some people make            ASSUMPTIONS 
              x  it difficult for themselves.   x   If you understand the 
              x  I did.                             assumptions of the model, 
              x  If a model is unclear, don’t       you will understand the 
                 try to think of an example         conclusions.
                 from the $10 trillion US       x   You will NOT understand 
                 economy.                           the conclusions, if you don’t 
              x  Instead, apply the model to        understand the 
                 a small rural village.             assumptions.
                                                x   WHEN READING, DON’T 
                                                    SKIP CHAPTERS! 
                                            Page 4