Lynne Pepall

Total utility (the amount of utility gained in total from consuming something) is a useful concept, but economists far more commonly look at how utility changes as consumption at the margin changes. For that, they use the concept of marginal utility: the utility that is gained from consuming one extra unit of a good.

In this list are some great economists who inspired us to discover microeconomics. What follows is a — perhaps slightly eccentric — list of inspiring and challenging thinkers. But they're just the tip of a huge iceberg. Alfred Marshall (1842–1924) The approach to microeconomics that is the mainstream approach for the profession is sometimes called marginalism, and much of it is due to Alfred Marshall.

A firm with a given technology makes a choice about how much of each of the factors of production to use to make how much output — and pays the cost for doing so. The question for the firm is how to use its technology and choose its inputs in order to make its profits as large as possible. The way it does so is to choose its inputs in order to make the costs as small as possible.

One way to think about consumption bundles and preferences on microeconomics is to think about all the possible choices. If you describe the set of possible choices in a diagram, you can see pretty easily which choices the consumer would prefer. For instance, this figure draws an indifference curve for all the consumption bundles for which Bob gets the same amount of utility.

A budget constraint maps the relative availability of two goods to a fixed amount of resources, called M. In the consumer choice model, this means that you take account of an increase in income by moving the budget constraint away from the origin so that the new curve is parallel to the old, as shown here. Representing a change in income by shifting the budget constraint.

One thing you can say about the relationship between preferences and the budget constraint is about the principle of revealed preference. Utility isn't measured, but things about utility can be found out by observing consumer choices and inferring from their choices the impact of price changes on their utility or welfare.

One word that's central to microeconomics is decision. Microeconomics is ultimately about making decisions: whether to buy a house, how much ice cream to make, what price to sell a bicycle at, or whether to offer a product to this or that market, and so on. This is one reason why economists center their models on choice.

Microeconomics is fundamentally about what happens when individuals and companies make decisions. The idea is to understand how those decisions are made and explore their consequences. What happens, for example, when prices of houses go up? Well, on the one hand, people are likely to buy fewer or smaller houses.

In a two-good model, the budget line is a simple straight line whose slope is the ratio of prices. But if, for instance, a tax changes the cost of a good relative to others, that is tantamount to a price change, and you can use the shape of the budget line to think about how to analyze the effect of the tax. Before doing so, you have to be a bit more specific about the type of tax, because different taxes do different things to the shape of the budget line.