The behaviour of the economy is the result of a host of decisions made each day by millions of people. How individual workers, households and firms make decisions, and how they interact with each other, is the subject of Microeconomics 2e. In a market economy like Australia’s, the crucial role in the making of these decisions is played by prices and markets, which create a system in which the actions of individuals, guided by self-interest and without any central coordination or planning, create a desirable level of wealth for society as a whole.

The most important ideas about microeconomics were set out in books by two British economists, Adam Smith and Alfred Marshall. Smith and Marshall wrote at a time when the most important economic activity for most countries was manufacturing, or supplying raw materials for factories. Transportation and communication were generally slow and this gave significant economic advantages to businesses that were located on harbours, rivers, or close to mineral deposits. That period in world economic history — what is now called the ‘old’ economy — has passed. In the ‘new’ economy, many of the old ideas and techniques of wealth and job creation are no longer relevant. Manufacturing accounts for a smaller percentage of the world’s jobs and output than it did a century ago. Raw materials have become a very small part of production costs and commodity prices have fallen. Electricity, cars and trucks and dramatic improvements in information technology have made it possible for businesses to operate successfully in virtually any part of the world.

This book introduces you to the basic principles of microeconomics. A sound knowledge of them is essential to anyone who is involved in the running of a business, who wants to understand the ideas of public policy, or simply wants to work out what has to be done to make money. They are the fundamental building blocks that every manager, financial advisor and economist uses to think about economic problems.

Microeconomics is also concerned with government policies that are specific to certain markets, industries and sectors. Microeconomics and microeconomic policy have been assuming increasing importance, particularly since the worldwide wave of privatisation that started in the early 1980s. Since then, microeconomic analysis has been an important input in political debates and decision-making.

You will have come across microeconomics issues already, perhaps without realising it. A range of issues currently demand the attention of Australian business, governments and citizens, such as the effects of economic change and government policies on regional and rural communities, the issue of safe heroin injecting rooms and how Australians should address the past ill-treatment of Aborigines. Microeconomic analysis is a useful tool for building understanding of, and objective thinking about, these and other controversial issues.

Microeconomics affects our lives because the political decisions on health, education, the environment and the welfare state are based on or justified by microeconomic considerations, even if it is purely for the purpose of propaganda. Understanding microeconomics is essential for understanding the validity of the arguments behind the decisions that affect our lives.

In this book, we follow a gradualist approach whereby we discuss the elements that eventually lead to models of markets and industries, which can then be used to derive some policy implications. The essentials are the basic microeconomic concepts of supply and demand, elasticity and the theories of individual behaviour. These essentials are then put together to study markets and industries, including the markets for goods, labour and capital. This is followed by a consideration of the role of the government, which is effectively a study of microeconomic policy. In order to make the material relevant and interesting for students, we use real-life examples that relate microeconomic analysis to problems and issues similar to those mentioned above.

Microeconomics 2e is designed for a one-semester course. Knowing that teachers use a great variety of sequences and syllabuses, great pains have been taken to allow for alternative plans of coverage. International economic issues are considered throughout the text, with separate chapters on international economic policy.