What Kinds of Problems do we Study in Microeconomics?

You watch another customer go to the counter and place an order. She purchases some fried chicken, an order of fries, and a Coca-Cola. The cost is €10. She hands over a bill and gets the food in exchange. It’s a simple transaction; you have witnessed exchanges like it thousands of times before. Now, though, you think about the fact that this exchange has made both the customer and the store better off than they were previously. The customer has voluntarily given up money to get food. Presumably, she would do this only if having the food makes her happier than having the €10. KFC, meanwhile, voluntarily gave up the food to get the €10. Presumably, the managers of the store would sell the food only if they benefit from the deal as well. They are willing to give up something of value (their food) in exchange for something else of value (the customer’s money). Think for a moment about all the transactions that could have taken place but did not. For the same €10, the customer could have bought two orders of fried chicken. But she didn’t. So even though you have never met the person, you know something about her. You know that—at this moment at least—she prefers having a Coca-Cola, fries, and one order of fried chicken to having two orders of fried chicken. You also know that she prefers having that food to any number of other things she could have bought with those euros, such as a movie theater ticket, some chocolate bars, or a book. From your study of economics, you know that her decision reflects two different factors. The first is her tastes. Each customer likes different items on the menu. Some love the spicy fried chicken; others dislike it. There is no accounting for differences in tastes. The second is what she can afford. She has a budget in mind that limits how much she is willing to spend on fast food on a given day. Her decision about what to buy comes from the interaction between her tastes and her budget. Economists have built a rich and complicated theory of decision making from this basic idea. You look back at the counter and to the kitchen area behind it. The kitchen, you now know, is an example of a production process that takes inputs and produces output. Some of the inputs are perhaps obvious, such as basic ingredients like raw chicken and cooking oil. Before you took the economics course, you might have thought only about those ingredients. Now you know that there are many more inputs to the production process, including the following:  The building housing the restaurant  The tables and chairs inside the room  The people working behind the cash register and in the kitchen  The people working at KFC headquarters managing the outlets in Paris  The stoves, ovens, and other equipment in the kitchen used to cook the food  The energy used to run the stoves, the ovens, the lighting, and the heat  The recipes used to convert the ingredients into a finished product