Microeconomics: A Very Short Introduction

Citation

Dixit, A. (2014). Microeconomics: A Very Short Introduction. Oxford University Press. Very Short Introductions.

Chapter Summary

The book is very compact: a preface and seven chapters on about 118 pages of main text, with lists of illustrations and tables. Two very short framing chapters (Chapters 1 and 7) enclose five substantial ones. The publisher's summary sets out the book's case: although public discussion of economics tends to focus on macroeconomic questions such as unemployment and inflation, the everyday choices of households and firms have a large effect on the economic world. It uses real examples from many countries and draws on psychology and sociology as well as standard theory.

Chapter 1: What and why of microeconomics

A four-page opening that defines the subject: how consumers choose what to buy, how producers decide how to meet those demands, and how the two sides interact. It notes that transactions usually work fairly smoothly but sometimes fail dramatically, citing the gasoline shortages of the 1970s and the housing bubble and collapse of the 2000s, and frames the book around three questions: when transactions go well, when and why they fail, and what can be done when they fail. Information, incentives and the working of prices are named as the core of the subject.

Chapter 2: Consumers

The consumer chapter moves through substitutes and complements, demand curves, the income effect, statistical estimation of demand, cost-of-living indexes, budgets, time, opportunity cost, and risk and loss aversion; the chapter's list of topics also includes what it calls the babysitter effect. It then asks whether consumers are rational, presenting the behavioural-economics view and Daniel Kahneman's distinction between fast and slow systems of decision-making, and points out that loss aversion and other features of decisions under risk can affect how financial markets behave.

Chapter 3: Producers

Production is treated as the transformation of inputs (materials, produced goods, labour, land and capital) into outputs, with attention to input costs and the judgement needed under uncertainty. The chapter covers supply curves, pricing strategies, rivalry between firms, supply chains and the organisation of the firm, ending with the make-or-buy question: why not put each link of a supply chain in a separate firm, or everything under one roof?

Chapter 4: Markets

The supply-and-demand chapter shows that a competitive market produces exactly the quantity that adds positive social surplus, so the outcome maximises total surplus and is efficient. It then analyses how equilibrium shifts when demand or supply conditions change, with a tax as one cause, and discusses boom-and-bust cycles in housing and mining and the effects of price floors and ceilings.

Chapter 5: Market and policy failures

The longest chapter (about 30 pages). It begins with monopoly and oligopoly and the effects of market power, then treats externalities such as pollution and asymmetric information, which the chapter connects to the externality framework. Remedies are discussed through Coasian and Pigouvian approaches. Moral hazard, adverse selection, collective goods, the political economy of policy and the recent financial crisis complete the chapter; as the title says, governments can fail as well as markets.

Chapter 6: Institutions and organizations

Transactions do not take place only in markets: families, social groups and networks, industry associations and governments can sometimes handle them better. The chapter identifies security of property and of contract as the two prerequisites for specialisation and exchange, examines state and non-state institutions of governance that provide them, and ends with market design: matching markets, auctions and intermediary platforms created for specialised transactions.

Chapter 7: What works?

A three-page conclusion. Despite the defects of markets and governments catalogued in the book, the world has not fared too badly. The chapter's verdict favours a mixed economy: competitive markets or similar institutions to signal scarcity and create incentives, antitrust policy to keep markets open, government and social organisations to correct externalities, and political competition as a check on abuses of power and errors of judgement.

Key Concepts

Chapters 1–2: Microeconomics and Consumers

• Coordination by prices: the role of prices, information and incentives in coordinating the choices of buyers and sellers, which Chapter 1 names as the main subject of microeconomics.
• Substitutes and complements: goods whose demand moves against or with the price of another good.
• Opportunity cost: the value of what is given up when a choice is made, including time.
• Loss aversion: the tendency to weigh losses more heavily than equal gains, one of the behavioural findings the book links to financial markets.

Chapters 3–4: Producers and Markets

• Supply chain and make-or-buy: the choice between buying inputs from other firms and producing them in-house.
• Social surplus: the total gain to buyers and sellers from trade, which a competitive equilibrium maximises.
• Equilibrium shifts: how changes in demand or supply, including taxes, move price and quantity.

Chapters 5–7: Failures, Institutions and What Works

• Externality: a side effect of an action on others that the market does not price, with Coasian and Pigouvian remedies.
• Asymmetric information: one side of a transaction knowing more than the other, leading to moral hazard and adverse selection.
• Property rights and contract enforcement: the institutional prerequisites for specialisation and trade.
• Market design: building matching markets, auctions and platforms for particular kinds of exchange.
• Mixed economy: the book's concluding model of markets, regulation and political competition working together.

Critical Analysis

Strengths

• A modern map of the subject in very few pages. Alongside supply and demand and consumer and producer choice, the chapters include behavioural economics, information economics, institutions and governance, and market design. In a little over a hundred pages the reader sees the shape of the whole field.
• Balanced on markets and government. The book gives market failures and policy failures a chapter together, and its conclusion argues for a mixed economy rather than for either markets or government alone.
• Grounded in real episodes. The chapter abstracts mention the 1970s gasoline shortages, the housing bubble of the 2000s, boom-and-bust cycles in housing and mining, and the recent financial crisis, and the publisher stresses examples from around the world.

Limitations

• Breadth over depth. With Chapter 5 covering monopoly, oligopoly, externalities, information, collective goods and political economy in about thirty pages, each topic receives only an introduction.
• Written to be read, not worked. Like other books in the series, it is continuous prose for general readers rather than a course text with problem sets; students still need a textbook to learn to use the models.
• Little on factor markets and distribution. The chapter titles and summaries do not show separate treatment of labour markets, wages or inequality, which principles textbooks cover.

Where It Fits in the Course

This is the lightest book on the list for this microeconomics course: a short overview to read before, or in the first weeks of, a full course. Michael Parkin's Microeconomics is a complete principles textbook that teaches the same core models through graphs and worked problems; Dixit gives the map and Parkin the practice. Students arriving at intermediate microeconomics without a principles course can read Dixit in a weekend and then use Parkin to fill in the techniques.

The intermediate microeconomics textbooks come next. Varian and Melitz's Intermediate Microeconomics: A Modern Approach builds consumer and producer theory from optimisation with modest calculus, and Pindyck and Rubinfeld's Microeconomics develops the same theory mainly through graphs and verbal reasoning, with applications. Dixit's chapters on information, institutions and market failure are a useful advance overview of the later chapters of both. Mas-Colell, Whinston and Green's Microeconomic Theory and Jehle and Reny's Advanced Microeconomic Theory are rigorous graduate texts, well beyond this book.

How to Use This Book

No previous economics is needed; the series is written for general readers.

• Read it straight through in two or three sittings. Chapters 1 and 7 together take only a few pages and give the framework: the questions in Chapter 1 and the answer in Chapter 7.
• Core chapters: 2–5 cover the ground of a first microeconomics course. Chapter 5 is the densest; take it in two parts, market power and externalities first, information and policy failure second.
• Return to Chapter 6 when the course reaches contracts, auctions or matching, which typically come late in a course.
• Pair with a textbook. After each chapter, read the corresponding textbook chapter and work its problems; use Dixit's examples as a check on whether the formal model captures the real situation.

For students in other disciplines who need only an overview, this book on its own is a sufficient introduction to how economists think about choices and markets.