A coffee shop raises its flat white from 3.50 to 3.80 and, somehow, still looks busy. A ride-hailing app doubles its fares in the rain and, ten minutes later, there are more cars on the road. A city starts charging drivers to enter its centre, and the jam thins out without a single new rule about who may drive. Nobody commanded any of this. A price moved, and thousands of people each did a small, selfish, sensible thing.
An economics graduate watches those three scenes and sees the same few ideas working: everything costs something you gave up, decisions happen one step at a time, and a price is a signal that tells buyers to hold back and sellers to show up. That toolkit is microeconomics: how individuals and firms choose, and what happens when those choices meet in a market. It is also the friendliest door into the whole subject, because you already use it every time you shop.
Wants have no ceiling; time, land, labour and money do. That gap is scarcity, and it makes every choice a trade. The honest price of anything is its opportunity cost: the best thing you gave up to get it. A two-hour film costs the ticket plus whatever else those two hours could have been. A university degree's biggest cost is often the wages you didn't earn.
Economists draw this as a production possibilities frontier: the most of one good you can make for each amount of another. It bows outward because resources aren't equally good at everything. The first fields moved from wool to wheat are the ones best suited to wheat; the last fields are poor wheat land. So each extra unit costs more than the one before. This rising cost, not any law of nature, is what lets prices carry information.
Illustrative farm: wool = 100 − wheat²/100. The cost of the next unit is wool(now) − wool(after one more wheat).
At 40 wheat the farm can have 84 wool. One more wheat costs 0.81 wool. At 80 wheat the same extra unit costs 1.61 wool, twice as much. Nothing got worse; you just ran out of the easy fields. Remember this shape whenever someone says "just do more of it".
People rarely choose all or nothing. They choose one more: one more hour of study, one more loaf baked, one more floor on the building. The margin is the edge where the decision lives. The rule an economics graduate carries: keep doing something while its marginal benefit is at least its marginal cost, and stop when the next unit would cost more than it brings in.
A bakery sells loaves at a fixed price. Its cost of the next loaf rises as the oven gets crowded and staff go onto overtime (an illustration, not a real bakery). The slider below is the owner's decision. Watch the profit hump: the top is exactly where the cost of the next loaf meets the price.
Illustrative: total cost = q + 0.05q², so the next loaf costs about 1 + 0.1q.
At a price of 6 the best output is 50 loaves and profit is 125. At 40 loaves the owner is leaving money on the table; at 60 she is baking loaves that cost more than they sell for. A higher price pushes the best output up: at 10 it is 90. Lining up each price with its best output is exactly how a supply curve is built.
Demand says that, other things equal, buyers want less as the price rises. Supply says that sellers offer more as it rises (the bakery just showed why). Draw both against price and they cross at one point: the equilibrium price, where the quantity buyers want equals the quantity sellers offer. Above it there is a surplus and sellers cut prices; below it there is a shortage and buyers bid up. The price is pulled to the crossing without anyone setting it.
The key habit: separate moving along a curve (the price changed) from shifting it (something else changed: tastes, income, input costs, a frost). Try three shocks in a market whose starting point is price 30, quantity 40.
Illustrative: demand Q = 100 − 2P, supply Q = 2P − 20, then shifted sideways.
A fad lifts both price (35) and quantity (50). A frost lifts the price to the same 35 but cuts the quantity to 30. Same price, opposite quantities: a graduate reads the quantity to tell whether demand or supply moved. When both shift by 20 the price jumps to 40 and the quantity barely changes, because the two effects on quantity cancel.
A price rise always lowers the quantity demanded. The question that matters is how much. Price elasticity of demand is the percentage fall in quantity for a 1% rise in price. If it is below 1 in size, demand is inelastic: buyers shrug (salt, insulin, petrol in the short run). If it is above 1, demand is elastic: buyers walk (one brand of cereal, a restaurant meal).
A real case: from January 2014 Mexico taxed sugary drinks at one peso a litre, commonly described as roughly a tenth of the price. Purchases of the taxed drinks fell about 6% over 2014, and about 9% in the lowest-income households (Colchero and colleagues, BMJ, 2016). If the whole tax reached shelf prices, that is an elasticity around 0.6: buyers responded, but less than one-for-one. It is a rough reading, since pass-through to prices varied.
Illustrative constant-elasticity demand: Q = 100 × (P ÷ 10)−e. Real elasticities differ by market, time horizon and how many substitutes exist.
With elasticity 0.5, a 10% price rise cuts quantity by about 4.7% and raises revenue by about 4.9%. At 2, the same rise cuts quantity by 17.4% and revenue by 9.1%. That is why a monopolist never charges where demand is inelastic: it could earn more by charging more.
A trade happens only if it makes both sides better off. Consumer surplus is the gap between what a buyer would have paid and what they did pay. Producer surplus is the gap between what a seller received and the least they would have taken. In the market above, each is worth 400, so the total is 800. A competitive market, left alone and free of side effects, produces exactly the trades that make that total as large as it can be.
Now interfere. A tax drives a wedge between what buyers pay and sellers keep, so some trades that were worth doing no longer happen. A price ceiling below the equilibrium makes sellers supply less than buyers want. Either way the lost trades are the deadweight loss: surplus that went to nobody. It is a triangle, so it grows with the square of the wedge.
Same market as above (price 30, quantity 40, surplus 800). For the cap, the best case is assumed: the buyers who value the good most get it. Real rationing is usually worse.
A tax of 10 shrinks the quantity from 40 to 30, raises 300, and destroys 50 of surplus. Double the tax to 20 and the deadweight loss does not double, it quadruples to 200, while revenue rises only to 400. A ceiling at 20 leaves 20 units on sale where buyers want 60: a shortage of 40, a loss of 200 even in the best case, and an invitation to queue, bribe or build a black market. Note what a tax can do that a cap cannot: it raises money that can be spent. The next piece in this thread, Public Economics (34/49), is about who ends up actually paying it.
"Supply and demand" assumes sellers are too small to move the price. That holds for a farmer selling wheat, not for an electricity grid or a search engine. Economists line up a spectrum. At one end is perfect competition: many sellers, identical goods, so each takes the price as given and price is driven to marginal cost. At the other is monopoly: one seller, who can choose the price, and who restricts quantity to keep it high. In between are oligopoly (a few firms who watch each other) and monopolistic competition (many firms with slightly different products, like restaurants).
The simplest model that shows the whole spectrum is Cournot's, from 1838: firms choose quantities, each knowing the others do the same. The more firms, the more each fears flooding the market, and the closer price falls to cost.
Illustrative: demand P = 100 − Q, each firm's marginal cost 20. One firm sets 40 units at 60. Cournot with n firms: Q = 80n ÷ (n+1).
One firm charges 60 and sells 40; two firms get 46.7; five get 33.3; twenty get 23.8, nearly the competitive 20. Buyers gain as firms are added (consumer surplus goes from 800 with one firm to about 2,900 with twenty), and the deadweight loss shrinks from 800 to about 7. This is the economic case for competition policy, and the reason Strategy & Competition (34/54) is a whole course. Entry matters more than the headcount, though: a market with one firm but easy entry can behave better than a market with three that are protected.
Prices work when the buyer and seller bear all the costs and benefits of the trade. An externality is a cost or benefit that lands on someone else: smoke from a factory, a neighbour's loud party, or, on the good side, a beekeeper's bees pollinating the orchard next door. The market quantity is too high for harms and too low for benefits, because the decision-maker ignores the third party.
The classic fix is a Pigouvian tax (A. C. Pigou, 1920): charge the polluter the damage they cause, so the private price includes the social cost. London's congestion charge, which began on 17 February 2003 at five pounds a day (the standard rate is now £18 as of January 2026), is a price on road space for exactly this reason. Ronald Coase argued in 1960 that, where bargaining is cheap and rights are clear, the parties can sort it out themselves with no tax at all. Both are alive in every environmental debate.
Same market as before. Making each unit costs the neighbours the amount on the slider.
With damage of 10 per unit, the market still makes 40 units but the best quantity is 30. The ten extra units each cost society more than they are worth: a loss of 50. A tax of 10 moves the market to exactly 30. The other kind of miss is a public good: something nobody can be excluded from and that one person's use doesn't use up (a lighthouse, clean air, a vaccine's herd effect). Each person would like someone else to pay, so private markets undersupply it. When a resource is shared but rivalrous, a commons, Garrett Hardin's 1968 "tragedy of the commons" warned of overuse. Elinor Ostrom's field work, in Governing the Commons (1990) and her 2009 Nobel Prize, showed that communities from Swiss pastures to fisheries often build rules that avoid it without privatising or handing it to the state. The honest version is "it depends on the rules". More on this in Public Economics (34/49).
Every choice costs the best alternative you gave up, and it is made one step at a time. Prices carry that cost between strangers: when they are right, markets turn scattered selfishness into trades that make both sides better off. When they are wrong (a cap, a tax, a monopolist, a neighbour who bears the smoke), something is lost, and the skill is to find which wedge is the problem.
Try this: this week, price one thing you buy in terms of what you gave up, and find your margin. Would you pay for one more? Then watch a price move at a shop or an app and ask which curve shifted.
Sources. The ideas are standard textbook microeconomics (Mankiw; Acemoglu, Laibson and List). Every number in the interactives uses invented, illustrative markets and was computed in node: farm frontier 84 to 83.19 (cost 0.81) at 40 wheat and 36 to 34.39 (1.61) at 80; bakery best output 50 with profit 125 at price 6, 90 at price 10; equilibrium 30 and 40, shocks 35 and 50 (fad), 35 and 30 (frost), 40 and 40 (both); elasticity 0.5 gives −4.65% quantity and +4.88% revenue, elasticity 2 gives −17.36% and −9.09%; tax of 10 gives quantity 30, revenue 300, deadweight loss 50, tax 20 gives 200 and revenue 400; ceiling 20 gives quantity 20, shortage 40, loss 200; Cournot with 1, 2, 5, 20 firms gives price 60, 46.7, 33.3, 23.8 and consumer surplus 800 to about 2,900; externality of 10 gives optimum 30 and loss 50. Mexico's 2014 sugary-drink tax: Colchero, Popkin, Rivera and Ng, BMJ 352:h6704 (2016), which reports a 6% fall in taxed-drink purchases in 2014 and 9% in the lowest-income households; the one-peso-a-litre rate is as reported in public summaries and the "about a tenth of the price" is approximate. London congestion charge: began 17 February 2003 at £5, £18 from 2 January 2026 (Transport for London, via Wikipedia). Coase 1960 (Nobel 1991), Pigou 1920, Hardin 1968 (Science), Ostrom 1990 (Nobel 2009), Cournot 1838 are standard history of economic thought.