Economics is the study of how individuals and societies allocate scarce resources to satisfy unlimited wants. Scarcity is the central problem: because resources are limited while human wants are essentially unbounded, choices must be made. Every choice carries an opportunity cost, defined as the value of the next-best alternative forgone. This single idea underlies nearly all economic reasoning, from a household choosing how to spend its weekly income to a government deciding how to allocate tax revenue.
Microeconomics is the branch of economics that focuses on the decisions of individuals, households, and firms, while macroeconomics studies economy-wide phenomena such as GDP, inflation, and unemployment. The fundamental building blocks of microeconomic analysis are markets, which are any arrangements in which buyers and sellers interact to trade goods and services. In these markets two forces interact: supply, the quantity producers are willing to sell at various prices, and demand, the quantity consumers are willing to buy at various prices. The law of demand holds that, all else equal, as price rises quantity demanded falls, while the law of supply holds that, all else equal, as price rises quantity supplied rises.
The equilibrium price is the price at which quantity supplied equals quantity demanded. When quantity demanded exceeds quantity supplied, a shortage exists and prices tend to rise; when quantity supplied exceeds quantity demanded, a surplus exists and prices tend to fall. Governments can intervene with a price floor, a legally set minimum price above equilibrium such as a minimum wage, or a price ceiling, a maximum price below equilibrium such as rent control. Each policy distorts the market, producing surpluses in the case of price floors and shortages in the case of price ceilings. Welfare effects can be tracked through consumer surplus, the difference between willingness to pay and actual payment, and producer surplus, the difference between what producers receive and the minimum they would accept. Deadweight loss is the reduction in total surplus when a market fails to reach equilibrium.