10 Recap: Back to the Market
(where we return to the Market Square and summarise the market’s triumphs and failures)
You have now worked your way through microeconomics. Well done! I hope you now have a deeper understanding of what microeconomics is about. All that remains in this course is the exam. A good way to test whether you’ve understood the material deeply is to explain aloud to a friend why she should take this course too. Can you tell the story of life on the Market Square convincingly? Can you answer her follow‑up questions? Can you draw the relationships and explain in your own words what happens and why? Can you also work with numbers and make precise forecasts — for example, predicting what happens to the price if one firm takes over the whole market or if the state raises VAT on food? If so, you are likely to do well on the exam. Below is a list of 10 lessons I think were especially important in the course. Do you agree with me?
Microeconomics is about everyday life on a small scale
There are many misconceptions. Some think it’s only advanced math and impenetrable theory. Others assume it’s just about money and firms, and that economists view people as emotionless robots. In reality microeconomics is about understanding life in the small. It can study how firms and consumers make decisions and what happens when they meet in markets: for example, what if we subsidise contraceptives for young people or impose rent caps on student housing? But microeconomics is also about all the other choices people make in their lives. Should you take a gap year after upper secondary school? Work part‑time or devote all your time to studying? Spend a semester abroad or stay in Turku? At its core microeconomics aims to understand everyday life and how our society takes shape. By combining theory and data you can investigate the intriguing puzzles you encounter. The possibilities are endless and fascinating. Can, for instance, the placement of cashiers in Wiklund affect their productivity? Is it true that sick leave rises during the World Cup, or that a bonus for fast graduation increases throughput at Åbo Akademi?
You must always choose — resources are limited
Economics is, at its core, about how individuals choose. Every day you make thousands of choices. In economics we study how these choices are made and how they shape our society. In an ideal world with eternal life and unlimited resources no choice would be necessary. But in reality both time and money are scarce. That is precisely why you must choose. Should you buy steak or chicken at Citymarket? Raise cows or chickens on the farm? Pick major A or major B? Everything around us is the result of someone’s choice. The store manager chose which products to stock. The farmer chose which animals to raise. Your tutor chose their major.
Opportunity cost is the true cost
You’ve now taken a course in economics — but what did it really cost? The opportunity cost is the most valuable alternative you gave up to take this course. If you had not taken the course you might instead have studied education, worked full time at CityMarket, or spent more time with family and friends. Those foregone opportunities are the real costs of taking this course. Everything costs, even what we think is free. That is why tennis pros, F1 drivers and young tech entrepreneurs often forgo university — their opportunity cost is simply too high.
What happens if you do a little more?
Your decisions are often about “how much.” For example, you must decide how many hours to devote to the courses you are taking. An effective approach is to think at the margin. Take Elin as an example. As a political science student she takes three courses in period 1: economics, political science and sociology. The university expects about 400 hours of work. Elin wants to become a political scientist. Does that mean she should spend all 400 hours on political science and none on sociology or economics? Probably not. Spending more time on political science can indeed raise her grade, but it also has a cost — those hours are not used to improve her chances of passing economics or sociology. The trick is to think hour by hour. As long as the benefit of studying one more hour of political science exceeds the cost, it’s a wise choice. That is thinking at the margin. This principle can also guide your daily decisions: how often should you party? How many gym sessions per week is right?
People seize opportunities to improve their lives
When a new checkout opens at CityMarket — or when I add more seats to seminars held at “good” times — people flock there, and when the deposit on bottles is raised more empties are recycled. Why? Because people tend to seize opportunities that improve their lives. They respond to incentives and take advantage of chances that benefit them. If you want to predict someone’s behaviour it is therefore wise to consider what incentives they face.
When the mayor wants to reduce illegal parking at the Market Square, an economist would likely suggest raising parking fines, hiring more wardens to increase the probability of being fined, or rewarding those who park correctly or leave their car at home. Economists are often sceptical of attempts to change behaviour that do not alter underlying incentives (for example putting up polite signs that read “Think of your neighbours and road safety — please do not park here”).
People cooperate because it pays
But to understand society it is not enough to understand how you choose. Your choices are also shaped by what many other people do. What you eat for lunch depends on what kinds of food the restaurants in Turku decide to serve — and their choices are driven by what you and other customers want. Everything is interconnected, so we must understand the economic interaction between individuals. The theory of comparative advantage explains why, throughout history, people have sought contact and cooperation with others. Adam and Eve could shorten their working days by dividing tasks so each specialised in their relative strength — a form of “trade” in labour. The key to prosperity is cooperation and trade. You don’t have to do everything yourself; you can specialise in a profession. It is rare for one person to be both a dairy farmer and a dentist. Markets make it possible for both the farmer and the dentist to specialise: the farmer can buy dental care instead of doing root canals at home, and the dentist can buy milk in the store rather than keep a cow in the apartment. This is why economists often advocate openness, cooperation and free trade rather than isolation and restrictions.
Markets move toward equilibrium
But can you trust that markets actually deliver? Is it safe to train as a dentist and rely on milk always being available in the shop? Can a farmer be sure there will always be someone to treat a toothache? Yes — markets tend to move toward equilibrium. One example is the checkout lines at CityMarket, where you usually cannot get home faster by switching queues; all the obvious opportunities have already been exploited. This happens because people respond to incentives and seize chances to improve their situation. If a new register opens, it typically takes only seconds before the queues are equal again. The same logic applies to all markets. If a stock is unreasonably cheap, thousands of speculators will spot the opportunity in fractions of a second and buy the share, pushing the price up. If a good or service is missing that many people want, firms will quickly enter to meet demand, and soon the product is available. Because markets move toward equilibrium, we can usually trust that we can specialise in one area and buy the rest from the market.
Resources should be used efficiently to achieve society’s goals
In economics, efficient use of resources means allocating resources so that the “right” producers make the “right” quantity for the “right” consumers. That means there is no way to reallocate resources to make someone better off without making someone else worse off.
Think again of the checkout line: if there were an unused register that you could join, it would be inefficient — you could get home faster without harming anyone. If all queues are equally long, however, the situation is efficient; the only way to get home sooner would be to cut in line, which would make someone else worse off.
Similarly, we want markets to function efficiently. That means all improvement opportunities have already been exploited. Buyers who purchase at the market price are happy, as are those who choose not to buy. Producers who sell at the market price are satisfied, as are those who choose not to sell. Moreover, an efficient market means the last unit produced costs exactly as much to make as consumers value it — a remarkable achievement. In command economies, where bureaucrats decide WHAT, HOW and FOR WHOM, it quickly becomes clear how hard it is to optimise production and allocation.
If the market is not efficient, government intervention can increase welfare
In reality markets can and do fail, often because incentives are wrong. This happens, for example, when your behaviour affects others but you do not bear the costs. Vomiting and urinating in the square may feel good to the weekend reveler, but it harms the rest of us. Similarly, production in a market can cause environmental damage that affects third parties. Policy measures — environmental taxes or fines for public urination — can improve the situation by forcing individuals to take into account all the costs of their behaviour. We also saw market failures that arise when one party has too much power (monopoly and monopsony) or when information is asymmetric (adverse selection and moral hazard). In those cases too government intervention can potentially improve social welfare.
But economists and politicians can also fail
Markets can sometimes fail, which means there is potential to do better. Economists and politicians can intervene to steer markets toward more efficient production and allocation. It is worth remembering, however, that these decision‑makers can also make mistakes. What happens, for example, if these same people are driven by self‑interest?
Here are some past exam questions (in Swedish). Remember to always answer in a way that makes the grader clearly see you understand the material.
This concludes the Introductory Course in Microeconomics. But the story doesn’t end here — there is much more to explore. Life at the Market Square is also shaped by events on a higher level. Why, for example, did all goods and services suddenly become so expensive in spring 2022 in every country? It can’t possibly be because every government raised taxes at exactly the same time. And how is it that most Finns live in abundance while 3 out of 5 children in Burundi die before age five? Can that really be explained by worse adverse selection in Burundi or by weaker competition in the market in Gitega compared with Finland? And why are we sometimes plunged into deep recessions in Finland, as if a wet blanket were thrown over all markets at once?
To understand these extremely important societal questions — and to know what to do to reduce poverty and social problems — we must leave the Market Square in Turku and move up to the International Space Station, currently circling the Earth at almost 28,000 km/h. From up there we can analyse the economy from a broader perspective. It’s time to learn the basics of macroeconomics. That course starts in January 2027. Welcome!