Economics Microeconomics: Markets and Consumers Syllabus

Microeconomics: Markets and Consumers syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Microeconomics: Markets and Consumers in Economics, not a summary of it.

1. 1

   Demand

   3 topics

   • The Law of Demand
   • Consumer Surplus
   • Utility Theory
2. 2

   Supply

   3 topics

   • The Law of Supply
   • Producer Surplus
   • Costs and Supply Decisions
3. 3

   Market Equilibrium

   4 topics

   • Equilibrium Price and Quantity
   • Excess Demand and Supply
   • Changes in Equilibrium
   • The Price Mechanism in Action
4. 4

   Elasticity

   4 topics

   • Price Elasticity of Demand
   • Income Elasticity of Demand
   • Cross Elasticity of Demand
   • Price Elasticity of Supply
5. 5

   Consumer Behaviour

   3 topics

   • Indifference Curves
   • Income and Substitution Effects
   • Behavioural Economics

Microeconomics: Markets and Consumers flashcards for Economics

25 of 51 cards from the Microeconomics: Markets and Consumers deck — real questions with worked answers.

1. State the Law of Demand.

   Other things being equal (ceteris paribus), as the price of a good falls, the quantity demanded rises; as price rises, quantity demanded falls. Price and quantity demanded are inversely related, giving a downward-sloping demand curve.

2. What are the two reasons the demand curve slopes downward (why a price fall raises quantity demanded)?

   The income effect (a lower price raises real purchasing power, so more can be bought) and the substitution effect (the good becomes cheaper relative to substitutes, so consumers switch toward it).

3. Distinguish a movement along a demand curve from a shift of the demand curve.

   A movement along the curve (change in quantity demanded) is caused only by a change in the good's own price. A shift of the whole curve (change in demand) is caused by non-price factors such as income, tastes, prices of related goods, population and expectations.

4. Define consumer surplus.

   The difference between the maximum price a consumer is willing to pay for a good and the price they actually pay. On a diagram it is the area below the demand curve and above the market price.

5. How is total consumer surplus shown on a demand-and-price diagram, and give its formula for a linear demand curve?

   It is the triangular area between the demand curve and the horizontal price line, up to the quantity bought. For a linear demand curve: $$\text{CS} = \tfrac{1}{2} \times Q \times (P_{\max} - P)$$ where $P_{\max}$ is the choke price (demand intercept).

6. What is total utility, and what is marginal utility?

   Total utility is the overall satisfaction gained from consuming a given quantity of a good. Marginal utility is the extra satisfaction from consuming one additional unit: $$MU = \frac{\Delta TU}{\Delta Q}$$

7. State the Law of Diminishing Marginal Utility.

   As more units of a good are consumed within a given period, the marginal (extra) utility gained from each additional unit eventually falls, other things being equal.

8. State the equimarginal principle (utility-maximising condition) for a consumer spending on goods A and B.

   A consumer maximises total utility when the marginal utility per unit of currency is equal across all goods: $$\frac{MU_A}{P_A} = \frac{MU_B}{P_B}$$

9. State the Law of Supply.

   Other things being equal, as the price of a good rises, the quantity supplied rises; as price falls, quantity supplied falls. Price and quantity supplied are directly (positively) related, giving an upward-sloping supply curve.

10. List the main non-price factors that shift the supply curve.

    Costs of production (wages, raw materials), technology, taxes and subsidies, prices of other goods a firm could produce, number of firms, expectations, and shocks such as weather. These cause the whole supply curve to shift.

11. Define producer surplus.

    The difference between the price a producer actually receives and the minimum price they would have been willing to accept (their marginal cost). On a diagram it is the area above the supply curve and below the market price.

12. How is producer surplus calculated for a linear supply curve?

    It is the triangular area between the market price and the supply curve up to the quantity sold: $$\text{PS} = \tfrac{1}{2} \times Q \times (P - P_{\min})$$ where $P_{\min}$ is the supply-curve intercept (minimum acceptable price).

13. Why is a firm's supply curve linked to its marginal cost curve?

    A profit-maximising firm supplies where price equals marginal cost ($P = MC$). As output rises, marginal cost typically rises, so higher prices are needed to justify supplying more. The firm's short-run supply curve is its MC curve above average variable cost.

14. Distinguish fixed costs from variable costs.

    Fixed costs do not change with the level of output (e.g. rent, insurance) and exist even at zero output. Variable costs change directly with output (e.g. raw materials, hourly labour). Total cost $TC = TFC + TVC$.

15. Give the formulas for average total cost and marginal cost.

    Average total cost: $$ATC = \frac{TC}{Q}$$ Marginal cost: $$MC = \frac{\Delta TC}{\Delta Q}$$

16. Define equilibrium price and quantity in a market.

    The equilibrium price is the price at which quantity demanded equals quantity supplied ($Q_d = Q_s$), so the market clears. The equilibrium quantity is the amount traded at that price. Graphically it is where the demand and supply curves intersect.

17. What is excess demand (a shortage), and how does the market correct it?

    Excess demand occurs when price is below equilibrium, so $Q_d > Q_s$. The shortage causes upward pressure on price; as price rises, quantity demanded falls and quantity supplied rises until the market clears at equilibrium.

18. What is excess supply (a surplus), and how does the market correct it?

    Excess supply occurs when price is above equilibrium, so $Q_s > Q_d$. The surplus causes downward pressure on price; as price falls, quantity supplied falls and quantity demanded rises until the market clears at equilibrium.

19. When demand increases (curve shifts right) with supply unchanged, what happens to equilibrium price and quantity?

    Both equilibrium price and equilibrium quantity rise.

20. When supply increases (curve shifts right) with demand unchanged, what happens to equilibrium price and quantity?

    Equilibrium price falls and equilibrium quantity rises.

21. When demand decreases with supply unchanged, and when supply decreases with demand unchanged, what happens to equilibrium?

    A fall in demand lowers both equilibrium price and quantity. A fall in supply raises equilibrium price but lowers equilibrium quantity.

22. What is the outcome for equilibrium quantity when both demand and supply increase, but by unknown amounts?

    Equilibrium quantity definitely rises, but the change in equilibrium price is indeterminate (ambiguous) — it depends on the relative sizes of the two shifts.

23. What are the three functions of the price mechanism (the 'invisible hand')?

    Signalling (prices convey information about shortages and surpluses), incentive (prices motivate producers and consumers to change behaviour), and rationing/allocation (prices allocate scarce resources to those willing and able to pay).

24. Define price elasticity of demand (PED) and give its formula.

    PED measures the responsiveness of quantity demanded to a change in the good's own price: $$PED = \frac{\%\,\Delta Q_d}{\%\,\Delta P}$$ It is normally negative because of the inverse price–quantity relationship.

25. Classify demand by the value of PED (using absolute values).

    $|PED| = 0$ perfectly inelastic; $0 < |PED| < 1$ inelastic; $|PED| = 1$ unit elastic; $1 < |PED| < \infty$ elastic; $|PED| = \infty$ perfectly elastic.

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