Government Economic Service (GES) Assessment Centre Microeconomics for Policy Analysis Syllabus

Microeconomics for Policy Analysis syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Microeconomics for Policy Analysis in Government Economic Service (GES) Assessment Centre, not a summary of it.

1. 1

   Markets, Supply and Demand

   4 topics

   • Demand and supply determinants and equilibrium
     • Movements along vs shifts of curves
     • Comparative statics
   • Elasticities and their policy uses
     • Price, income and cross elasticities
     • Tax incidence and elasticity
   • Consumer and producer surplus
     • Deadweight loss measurement
   • Price controls, subsidies and taxes
2. 2

   Consumer and Producer Theory

   4 topics

   • Utility maximisation and indifference analysis
     • Budget constraints and substitution/income effects
   • Firm cost structures
     • Short-run vs long-run costs
     • Economies and diseconomies of scale
   • Profit maximisation and the MR=MC rule
   • Behavioural economics and bounded rationality
     • Nudges and choice architecture in government
3. 3

   Market Structures

   5 topics

   • Perfect competition and allocative efficiency
   • Monopoly, market power and price discrimination
   • Oligopoly and strategic interaction
     • Game theory and Nash equilibrium
     • Collusion and cartels
   • Monopolistic competition and product differentiation
   • Contestable markets and barriers to entry
4. 4

   Market Failure and Government Intervention

   5 topics

   • Externalities and Pigouvian remedies
     • Coase theorem and property rights
   • Public goods and the free-rider problem
   • Information asymmetry
     • Adverse selection and moral hazard
   • Merit and demerit goods
   • Government failure and unintended consequences
5. 5

   Welfare Economics and Efficiency

   4 topics

   • Pareto efficiency and the two welfare theorems
   • Equity-efficiency trade-offs
   • Social welfare functions and distributional weights
   • Cost-benefit analysis foundations

Microeconomics for Policy Analysis flashcards for Government Economic Service (GES) Assessment Centre

23 of 71 cards from the Microeconomics for Policy Analysis deck — real questions with worked answers.

1. What is the difference between a change in quantity demanded and a change in demand?

   A change in quantity demanded is a movement along a fixed demand curve caused by a change in the good's own price. A change in demand is a shift of the whole curve caused by a non-price determinant (income, tastes, prices of related goods, expectations, number of buyers).

2. List the main non-price determinants that shift the demand curve.

   Income, tastes/preferences, prices of substitutes and complements, consumer expectations, the number of buyers, and (for some goods) population demographics.

3. List the main non-price determinants that shift the supply curve.

   Input/factor prices, technology, taxes and subsidies, prices of related goods in production, producer expectations, the number of sellers, and natural/random shocks.

4. Define market equilibrium and state the condition that characterises it.

   Equilibrium is the price-quantity pair where the plans of buyers and sellers are consistent, i.e. where quantity demanded equals quantity supplied: $Q_d = Q_s$, clearing the market with no shortage or surplus.

5. What happens to equilibrium price and quantity if demand rises while supply is unchanged?

   Both equilibrium price and equilibrium quantity rise.

6. Give the formula for own-price elasticity of demand and state its typical sign.

   $$E_d = \frac{\% \Delta Q_d}{\% \Delta P} = \frac{\partial Q}{\partial P}\cdot\frac{P}{Q}$$ It is normally negative because demand curves slope downward; magnitudes are usually compared in absolute value.

7. Classify demand as elastic, inelastic or unit elastic using the elasticity coefficient.

   Elastic if $|E_d| > 1$, inelastic if $|E_d| < 1$, and unit elastic if $|E_d| = 1$. Perfectly inelastic is $E_d = 0$ and perfectly elastic is $E_d = \pm\infty$.

8. How does price elasticity of demand relate to a firm's total revenue when price falls?

   If demand is elastic ($|E_d|>1$), a price cut raises total revenue; if inelastic ($|E_d|<1$), a price cut lowers total revenue; if unit elastic, revenue is unchanged (revenue is maximised).

9. Define income elasticity of demand and use it to classify goods.

   $$E_Y = \frac{\% \Delta Q}{\% \Delta Y}$$ Normal goods have $E_Y > 0$ (luxuries $E_Y>1$, necessities $0<E_Y<1$); inferior goods have $E_Y < 0$.

10. Define cross-price elasticity of demand and interpret its sign.

    $$E_{XY} = \frac{\% \Delta Q_X}{\% \Delta P_Y}$$ A positive value indicates substitutes; a negative value indicates complements; near zero indicates unrelated goods.

11. Why is elasticity central to the incidence (burden) of a tax?

    The side of the market that is more inelastic bears the larger share of a tax. If demand is more inelastic than supply, consumers bear more of the burden; if supply is more inelastic, producers bear more.

12. Define consumer surplus and state how to measure it on a diagram.

    Consumer surplus is the difference between the maximum buyers are willing to pay and what they actually pay. It is the area below the demand curve and above the market price, up to the quantity traded.

13. Define producer surplus and state how to measure it on a diagram.

    Producer surplus is the difference between the price received and the minimum (marginal cost) at which producers would supply. It is the area above the supply curve and below the market price, up to the quantity traded.

14. What is total economic surplus and when is it maximised in a competitive market?

    Total surplus is consumer surplus plus producer surplus. In an undistorted competitive market it is maximised at the equilibrium quantity where price equals marginal cost and there is no deadweight loss.

15. Define deadweight loss.

    Deadweight loss is the reduction in total economic surplus caused by an inefficient level of output (e.g. from taxes, price controls, monopoly), representing mutually beneficial trades that do not occur.

16. What is a binding price ceiling and what is its predictable effect?

    A price ceiling set below the equilibrium price (e.g. rent control) is binding and creates a persistent shortage ($Q_d > Q_s$), often with queuing, quality erosion and black markets, plus deadweight loss.

17. What is a binding price floor and what is its predictable effect?

    A price floor set above equilibrium (e.g. a minimum wage) is binding and creates a persistent surplus ($Q_s > Q_d$); in labour markets this surplus is unemployment, with deadweight loss.

18. How does a per-unit subsidy affect price, quantity and welfare?

    A subsidy shifts supply down by the subsidy amount, raising the quantity traded; the price buyers pay falls and the price sellers receive rises. It can create deadweight loss because output exceeds the efficient level, and it has a fiscal cost to government.

19. Distinguish a specific (per-unit) tax from an ad valorem tax.

    A specific tax is a fixed amount per unit (shifts supply up by a constant), while an ad valorem tax is a percentage of price (shifts supply up proportionally, so the gap widens at higher prices).

20. State the consumer's utility-maximisation condition (equi-marginal principle).

    Utility is maximised where the marginal utility per pound is equal across goods: $$\frac{MU_x}{P_x} = \frac{MU_y}{P_y}$$ subject to the budget constraint $P_x x + P_y y = M$.

21. What does the marginal rate of substitution (MRS) measure and what equals it at the optimum?

    The MRS is the rate at which a consumer will trade one good for another keeping utility constant: $MRS = \frac{MU_x}{MU_y}$. At the optimum it equals the price ratio: $MRS = \frac{P_x}{P_y}$.

22. What are the defining properties of standard indifference curves?

    They are downward sloping, convex to the origin (diminishing MRS), never cross, and higher curves represent higher utility. Each maps a set of bundles giving equal satisfaction.

23. Distinguish the substitution effect from the income effect of a price change.

    The substitution effect is the change in quantity from the change in relative prices holding utility constant; the income effect is the change from the change in real purchasing power. Together they give the total (Slutsky) effect.

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