Microeconomics Exam Question Bank: Core Concepts and Applications

Study Guide - Smart Notes

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Basic Principles of Economics

Production Possibility Frontier (PPF)

The Production Possibility Frontier (PPF) illustrates the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently utilized.

Key Point 1: The PPF is typically concave to the origin due to increasing opportunity costs.
Key Point 2: Points inside the PPF indicate inefficient use of resources, while points outside are unattainable with current resources.
Example: If an economy produces only two goods, X and Y, the PPF shows the trade-off between producing more of X and less of Y, and vice versa.

Reading and Understanding Graphs

Shifts vs. Movements Along Curves

Understanding the difference between a movement along a curve and a shift of the curve is fundamental in microeconomics.

Key Point 1: A movement along the demand or supply curve is caused by a change in the good's own price.
Key Point 2: A shift of the curve is caused by non-price factors (e.g., income, tastes, technology).
Example: An increase in consumer income shifts the demand curve for normal goods to the right.

Introductory Economic Models

Opportunity Cost

Opportunity cost is the value of the next best alternative foregone when making a choice.

Key Point 1: Opportunity cost is central to all economic decisions.
Key Point 2: It is represented by the slope of the PPF.
Example: If producing 1 more unit of good X requires sacrificing 2 units of good Y, the opportunity cost of X is 2Y.

The Market Forces of Supply and Demand

Law of Demand and Law of Supply

The law of demand states that, ceteris paribus, as the price of a good increases, the quantity demanded decreases. The law of supply states that as the price increases, the quantity supplied increases.

Key Point 1: Demand curves slope downward; supply curves slope upward.
Key Point 2: Market equilibrium occurs where quantity demanded equals quantity supplied.
Example: If the price of apples rises, consumers buy fewer apples (movement along the demand curve).

Elasticity

Price Elasticity of Demand

Price elasticity of demand measures the responsiveness of quantity demanded to a change in price.

Key Point 1: Elasticity is calculated as:

Key Point 2: If , demand is elastic; if , demand is inelastic.
Example: If a 10% increase in price leads to a 20% decrease in quantity demanded, (elastic demand).

Consumer and Producer Surplus; Price Ceilings and Floors

Consumer and Producer Surplus

Consumer surplus is the difference between what consumers are willing to pay and what they actually pay. Producer surplus is the difference between the price received and the minimum price at which producers are willing to sell.

Key Point 1: Price ceilings (maximum prices) can create shortages; price floors (minimum prices) can create surpluses.
Example: A government-imposed rent ceiling below equilibrium rent leads to excess demand for apartments.

Introduction to Taxes and Subsidies

Tax Incidence

Tax incidence refers to how the burden of a tax is shared between buyers and sellers.

Key Point 1: The more inelastic side of the market bears a greater tax burden.
Key Point 2: Taxes shift the supply or demand curve, depending on whether they are levied on producers or consumers.
Example: A per-unit tax on sellers shifts the supply curve vertically upward by the amount of the tax.

The Costs of Production

Short-Run and Long-Run Costs

Costs of production are divided into fixed and variable costs in the short run. In the long run, all costs are variable.

Key Point 1: Marginal cost (MC) is the change in total cost from producing one more unit.
Key Point 2: Average cost (AC) is total cost divided by quantity produced.
Formulas:

Example: If total cost increases from 100 to 120 when output increases from 10 to 12, per unit.

Perfect Competition

Characteristics and Equilibrium

Perfect competition is a market structure with many buyers and sellers, homogeneous products, and free entry and exit.

Key Point 1: Firms are price takers; market price is determined by supply and demand.
Key Point 2: In the long run, firms earn zero economic profit.
Example: Agricultural markets often approximate perfect competition.

Monopoly and Other Market Structures

Monopoly

A monopoly is a market with a single seller and high barriers to entry. The monopolist sets price above marginal cost, leading to deadweight loss.

Key Point 1: The monopolist maximizes profit where .
Key Point 2: Monopoly results in lower output and higher prices compared to perfect competition.
Formulas:

Example: Utility companies are often monopolies due to high infrastructure costs.

Consumer Choice and Behavioral Economics

Utility Maximization

Consumers allocate their income to maximize utility, subject to their budget constraint.

Key Point 1: The optimal consumption bundle is where the marginal utility per dollar is equalized across all goods.
Formula:

Example: If the marginal utility of X is 10 and its price is 2, and the marginal utility of Y is 20 and its price is 4, the consumer is maximizing utility.

Tables and Tabular Data

Purpose and Example Table

Tables in the exam questions are used to compare answers, match questions to answers, or summarize key relationships (e.g., cost schedules, demand schedules).

Quantity (Q)	Total Cost (TC)	Marginal Cost (MC)
0	100	-
1	120	20
2	135	15
3	155	20

Additional info: Table inferred for illustration; actual exam tables may focus on answer keys or cost calculations.

Additional Info

Many questions involve calculation and application of formulas, such as cost functions, elasticity, and equilibrium analysis.
Some questions test understanding of shifts in supply and demand, tax incidence, and market outcomes under different structures.
Students are expected to interpret graphs, solve for equilibrium, and analyze the effects of policy interventions (taxes, subsidies, price controls).