Microeconomics Final Exam Study Guide: Key Concepts and Topics

Chapter 3: The Market Forces of Supply and Demand

Change in Demand vs. Change in Quantity Demanded

Understanding the distinction between a change in demand and a change in quantity demanded is fundamental in microeconomics.

• Change in Demand: Refers to a shift of the entire demand curve due to factors such as income, tastes, or prices of related goods.

• Change in Quantity Demanded: Refers to movement along the demand curve due to a change in the good's own price.

• Example: If consumer income increases, the demand for normal goods increases (demand curve shifts right).

Market Equilibrium and Shifts

• Increase in Demand: Leads to a higher equilibrium price and quantity.

• Decrease in Demand: Leads to a lower equilibrium price and quantity.

• Increase in Supply: Leads to a lower equilibrium price and higher quantity.

• Decrease in Supply: Leads to a higher equilibrium price and lower quantity.

• Simultaneous Shifts: The effect on equilibrium depends on the magnitude and direction of shifts in both supply and demand.

Price Floors

A price floor is a legally established minimum price for a good or service.

• Effect: If set above equilibrium, it creates a surplus (excess supply).

• Example: Minimum wage laws are a common example of price floors.

Chapter 4: Elasticity

Price Elasticity of Demand

Price elasticity of demand measures how much quantity demanded responds to a change in price.

• Formula: $\text{Price Elasticity of Demand} = \frac{\% \text{ Change in Quantity Demanded}}{\% \text{ Change in Price}}$

• Types:

  • Elastic: Elasticity > 1 (quantity demanded changes more than price)

  • Inelastic: Elasticity < 1 (quantity demanded changes less than price)

  • Unitary Elastic: Elasticity = 1 (proportional change)

• Effect on Revenue: If demand is elastic, a price increase decreases total revenue; if inelastic, a price increase increases total revenue.

Chapter 11: Economic Profit and Accounting Profit

Definitions

• Economic Profit: Total revenue minus total costs, including both explicit and implicit costs.

• Accounting Profit: Total revenue minus explicit costs only.

• Formula: $\text{Economic Profit} = \text{Total Revenue} - (\text{Explicit Costs} + \text{Implicit Costs})$

• Formula: $\text{Accounting Profit} = \text{Total Revenue} - \text{Explicit Costs}$

Chapter 12: Perfect Competition (Reference)

• Use numerical examples to analyze firm behavior in perfectly competitive markets.

• Understand how firms maximize profit where marginal cost equals marginal revenue.

Chapter 13: Monopolistic Competition (Reference)

• Review the characteristics of monopolistic competition, including product differentiation and many sellers.

Chapter 14: Oligopoly (Reference)

• Understand the strategic behavior of firms in oligopolistic markets, including collusion and competition.

Chapter 15: Monopoly

Definition and Sources of Monopoly

• Monopoly: A market structure where a single firm is the sole producer of a product with no close substitutes.

• Sources: Barriers to entry such as control of resources, government regulation, or economies of scale.

• Natural Monopoly: Occurs when a single firm can supply the entire market at a lower cost than multiple firms.

Monopoly Profit Maximization

• Monopolists maximize profit where marginal revenue equals marginal cost ($MR = MC$).

• Graphical analysis involves identifying the profit-maximizing output and price, as well as average total cost ($ATC$).

• Example: Use a graph to show the intersection of $MR$ and $MC$, and determine profit using $ATC$.

Price Discrimination

• Occurs when a firm sells the same good at different prices to different consumers.

• Increases monopoly profit by capturing consumer surplus.

Antitrust Laws

• Designed to prevent monopolies and promote competition.

• Examples include the Sherman Act and Clayton Act in the United States.

Why Monopolies Are Undesirable

• Monopolies can lead to higher prices, lower output, and reduced consumer welfare compared to competitive markets.

Additional info:

• Chapters 12, 13, and 14 are referenced for numerical and graphical analysis; students should review textbook examples for these chapters.