Microeconomics Final Exam Study Guide: Key Topics and Concepts

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Microeconomics begins with foundational concepts that set the stage for understanding market behavior and decision-making.

Production Possibilities Curve (PPC): Illustrates the maximum feasible combinations of two goods that an economy can produce, given resources and technology. The curve demonstrates opportunity cost and efficiency.
Opportunity Cost: The value of the next best alternative forgone when making a choice. It is a central concept in economic decision-making.
Supply and Demand: The fundamental model explaining how prices and quantities are determined in markets. - Law of Demand: As price decreases, quantity demanded increases, ceteris paribus. - Law of Supply: As price increases, quantity supplied increases, ceteris paribus.
Elasticity: Measures responsiveness of quantity demanded or supplied to changes in price or other factors. - Price Elasticity of Demand:
Consumer and Producer Surplus: - Consumer Surplus: Difference between what consumers are willing to pay and what they actually pay. - Producer Surplus: Difference between the price received by producers and their minimum acceptable price.
Short Run vs. Long Run: - Short Run: At least one input is fixed. - Long Run: All inputs are variable.

Production theory examines how firms transform inputs into outputs, while cost theory analyzes the expenses incurred in the process.

Long-Run Considerations of Scale: - Economies of Scale: Average costs decrease as output increases. - Diseconomies of Scale: Average costs increase as output increases.
Cost Structures: - Total Cost (TC): - Average Cost (AC): - Marginal Cost (MC):

Perfect competition describes a market structure with many firms, identical products, and free entry and exit.

Characteristics: - Many buyers and sellers - Homogeneous products - No barriers to entry or exit - Perfect information
Profit Maximization: Firms maximize profit where (Marginal Revenue equals Marginal Cost).
Short-Run and Long-Run Equilibrium: - Short Run: Firms may earn profits or losses. - Long Run: Entry and exit drive economic profit to zero.
Shutdown Rule: In the short run, a firm should shut down if price is less than average variable cost ().
Supply Curve: The firm's supply curve is the portion of its marginal cost curve above average variable cost.
Market Supply and Demand: Aggregate supply and demand determine equilibrium price and quantity.

Monopolistic competition features many firms selling differentiated products, with some market power and free entry.

Characteristics: - Many firms - Product differentiation - Free entry and exit
Short-Run and Long-Run Equilibrium: - Short Run: Firms may earn profits. - Long Run: Entry erodes profits; firms earn zero economic profit.
Advertising and Brand Loyalty: Firms use advertising to differentiate products and build brand loyalty.
Efficiency: Monopolistic competition is less efficient than perfect competition due to excess capacity and markup over marginal cost.

Oligopoly is a market structure with a few large firms, interdependent decision-making, and potential for strategic behavior.

Characteristics: - Few firms - Barriers to entry - Products may be homogeneous or differentiated
Barriers to Entry: High startup costs, economies of scale, legal restrictions.
Game Theory: Used to analyze strategic interactions among firms. - Nash Equilibrium: Each player's strategy is optimal given the strategies of others. - Repeated Games: Strategies may differ when games are played multiple times. - Entry Deterrence: Incumbents may act to prevent new competitors.

Monopoly is a market structure with a single seller, unique product, and significant barriers to entry.

Characteristics: - Single firm - No close substitutes - High barriers to entry
Sources of Monopoly Power: Control of resources, patents, government regulation.
Profit Maximization: Monopolist sets output where and price from the demand curve.
Market Power and Deadweight Loss: Monopoly leads to higher prices, lower output, and deadweight loss compared to perfect competition.
Antitrust Policy: Laws such as the Sherman Act and Clayton Act aim to prevent anti-competitive practices.

The following table summarizes key differences among market structures.

Market Structure	Number of Firms	Product Type	Entry Barriers	Market Power
Perfect Competition	Many	Homogeneous	None	None
Monopolistic Competition	Many	Differentiated	Low	Some
Oligopoly	Few	Homogeneous or Differentiated	High	Significant
Monopoly	One	Unique	Very High	Complete

Some subtopics (e.g., "Game Theory" and "Antitrust Policy") were expanded for academic completeness.
Equations and definitions were added for clarity and exam preparation.