Microeconomics Study Guide: Key Concepts and Objectives

Module 1: Foundations of Economics

1.1 Key Economic Ideas

Economics is built on three fundamental ideas: rationality, incentives, and marginal decision-making. Understanding these concepts is essential for analyzing economic behavior.

• People are rational: Individuals use available information to make decisions that maximize their well-being.

• People respond to economic incentives: Changes in costs and benefits influence people's choices.

• Optimal decisions are made at the margin: Decisions are based on weighing additional benefits and costs.

• Example: Choosing to work an extra hour if the wage outweighs the opportunity cost.

1.2 Fundamental Economic Questions

Every economy must answer three basic questions to allocate resources efficiently:

• What goods and services will be produced? Determined by consumer preferences and resource availability.

• How will goods and services be produced? Choices about production methods, technology, and labor.

• Who will receive the goods and services produced? Distribution based on income, prices, and government policy.

• Example: Market economies use prices to allocate goods, while command economies rely on government decisions.

1.3 Economic Models

Economists use models to simplify and analyze complex economic events and policies. Models are theoretical frameworks that help predict outcomes and test hypotheses.

• Definition: An economic model is a simplified representation of reality.

• Application: Models are used to analyze the effects of policy changes, market shocks, and consumer behavior.

• Example: The supply and demand model predicts price changes in response to shifts in market conditions.

Module 2: Trade-offs and Market Systems

2.1 Production Possibilities Frontier (PPF)

The PPF illustrates the trade-offs and opportunity costs faced by an economy when allocating resources between two goods.

• Definition: The PPF is a curve showing the maximum attainable combinations of two products.

• Opportunity cost: The value of the next best alternative forgone.

• Trade-offs: Moving along the PPF involves sacrificing one good for another.

• Formula: $Opportunity\ Cost = \frac{Loss\ in\ Good\ A}{Gain\ in\ Good\ B}$

• Example: Producing more cars means producing fewer computers.

2.3 Market System Basics

A market system coordinates economic activity through voluntary exchange and price signals.

• Variables: Supply, demand, prices, and competition.

• Role of prices: Prices allocate resources and provide incentives.

• Example: In a competitive market, prices adjust to balance supply and demand.

Module 3: Demand, Supply, and Market Equilibrium

3.1 Variables Influencing Demand

Several factors affect the quantity of a good that consumers are willing and able to buy.

• Price of the good

• Income of consumers

• Prices of related goods (substitutes and complements)

• Tastes and preferences

• Expectations

• Example: An increase in income raises demand for normal goods.

3.2 Variables Influencing Supply

Supply is determined by factors that affect producers' willingness and ability to sell goods.

• Price of the good

• Input prices

• Technology

• Number of sellers

• Expectations

• Example: A decrease in input prices increases supply.

3.3 Market Equilibrium

Market equilibrium occurs where quantity demanded equals quantity supplied, resulting in a stable price.

• Definition: The intersection of the demand and supply curves.

• Formula: $Q_d = Q_s$

• Example: If demand increases, equilibrium price and quantity rise.

3.4 Predicting Price and Quantity Changes

Demand and supply graphs are used to analyze how shifts affect market outcomes.

• Increase in demand: Raises price and quantity.

• Decrease in supply: Raises price, lowers quantity.

• Example: A drought reduces supply of wheat, increasing price.

Module 4: Economic Efficiency and Government Policy

4.1 Consumer Surplus vs. Producer Surplus

Consumer and producer surplus measure the benefits buyers and sellers receive from market transactions.

• Consumer surplus: The difference between what consumers are willing to pay and what they actually pay.

• Producer surplus: The difference between the price received and the minimum price sellers are willing to accept.

• Formula: $Consumer\ Surplus = \frac{1}{2} \times (Base \times Height)$

• Example: If a buyer is willing to pay $10 but pays $7, surplus is $3.

4.2 Economic Efficiency

Economic efficiency occurs when resources are allocated to maximize total surplus.

• Definition: Achieved when marginal benefit equals marginal cost.

• Example: Competitive markets tend to be efficient.

4.3 Price Floors and Price Ceilings

Government-imposed price controls can lead to inefficiencies in the market.

• Price floor: Minimum legal price (e.g., minimum wage).

• Price ceiling: Maximum legal price (e.g., rent control).

• Effects: Surpluses, shortages, and deadweight loss.

• Example: A price ceiling below equilibrium causes shortages.

4.4 Taxes and Economic Effects

Taxes affect market outcomes by changing prices and quantities, and can create deadweight loss.

• Definition: Taxes are government-imposed charges on goods and services.

• Effects: Reduce consumer and producer surplus, create deadweight loss.

• Formula: $Deadweight\ Loss = \frac{1}{2} \times (Base \times Height)$

• Example: A tax on cigarettes reduces quantity sold and increases price.

Summary Table: Module Objectives and Exam Weight

Module	Chapter Section	Objective	% of Exam	Essay Topic
1	1.1	Key economic ideas	2%	No
1	1.2	Economic questions	2%	No
1	1.3	Economic models	4%	No
2	2.1	PPF and opportunity cost	13%	No
2	2.3	Market system basics	2%	Yes
3	3.1	Variables influencing demand	7%	No
3	3.2	Variables influencing supply	7%	No
3	3.3	Market equilibrium	16%	Yes
3	3.4	Predicting price and quantity changes	16%	Yes
4	4.1	Consumer vs. producer surplus	9%	Yes
4	4.2	Economic efficiency	8%	No
4	4.3	Price floors and ceilings	8%	Yes
4	4.4	Taxes and economic effects	8%	No