Principles of Microeconomics: Final Exam Study Guide

Chapter 4: Demand, Supply, and Equilibrium

Law of Demand, Demand Schedule, and Demand Curve

The law of demand states that, all else equal, as the price of a good increases, the quantity demanded decreases, and vice versa. The demand schedule is a table showing the quantity demanded at different prices, while the demand curve is a graphical representation of this relationship.

• Law of Demand: Inverse relationship between price and quantity demanded.

• Demand Schedule: Tabular form of price-quantity demanded pairs.

• Demand Curve: Downward-sloping curve on a price-quantity graph.

• Example: If the price of coffee rises from $2 to $3, the quantity demanded falls from 100 to 80 cups per day.

Market Equilibrium

Market equilibrium occurs where the quantity demanded equals the quantity supplied. At this point, there is no tendency for price to change.

• Equilibrium Condition: $Q_d = Q_s$

• Equilibrium Price: The price at which the market clears.

• Example: If at $5 per unit, buyers want 50 units and sellers offer 50 units, the market is in equilibrium.

The Definition of Markets

A market is any arrangement that allows buyers and sellers to exchange goods and services. Markets can be physical or virtual, local or global.

• Key Features: Buyers, sellers, and a product or service.

• Types: Competitive, monopolistic, oligopolistic, etc.

Law of Supply, Supply Schedule, and Supply Curve

The law of supply states that, all else equal, as the price of a good increases, the quantity supplied increases. The supply schedule is a table showing quantity supplied at various prices, and the supply curve is its graphical representation.

• Law of Supply: Direct relationship between price and quantity supplied.

• Supply Schedule: Table of price-quantity supplied pairs.

• Supply Curve: Upward-sloping curve on a price-quantity graph.

Market Disequilibrium: Surplus and Shortage

When the market is not at equilibrium, there can be a surplus (excess supply) or a shortage (excess demand).

• Surplus: Occurs when $Q_s > Q_d$ (price above equilibrium).

• Shortage: Occurs when $Q_d > Q_s$ (price below equilibrium).

• Formulas:

  • Shortage: $Q_d - Q_s$

  • Surplus: $Q_s - Q_d$

Outside Factors Affecting Demand and Shifts of Demand Curve

Factors other than price can shift the demand curve, such as income, tastes, prices of related goods, expectations, and number of buyers.

• Increase in Demand: Demand curve shifts right.

• Decrease in Demand: Demand curve shifts left.

• Example: A rise in consumer income increases demand for normal goods.

Chapter 6: Sellers and Incentives

Producer Surplus

Producer surplus is the difference between the market price and the minimum price at which producers are willing to sell a good.

• Individual Producer Surplus: Area between the price and the marginal cost (MC) curve for the firm’s quantity.

• Market Producer Surplus: Area between the market price and the market supply curve.

Total, Fixed, and Variable Cost

Costs are classified as fixed (do not vary with output) and variable (change with output). Total cost is the sum of fixed and variable costs.

• Formulas:

  • Total Cost: $TC = VC + FC$

  • Average Total Cost: $ATC = \frac{TC}{Q}$ or $ATC = AVC + AFC$

• Example: If $FC = 100$ and $VC = 200$, then $TC = 300$.

Key Characteristics of Perfectly Competitive Markets

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

• Many buyers and sellers

• Homogeneous (identical) products

• No barriers to entry or exit

• Perfect information

Total and Marginal Revenue

Total revenue (TR) is the total amount received from sales. Marginal revenue (MR) is the additional revenue from selling one more unit.

• Formulas:

  • Total Revenue: $TR = P \times Q$

  • Marginal Revenue: $MR = \frac{\Delta TR}{\Delta Q}$

Profit Maximization and the Optimality Rule (MC = MR)

Firms maximize profit by producing the quantity where marginal cost equals marginal revenue.

• Optimality Rule: $MC = MR$

• Profit: $\pi = TR - TC$ or $\pi = (P - ATC) \times Q$

Chapter 12: Monopoly

The Definition of Monopoly

A monopoly is a market with a single seller and no close substitutes for the product.

• Single seller

• Unique product

• High barriers to entry

Barriers to Entry, Natural Monopolies, Economies of Scale

Barriers to entry prevent new firms from entering the market. Natural monopolies occur when a single firm can supply the entire market at lower cost due to economies of scale.

• Legal barriers (patents, licenses)

• Control of key resources

• Cost advantages (economies of scale)

Benefits of Certain Monopolies

Some monopolies may benefit society by providing goods efficiently when competition is impractical (e.g., utilities).

Comparison of Different Market Structures

Market structures differ by number of firms, product differentiation, and barriers to entry.

Structure	Firms	Product	Entry Barriers
Perfect Competition	Many	Identical	None
Monopoly	One	Unique	High
Oligopoly	Few	Similar/Differentiated	High
Monopolistic Competition	Many	Differentiated	Low

Price Discrimination: Types, Characteristics, and Examples

Price discrimination occurs when a firm charges different prices to different consumers for the same good.

• First-degree: Each consumer pays their maximum willingness to pay.

• Second-degree: Price varies by quantity purchased (block pricing).

• Third-degree: Different prices for different groups (e.g., student discounts).

• Formulas:

  • First-degree: $\pi = \text{Total Willingness to Pay} - \text{Total Cost}$

  • Second-degree: $\pi = (\text{Revenue from Block 1} + \text{Revenue from Block 2} + \ldots) - \text{Total Cost}$

  • Third-degree: $\pi = (\text{Revenue from Group A} + \text{Revenue from Group B}) - \text{Total Cost}$

Social Cost and Deadweight Loss Resulting from Monopoly

Monopolies restrict output and raise prices, causing a deadweight loss—a loss of total surplus compared to perfect competition.

• Deadweight Loss: Area between demand and supply curves over the range of reduced output.

• Area of a Triangle: $\text{Area} = \frac{1}{2} \times \text{Base} \times \text{Height}$

Chapter 9: Externalities and Public Goods

Properties of Goods: Rivalry and Excludability

Goods are classified by rivalry (one person's use reduces availability for others) and excludability (people can be prevented from using the good).

Type	Rival?	Excludable?	Example
Private Good	Yes	Yes	Ice cream
Public Good	No	No	National defense
Common Resource	Yes	No	Fish in the ocean
Club Good	No	Yes	Cable TV

Common Goods (Resources), Tragedy of the Commons, and Solutions

Common resources are rival but not excludable, leading to overuse—a problem known as the tragedy of the commons. Solutions include regulation, privatization, or community management.

Externalities: Positive, Negative, and Pecuniary

Externalities are costs or benefits that affect third parties not involved in a transaction.

• Negative externality: Pollution from a factory.

• Positive externality: Vaccination benefits others.

• Pecuniary externality: Market price changes due to others' actions.

• Remedies: Taxes, subsidies, regulation, or tradable permits.

• Formulas:

  • Marginal Social Cost: $MSC = MC + MEC$

  • Marginal Social Benefit: $MSB = MB + MEB$

Chapter 8: Trade

Arguments Against Free Trade

Common arguments include protecting jobs, national security, infant industry protection, and preventing unfair competition.

Comparative Advantage and Absolute Advantage

Comparative advantage is the ability to produce a good at a lower opportunity cost than others. Absolute advantage is the ability to produce more of a good with the same resources.

• Opportunity Cost of Good A: $OCA = \frac{\text{Quantity of Good B Given Up}}{\text{Quantity of Good A Gained}}$

• Example: If producing 1 car means giving up 2 computers, the opportunity cost of 1 car is 2 computers.

Tariffs and Their Effects on Welfare

Tariffs are taxes on imports, raising domestic prices, reducing imports, and generating government revenue, but causing deadweight loss.

• Tariff Revenue: $\text{Tariff Rate} \times \text{Quantity of Imports}$

• Quantity of Imports: $Q_{demand} - Q_{supply}$ (at world/tariff price)

• Quantity of Exports: $Q_{supply} - Q_{demand}$ (at world price)

• Area of a Rectangle (Tariff Revenue): $\text{Area} = \text{Base} \times \text{Height}$

Trade Between Countries and Welfare Effects

Trade allows countries to specialize according to comparative advantage, increasing total welfare. However, some groups may lose from trade even as the overall economy gains.

Geometry for Surplus and Welfare

• Consumer Surplus: Area below the demand curve and above the market price.

• Producer Surplus: Area above the supply curve and below the market price.

• Deadweight Loss: Area representing lost total surplus due to market inefficiency (e.g., monopoly, tariffs).

• Area of a Triangle: $\text{Area} = \frac{1}{2} \times \text{Base} \times \text{Height}$

• Area of a Rectangle: $\text{Area} = \text{Base} \times \text{Height}$

Additional info: Some topics listed in the outline are not covered on the exam, as indicated by the original document. The above notes focus on the key concepts expected to appear, with expanded academic context for clarity and completeness.