Basics
What is microeconomics, and which economic agents does it study?
Microeconomics is the branch of economics that studies the behavior and decision-making of individual economic agents such as consumers, producers, and governments.
State the law of demand.
As the price of a good falls, the quantity demanded increases, and as price rises, quantity demanded falls, ceteris paribus.
State the law of supply.
The law of supply states that as the price of a good increases, the quantity supplied increases, and as price falls, quantity supplied falls, ceteris paribus
What is the formula for Price Elasticity of Demand?
PED =% change in quantity demanded / % change in selling price.
What is the price mechanism, and what are its two functions?
The price mechanism allocates resources through price changes and performs two functions:
Signals information
Incentives behavior
What is the difference between total utility and marginal utility?
Total utility is the total satisfaction from consuming a certain quantity of a good, while marginal utility is the additional satisfaction gained from consuming one more unit.
List five factors that can cause a shift in demand
Income, Preferences, Population, Prices of substitutes, and Prices of complements
List seven factors that can cause a shift in supply
Input costs, Technology, Prices of Related goods, Taxes and subsidies, Price expectations, Number of producers, and Shocks
What is the elasticity of a producer which sees a 10% rise in quantity demanded in response to a 5% fall in price.
Price elastic (10/5 = 2)
What type of statement is the following: "Inflation in the USA in 2025 was 2.7%"
Positive Statement
What does it mean for a consumer to be rational in classical economic theory?
A rational consumer is assumed to have perfect information, consistent & transitive preferences, and aims to maximize utility given their budget constraint (Non-satiation assumption).
What is the difference between demand and quantity demanded?
Demand refers to the overall relationship between price and quantity demanded, while quantity demanded is the specific amount consumers are willing and able to buy at a particular price.
What is meant by competitive supply and joint supply?
Competitive supply occurs when goods compete for the same resources, while joint supply occurs when producing one good also produces another.
Identify the elasticity of a service whose quantity demanded rises by just 2% in response to a fall in the price of the service of 20%.
Price Inelastic (2/20 = 0.1)
Define producer surplus.
Producer surplus is the difference between the minimum price producers are willing to accept and the price they actually receive.
What does ceteris paribus mean, and why is it important in economic analysis?
Ceteris paribus means “all other things equal” and is important because it allows economists to isolate the effect of one variable (like price) on quantity demanded.
What is the difference between a movement along the demand curve and a shift of the demand curve?
A movement along the demand curve is caused by a change in price, while a shift of the demand curve is caused by a change in a non-price determinant.
Distinguish between Fixed Costs and Variable Costs.
Fixed inputs cannot be changed in the short run (e.g., factory size), while variable inputs can be adjusted (e.g., labor)
Identify the type of elasticity of a product whose price rises from £5 to £6, while quantity demanded for that product falls by 20%
Unitary Elastic
Percentage change of price is (6-5)/5 = 20%
Percentage change of quantity is 20%,
so 20% / 20% = 1
How does an increase in income affect demand for an inferior good?
When income increases, the consumer will purchase less of an inferior good.
What are the 9 economic concepts?
Efficiency, Equity, Sustainability, Economic Well-Being, Interdependence, Intervention, Change, Choice, and Scarcity
Explain the income effect using a real-world example.
The income effect occurs when a price decrease increases consumers’ real wage, allowing them to buy more goods overall.
Explain why the marginal cost (MC) curve is the same as the firm´s supply curve
After reaching peak marginal product (MP), a rational producer will only continue to supply their goods/services to the market so long as the price covers the cost of each additional unit produced.
The price of a camera is valued at $150, and the quantity demanded at this price is 4 million units. During the end of year sales the shop reduces the price to $130 and as a result the quantity demanded rises to 6m.
50 / 13 = 3.85, thus making the camera a highly PED elastic product. The shop should receive a higher revenue from selling the cameras at the reduced price.
What is the formula for a consumer surplus expressed as a trapezium?
Area=1/2(a+b)h