lOMoAR cPSD| 5877629
MICROECONOMICS SUMMARY FOR FIRST YEAR STUDENT
, lOMoAR cPSD| 5877629
Microeconomics Summary
Week 1
1.1 The Themes of Microeconomics
**Microeconomics describes the trade-offs that consumers, workers, and firms face,
and shows how these trade-offs are best made.
In a centrally planned economy, the government sets prices. In a market economy,
prices are determined by the interactions of consumers, workers, and firms.
The theory of the firm begins with a simple assumption – firms try to maximize their
profits. The theory of the firm tells us whether a firm’s output level will increase or
decrease in response to an increase in wage rates or a decrease in the price of raw
materials.
Positive analysis – Analysis describing relationships of cause and effect.
Normative analysis – Analysis examining questions of what ought to be.
1.2 What Is a Market?
Market – Collection of buyers and sellers that, through their actual or potential
interactions, determine the price of a product or set of products.
Industry – A collection of firms that sell the same or closely related products.
Market definition – Determination of the buyers, sellers, and range of products that
should be included in a particular market.
Arbitrage – Practice of buying at a low price at one location and selling at a higher
price in another.
Perfectly competitive market – Market with many buyers and sellers, so that no
single buyer or seller has a significant impact on price.
Market price – Price prevailing in a competitive market.
Extent of a Market – Boundaries of a market, both geographical and in terms of
range of products produced and sold within it.
2.1 Supply and Demand
The supply-demand model combines two important concepts: the supply curve and a
demand curve.
Supply curve – Relationship between the quantity of a good that producers are
willing to sell and the price of the good.
, lOMoAR cPSD| 5877629
**The higher the price, the more firms are
able and willing to produce and sell. The
quantity supplied can also depend on
production costs, including wages, interest
charges, and the costs of raw materials.
Movements along the supply curve can
represent changes in price. Changes in
other variables are shown by a shift of the
supply curve itself.
Demand curve – Relationship between the quantity of a good that consumers are
willing to buy and the price of the good.
Substitutes – Two goods for which an increase in the price of one leads to an
increase in the quantity demanded of the other.
Complements – Two goods for which an increase in the price of one leads to a
decrease in the quantity demanded of the other.
2.2 The Market Mechanism
Equilibrium (market-clearing price) – Price that equates the quantity supplied to
the quantity demanded.
Market mechanism – Tendency in a free market for price to change until the market
clears.
Surplus – Situation in which the quantity supplied exceeds the quantity demanded.
Shortage – Situation in which the quantity demanded exceeds the quantity supplied.
2.4 Elasticities of Supply and Demand
Elasticity – Percentage change in one variable resulting from a 1% increase in
another.
, lOMoAR cPSD| 5877629
Price Elasticity of Demand – Percentage change in quantity demanded of a good
resulting from a 1% increase in its price.
P ΔQ %ΔQ
Ep = =
Q∆P %∆P
Infinitely elastic demand – Principle that consumers will buy as much of a good as
they can get at a single price, but for any higher price the quantity demanded drops to
zero, while for any lower price the quantity demanded increases without limit.
Completely inelastic demand – Principle that consumers will buy a fixed quantity of
a good regardless of its price.
**The steeper the slope of the cure, the less elastic demand is.
Income elasticity of demand – Percentage change in the quantity demanded resulting
from a 1% increase in income.
I ∆Q
EI = Q∆I
Cross-price elasticity of demand – Percentage change in the quantity demanded of
one good resulting from a 1% increase in the price of another.
P∆Q
EQP =
Q∆P
When goods are substitutes, cross-price elasticities will be positive. When goods are
complements, cross-price elasticities will be negative.
Price elasticity of supply – Percentage change in quantity supplied resulting from a
1% increase in price.
Point elasticity of demand – Price elasticity at a particular point on the demand
curve.
MICROECONOMICS SUMMARY FOR FIRST YEAR STUDENT
, lOMoAR cPSD| 5877629
Microeconomics Summary
Week 1
1.1 The Themes of Microeconomics
**Microeconomics describes the trade-offs that consumers, workers, and firms face,
and shows how these trade-offs are best made.
In a centrally planned economy, the government sets prices. In a market economy,
prices are determined by the interactions of consumers, workers, and firms.
The theory of the firm begins with a simple assumption – firms try to maximize their
profits. The theory of the firm tells us whether a firm’s output level will increase or
decrease in response to an increase in wage rates or a decrease in the price of raw
materials.
Positive analysis – Analysis describing relationships of cause and effect.
Normative analysis – Analysis examining questions of what ought to be.
1.2 What Is a Market?
Market – Collection of buyers and sellers that, through their actual or potential
interactions, determine the price of a product or set of products.
Industry – A collection of firms that sell the same or closely related products.
Market definition – Determination of the buyers, sellers, and range of products that
should be included in a particular market.
Arbitrage – Practice of buying at a low price at one location and selling at a higher
price in another.
Perfectly competitive market – Market with many buyers and sellers, so that no
single buyer or seller has a significant impact on price.
Market price – Price prevailing in a competitive market.
Extent of a Market – Boundaries of a market, both geographical and in terms of
range of products produced and sold within it.
2.1 Supply and Demand
The supply-demand model combines two important concepts: the supply curve and a
demand curve.
Supply curve – Relationship between the quantity of a good that producers are
willing to sell and the price of the good.
, lOMoAR cPSD| 5877629
**The higher the price, the more firms are
able and willing to produce and sell. The
quantity supplied can also depend on
production costs, including wages, interest
charges, and the costs of raw materials.
Movements along the supply curve can
represent changes in price. Changes in
other variables are shown by a shift of the
supply curve itself.
Demand curve – Relationship between the quantity of a good that consumers are
willing to buy and the price of the good.
Substitutes – Two goods for which an increase in the price of one leads to an
increase in the quantity demanded of the other.
Complements – Two goods for which an increase in the price of one leads to a
decrease in the quantity demanded of the other.
2.2 The Market Mechanism
Equilibrium (market-clearing price) – Price that equates the quantity supplied to
the quantity demanded.
Market mechanism – Tendency in a free market for price to change until the market
clears.
Surplus – Situation in which the quantity supplied exceeds the quantity demanded.
Shortage – Situation in which the quantity demanded exceeds the quantity supplied.
2.4 Elasticities of Supply and Demand
Elasticity – Percentage change in one variable resulting from a 1% increase in
another.
, lOMoAR cPSD| 5877629
Price Elasticity of Demand – Percentage change in quantity demanded of a good
resulting from a 1% increase in its price.
P ΔQ %ΔQ
Ep = =
Q∆P %∆P
Infinitely elastic demand – Principle that consumers will buy as much of a good as
they can get at a single price, but for any higher price the quantity demanded drops to
zero, while for any lower price the quantity demanded increases without limit.
Completely inelastic demand – Principle that consumers will buy a fixed quantity of
a good regardless of its price.
**The steeper the slope of the cure, the less elastic demand is.
Income elasticity of demand – Percentage change in the quantity demanded resulting
from a 1% increase in income.
I ∆Q
EI = Q∆I
Cross-price elasticity of demand – Percentage change in the quantity demanded of
one good resulting from a 1% increase in the price of another.
P∆Q
EQP =
Q∆P
When goods are substitutes, cross-price elasticities will be positive. When goods are
complements, cross-price elasticities will be negative.
Price elasticity of supply – Percentage change in quantity supplied resulting from a
1% increase in price.
Point elasticity of demand – Price elasticity at a particular point on the demand
curve.
