Microeconomics summary
2025 - 2026
Rania El Ghalbzouri 1
Bridging Programme - MBA
,Table of Contents
Table of Contents ..................................................................................................... 2
Unit 1: Prosperity, Inequality and Planetary Limits ...................................................... 4
1. Introduction...................................................................................................... 4
2. Inequality ......................................................................................................... 8
3. Technological progress and growth ................................................................... 10
4. Malthus and diminishing APL – explaining stagnation ......................................... 15
5. Capitalism...................................................................................................... 20
6. Economics and the biosphere .......................................................................... 25
Chapter summary .............................................................................................. 26
Unit 2: Technological change, population, and growth .............................................. 27
1. Introduction ................................................................................................ 27
2. Decision Making .......................................................................................... 27
3. Specialization and Comparative Advantage ................................................... 30
4. Technologies and Innovation ............................................................................ 36
5. Economic models ........................................................................................... 46
6. Economic Growth and Climate Change ............................................................ 48
Summary ........................................................................................................... 50
Unit 3: Scaricity, Work and Choice ........................................................................... 51
1. Introduction.................................................................................................... 51
2. Scarcity and choice: key concepts ................................................................... 51
3. Decision-making under scarcity ....................................................................... 54
4. Income and substitution effects ....................................................................... 55
5. Application to technological change ................................................................. 56
Summary ........................................................................................................... 57
Unit 4: Social Interactions ....................................................................................... 58
Introduction ....................................................................................................... 58
Game theory: key concepts ................................................................................. 59
Evaluating outcomes .......................................................................................... 63
Resolving social dilemmas .................................................................................. 64
Summary ........................................................................................................... 72
Unit 7: Firms and Customers .................................................................................. 73
Introduction ....................................................................................................... 73
1. Production and Costs: Key Concepts ............................................................ 74
2. Demand, Elasticity, and Revenue .................................................................. 79
Rania El Ghalbzouri 2
Bridging Programme - MBA
, 3. Pricing and Production Decisions: Profit maximization ................................... 83
4. Gains from trade .......................................................................................... 87
5. Competition, Differentiation and Market Power .............................................. 89
Summary ........................................................................................................... 91
Unit 8: Supply and demand ..................................................................................... 92
1. Introduction ................................................................................................ 92
2. Demand and supply ..................................................................................... 92
3. Factors that affect equilibrium ...................................................................... 97
4. Applications (Taxes) ................................................................................... 100
5. Perfect competition ................................................................................... 103
Summary ......................................................................................................... 105
Unit 10: Market Successes and Failures ................................................................. 106
A. Introduction ................................................................................................. 106
External Effects ................................................................................................ 106
Market Failure: Other Types ............................................................................... 110
Limits to Markets .............................................................................................. 111
Summary ......................................................................................................... 111
Rania El Ghalbzouri 3
Bridging Programme - MBA
,Unit 1: Prosperity, Inequality and Planetary Limits
1. Introduction
1.1 Context for this unit
Before 1700, the world experienced almost no economic growth. Living standards
remained largely stagnant. While differences within countries were substantial (for
example between social classes), differences between countries were relatively small.
From around 1700 onward, however, the world entered a period of unprecedented
economic growth. This raised living standards overall, but also increased inequality
between nations.
To understand these historical changes, economists first ask a basic question: how do
we measure living standards?
1.2 Measuring income and living standards
Gross Domestic Product (GDP): GDP is the most commonly used measure of economic
output and income.
➢ Definition: The total value of all goods and services produced within a country in a
given period.
➢ Interpretation: GDP measures the total income and total output of an economy.
➢ Calculation:
• GDP = sum of all value added in an economy.
• Value added = output value − value of intermediate inputs.
➢ Distribution: The value generated in production is distributed to the owners of the
factors of production:
• Labour → wages
• Capital → rents or dividends
➢ GDP per capita: GDP divided by the population. This represents average income and
is often used as an indicator of average living standards.
1.3 Long-term evolution of GDP per capita
Key insights
➢ Before 1820: Differences between regions were minimal. In this period, the world
was roughly equal in poverty.
➢ After 1820: The Great Divergence occurred. GDP per capita in Western countries
grew rapidly, while other regions lagged behind.
➢ By 2015: Western Europe and the United States reached income levels more than 10
times higher than those in much of Africa or Asia.
➢ Takeaway: Economic prosperity is a recent and uneven phenomenon. Over the last
two centuries, global inequality increased sharply as some regions experienced
unprecedented wealth while others remained far behind.
Rania El Ghalbzouri 4
Bridging Programme - MBA
,1.4 Measuring living standards: limitations of GDP as a measure of well-being
GDP per capita is widely used as a measure of living standards, but it is an imperfect
measure of overall well-being. GDP captures market-based production and income, but
it excludes several important dimensions of quality of life.
Non-market aspects of well-being
➢ GDP excludes factors that contribute to welfare, including:
➢ Social and environmental quality: friendships, community ties, clean air, and a safe
environment.
➢ Leisure and work-life balance: GDP does not distinguish between high income
earned through 60-hour work weeks and lower income earned with more free time.
➢ Unpaid household production: home production such as cooking, cleaning, and
childcare is not counted, even though it generates real value.
➢ A well-known illustration is Paul Samuelson’s paradox: “GDP falls when a man
marries his maid.” The reason is that unpaid domestic work replaces paid labour,
which lowers measured GDP even if actual well-being does not fall.
GDP vs. genuine progress
Robert F. Kennedy (1968) criticized GDP as a measure of what matters in life. He argued
that GDP counts “air pollution, cigarette advertising, and jails” but excludes “the health
of our children, the joy of their play, and the integrity of our public officials.” In this view,
GDP measures economic activity, not human progress or moral worth.
Distribution matters: GDP per capita is an average, and it hides inequality within a
country. Two countries can have the same GDP per capita but very different levels of well-
being depending on how income is distributed:
➢ Country A: half earn 100.000, half earn 1.000.
➢ Country B: everyone earns 50.000.
Although GDP per capita is identical in both cases, Country B is likely to experience higher
overall well-being because income is more evenly distributed.
1.5 Context for this unit: the historical
breakthrough
Since 1700, the world has experienced a
period of rapid and sustained economic
growth that is unprecedented in human
history. Average living standards, measured
by GDP per capita, rose sharply after
remaining nearly flat for centuries.
Rania El Ghalbzouri 5
Bridging Programme - MBA
, The Great Acceleration: a historical overview
The chart illustrates the evolution of GDP per capita (in 2009 USD, PPP-adjusted) for
several countries from the year 1000 to the present:
➢ Britain: first to experience sustained growth around 1750, marking the start of the
Industrial Revolution.
➢ Italy: relatively prosperous during the Renaissance, but largely stagnant until modern
industrialization.
➢ Japan: rapid catch-up after 1850 through Meiji reforms and post–WWII
modernization.
➢ China and India: long stagnation followed by rapid growth in the late 20th century
due to economic liberalization.
1.6 Growth rates
Definition: The growth rate measures how quickly income or output increases over time.
It is calculated as: For instance, in 2024:
➢ USA: +2,5% GDP growth
➢ Euro Area: +0,4% GDP growth
Even small differences in growth rates can create very large differences in living
standards when they persist over long periods.
Historical growth patterns
1. Short-term fluctuations:
➢ The left graph (1820–2020) shows annual GDP per capita growth for Britain, the
USA, China, and Belgium:
➢ Growth rates fluctuate sharply year to year, reflecting economic cycles, wars, and
crises.
➢ Long-term averages nevertheless show sustained upward trends, especially after
the 20th century.
Rania El Ghalbzouri 6
Bridging Programme - MBA
2025 - 2026
Rania El Ghalbzouri 1
Bridging Programme - MBA
,Table of Contents
Table of Contents ..................................................................................................... 2
Unit 1: Prosperity, Inequality and Planetary Limits ...................................................... 4
1. Introduction...................................................................................................... 4
2. Inequality ......................................................................................................... 8
3. Technological progress and growth ................................................................... 10
4. Malthus and diminishing APL – explaining stagnation ......................................... 15
5. Capitalism...................................................................................................... 20
6. Economics and the biosphere .......................................................................... 25
Chapter summary .............................................................................................. 26
Unit 2: Technological change, population, and growth .............................................. 27
1. Introduction ................................................................................................ 27
2. Decision Making .......................................................................................... 27
3. Specialization and Comparative Advantage ................................................... 30
4. Technologies and Innovation ............................................................................ 36
5. Economic models ........................................................................................... 46
6. Economic Growth and Climate Change ............................................................ 48
Summary ........................................................................................................... 50
Unit 3: Scaricity, Work and Choice ........................................................................... 51
1. Introduction.................................................................................................... 51
2. Scarcity and choice: key concepts ................................................................... 51
3. Decision-making under scarcity ....................................................................... 54
4. Income and substitution effects ....................................................................... 55
5. Application to technological change ................................................................. 56
Summary ........................................................................................................... 57
Unit 4: Social Interactions ....................................................................................... 58
Introduction ....................................................................................................... 58
Game theory: key concepts ................................................................................. 59
Evaluating outcomes .......................................................................................... 63
Resolving social dilemmas .................................................................................. 64
Summary ........................................................................................................... 72
Unit 7: Firms and Customers .................................................................................. 73
Introduction ....................................................................................................... 73
1. Production and Costs: Key Concepts ............................................................ 74
2. Demand, Elasticity, and Revenue .................................................................. 79
Rania El Ghalbzouri 2
Bridging Programme - MBA
, 3. Pricing and Production Decisions: Profit maximization ................................... 83
4. Gains from trade .......................................................................................... 87
5. Competition, Differentiation and Market Power .............................................. 89
Summary ........................................................................................................... 91
Unit 8: Supply and demand ..................................................................................... 92
1. Introduction ................................................................................................ 92
2. Demand and supply ..................................................................................... 92
3. Factors that affect equilibrium ...................................................................... 97
4. Applications (Taxes) ................................................................................... 100
5. Perfect competition ................................................................................... 103
Summary ......................................................................................................... 105
Unit 10: Market Successes and Failures ................................................................. 106
A. Introduction ................................................................................................. 106
External Effects ................................................................................................ 106
Market Failure: Other Types ............................................................................... 110
Limits to Markets .............................................................................................. 111
Summary ......................................................................................................... 111
Rania El Ghalbzouri 3
Bridging Programme - MBA
,Unit 1: Prosperity, Inequality and Planetary Limits
1. Introduction
1.1 Context for this unit
Before 1700, the world experienced almost no economic growth. Living standards
remained largely stagnant. While differences within countries were substantial (for
example between social classes), differences between countries were relatively small.
From around 1700 onward, however, the world entered a period of unprecedented
economic growth. This raised living standards overall, but also increased inequality
between nations.
To understand these historical changes, economists first ask a basic question: how do
we measure living standards?
1.2 Measuring income and living standards
Gross Domestic Product (GDP): GDP is the most commonly used measure of economic
output and income.
➢ Definition: The total value of all goods and services produced within a country in a
given period.
➢ Interpretation: GDP measures the total income and total output of an economy.
➢ Calculation:
• GDP = sum of all value added in an economy.
• Value added = output value − value of intermediate inputs.
➢ Distribution: The value generated in production is distributed to the owners of the
factors of production:
• Labour → wages
• Capital → rents or dividends
➢ GDP per capita: GDP divided by the population. This represents average income and
is often used as an indicator of average living standards.
1.3 Long-term evolution of GDP per capita
Key insights
➢ Before 1820: Differences between regions were minimal. In this period, the world
was roughly equal in poverty.
➢ After 1820: The Great Divergence occurred. GDP per capita in Western countries
grew rapidly, while other regions lagged behind.
➢ By 2015: Western Europe and the United States reached income levels more than 10
times higher than those in much of Africa or Asia.
➢ Takeaway: Economic prosperity is a recent and uneven phenomenon. Over the last
two centuries, global inequality increased sharply as some regions experienced
unprecedented wealth while others remained far behind.
Rania El Ghalbzouri 4
Bridging Programme - MBA
,1.4 Measuring living standards: limitations of GDP as a measure of well-being
GDP per capita is widely used as a measure of living standards, but it is an imperfect
measure of overall well-being. GDP captures market-based production and income, but
it excludes several important dimensions of quality of life.
Non-market aspects of well-being
➢ GDP excludes factors that contribute to welfare, including:
➢ Social and environmental quality: friendships, community ties, clean air, and a safe
environment.
➢ Leisure and work-life balance: GDP does not distinguish between high income
earned through 60-hour work weeks and lower income earned with more free time.
➢ Unpaid household production: home production such as cooking, cleaning, and
childcare is not counted, even though it generates real value.
➢ A well-known illustration is Paul Samuelson’s paradox: “GDP falls when a man
marries his maid.” The reason is that unpaid domestic work replaces paid labour,
which lowers measured GDP even if actual well-being does not fall.
GDP vs. genuine progress
Robert F. Kennedy (1968) criticized GDP as a measure of what matters in life. He argued
that GDP counts “air pollution, cigarette advertising, and jails” but excludes “the health
of our children, the joy of their play, and the integrity of our public officials.” In this view,
GDP measures economic activity, not human progress or moral worth.
Distribution matters: GDP per capita is an average, and it hides inequality within a
country. Two countries can have the same GDP per capita but very different levels of well-
being depending on how income is distributed:
➢ Country A: half earn 100.000, half earn 1.000.
➢ Country B: everyone earns 50.000.
Although GDP per capita is identical in both cases, Country B is likely to experience higher
overall well-being because income is more evenly distributed.
1.5 Context for this unit: the historical
breakthrough
Since 1700, the world has experienced a
period of rapid and sustained economic
growth that is unprecedented in human
history. Average living standards, measured
by GDP per capita, rose sharply after
remaining nearly flat for centuries.
Rania El Ghalbzouri 5
Bridging Programme - MBA
, The Great Acceleration: a historical overview
The chart illustrates the evolution of GDP per capita (in 2009 USD, PPP-adjusted) for
several countries from the year 1000 to the present:
➢ Britain: first to experience sustained growth around 1750, marking the start of the
Industrial Revolution.
➢ Italy: relatively prosperous during the Renaissance, but largely stagnant until modern
industrialization.
➢ Japan: rapid catch-up after 1850 through Meiji reforms and post–WWII
modernization.
➢ China and India: long stagnation followed by rapid growth in the late 20th century
due to economic liberalization.
1.6 Growth rates
Definition: The growth rate measures how quickly income or output increases over time.
It is calculated as: For instance, in 2024:
➢ USA: +2,5% GDP growth
➢ Euro Area: +0,4% GDP growth
Even small differences in growth rates can create very large differences in living
standards when they persist over long periods.
Historical growth patterns
1. Short-term fluctuations:
➢ The left graph (1820–2020) shows annual GDP per capita growth for Britain, the
USA, China, and Belgium:
➢ Growth rates fluctuate sharply year to year, reflecting economic cycles, wars, and
crises.
➢ Long-term averages nevertheless show sustained upward trends, especially after
the 20th century.
Rania El Ghalbzouri 6
Bridging Programme - MBA
