Micro economics cheat sheet Cheat Sheet

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Law of demand Law of supply Compet​itive market equili​brium

Demand : the quantity of a good or service Supply : quantity of goods and services that Market equili​brium : When the quantity
that consumers are willing and able to firms are willing and able to sell at any demanded for a product is equal to the
purchase at a given price in a particular time given price quantity supplied of the product
period Law of supply: As price increases, supply Equili​brium price: the point where the
Law of demand: quantity demanded increases demand for the product matches the supply
increases when prices decrease and vise ASSUMP​TIONS of the product
versa Market disequ​ili​brium: when the quantity
Dimini​shing marginal returns: after some
ASSUMP​TIONS optimal level of capacity is reached, adding demanded for a product is either higher or
Income effect: lower price = higher income = an additional factor of production will lower than the quantity supplied for the
higher demand actually result in smaller increases in output product

Substi​tution effect : consumers replace Increasing marginal costs : firms are willing Excess supply: e price of a product is set
higher priced products with lower priced and able to increase production only if they above equili​brium price, creating a surplus

ones. receive a higher price for the additional in the market repres​ented by the higher
units of output. quantity supplied than demanded
Dimini​shing marginal utility: as consum​ption
increases, the satisf​action gained from Excess demand: price for a product is set
consuming one additional unit of a product Supply curve below equili​brium price, resulting in a
decreases. higher demand and a lower supply

Demand curve Functions of the price mechanism

The price mechanism: the intera​ctions

between buyers and sellers in order to
allocate resources, therefore determ​ining
production and consum​ption choices
Signalling function: aspect of the price
mechanism that signifies to producers and
consumers where resources are required
An increase in the price of tuna fish Incentive function: as price changes, the
provides an incentive on producers to mechanism provides an incentive for
spend more time and effort to catch or farm producers and consumers to change their
tuna fish. behaviour in order to maximize their
benefits
Non price determ​inants of supply Rationing function: Higher prices, lower the
The demand curve illust​rates an inverse
relati​onship which explores how an increase Costs of factors of production quantity demanded therefore helping to
in price leads to a decrease in the quantity Price of related goods preserve the good or service
demanded
Indirect taxes
Subsidies
Non price determ​inants of demand
Future price expect​ations
Future price expect​ations
Changes in technology
Income
Tastes and prefer​ences
Price of related goods (subst​itutes)
Price of related goods (compl​eme​ntary)
Number of consumers

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Surpluses Behavi​oural economics Price elasticity of demand (cont)

Consumer : Benefit to buyers who can Choice archit​ecture : the deliberate design of PED < 1 → price inelastic demand
purchase the product at a lower price than different ways of presenting choices to PED = 0 → perfectly price inelastic demand
they were willing and able to pay members of society, and the impact of these
PED = ∞ → perfectly price elastic demand
Producer : Benefit to firms who receive a methods on decisi​on-​making.
PED = 1 → unitary elastic demand
price that is higher than the price at which Nudge theory: the practice of influe​ncing the
they were willing to supply at choices that people make. Nudges are
Price elasticity of supply
Social: Sum of consumer and producer created by choice architects using small
prompts or tweaks to alter social and The degree of respon​siv​eness of quantity
surplus at a given market price and output,
economic behaviour, but without taking supplied of a product due to a change in its
thereby maximizing economic welfare
away the power for people to choose. price

Allocative efficiency Formula: PES = % change in quantity

Business objectives supplied / % change in price

profit maximi​zation: Sales level where DEGREES OF PES VALUES

profits are the highest PES > 1 → price elastic supply
CSR: commit ethical objectives to benefit PES < 1 → price inelastic supply
stakeh​olders
PES = 0 → perfectly price inelastic supply
Market share: a firm's portion of the total
PES = ∞ → perfectly price elastic supply
value of sales revenue
PES = 1 → unitary elastic supply
Satisf​action: aim for a satisf​actory or
Socially optimum situation that occurs when
adequate level or profit
resources are distri​buted in a way that Income elasticity of demand
allows consumers and producers to gain the Growth: increasing the size and scale of
The degree of respon​siv​eness of demand
maximum benefit operations of a firm
following a change in income
Formula: YED = % change in QD / %
Rational consumer choice Price elasticity of demand
change in income
decisi​on-​making process based on the The respon​siv​eness of quantity demanded
YED SIGNS
assumption that people make choices that for a good in relation to a change in the
price for the product YED + < 1 → normal goods
result in the optimal level of benefits
Price elastic: if a slight change in the price YED + > 1 →Luxury goods
ASSUMP​TIONS
or income leads to a large change in the YED - → Inferior goods
Consumer ration​ality
demand for the product.
Utility maximi​zation YED Engel curve
Price inelastic: if a change in price or
Perfect inform​ation income has little impact on the demand for
LIMITA​TIONS a good or service.
Biases (rule of thumb, anchoring, framing Formula: PED = % change in QD / %
and availa​bility) change in price
Bounded ration​ality DEGREES OF PED VALUES
Bounded self control PED > 1 → price elastic demand
Bounded selfis​hness The engel curve is used to demons​trate the

Imperfect inform​ation relati​onship between income and the

quantity demanded

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Reasons for government interv​ention Market failure - extern​alities main terms Extern​alities

Earn government revenue Market failure : when the signal​ling, The external costs or benefits of an
Support firms incentive and rationing functions of the price economic transa​ction, causing the market
mechanism fail to operate optimally, which to fail to achieve the socially optimal level of
Support households on low incomes
leads to a loss in economic welfare. It is consum​ption and production
Influence the level of production
when there is a misall​ocation of resources Positive consum​ption: When consuming a
Influence the level of consum​ption
private benefits: advantages or gains of good or service, provides a benefit to an
To correct market failure production and consum​ption enjoyed by an unrelated third party
Promote equity individual firm or person. Positive production: the positive effect an
Private costs: actual expenses incurred by activity imposes on an unrelated third party
Main forms of government interv​ention an individual firm or person Negative consum​ption: when consuming a
PRICE CONTROLS Social benefits: benefits of consum​ption or good causes a harmful effect to a third party
Government regula​tions establ​ishing a produc​tion, that is, the sum of private Negative production: the production process
maximum or minimum price to be charged benefits and external benefits results in a harmful effect on a third party.
for certain goods and services. They consist Social costs : costs of consum​ption or INTERV​ENTION TO CORRECT EXTERN​‐
of price ceilings and price floors. produc​tion, that is, the sum of private costs ALITIES
price ceilings : limits the maximum price in and external costs
Indirect taxes, carbon taxes, education,
order to encourage output and consum​‐ MPB: additional value enjoyed by intern​ational agreem​ents, subsidies, direct
ption. households and firms from the consum​ption provision
Price floor: binding minimum price in order or production of an extra unit of a particular
to encourage production and supply good or service. Public goods
INDIRECT TAXES MPC additional expense of production for
Collective consum​ption goods that have
firms or the extra charge paid by customers
A government levy or charge on the sale of two key charac​ter​istics of being non
for the output or consum​ption of an extra
goods and services, rather than on incomes rivalrous and non excludable
unit of a good or service
or wealth. Non rivalrous: a person’s consum​ption of a
MSB: total gains to society from an extra
specific : charge a fixed amount of tax per public good does not limit the benefits
unit of production or consum​ption of a
unit sold available to other people.
particular good or service
Ad valorem: impose a percentage tax on the Non excludable: firms cannot exclude
MSC total expenses to society from an extra
value of a good or service. people from the benefits of consum​ption
unit of production or consum​ption of a
SUBSIDIES FREE RIDER PROBLEM
particular product
a sum of money granted to help keep the When people have access to a good or
price of a commodity or service low. service without having to pay for it. As a
result, the good or service will be under
DIRECT PROVISION
provided or not provided at all in the free
Government provides certain goods and
market
services deemed to be in the best interest of
the public.

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 Micro economics cheat sheet Cheat Sheet
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Asymmetric inform​ation

A source of market failure that exists when

one economic agent (buyer or seller) has
more inform​ation than the other in an
economic transa​ction. It occurs owing to
incomplete inform​ation or inacce​ssi​bility to
inform​ation.
Adverse selection: the undesired decisions
or outcomes that occur when buyers and
sellers have access to imperfect inform​‐
ation.
Moral hazard: situation where a party
protected from risk behaves differ​ently than
if they were fully exposed to the risk.

Responses to asymmetric inform​ation

GOVERNMENT RESPONSES
legisl​ation
Provision of inform​ation
PRIVATE RESPONSES
Signalling : used by parties with access to
more inform​ation to maximize their own
level of satisf​action
Screening: used by parties with access to
less inform​ation to maximize their own level
of satisf​action

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