How does elasticity affect total revenue when price rises?
Answer: If demand is elastic, revenue falls; if inelastic, revenue rises.
Explanation
Total revenue = price × quantity.
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Microeconomics Principles (University)
ElasticityMarket structuresFirmsMarket failureWelfareFoundationsSupply & demand
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Elasticity
What determines price elasticity of demand?
Answer: Availability of substitutes, necessity vs luxury, share of budget, and time horizon.
Explanation
More substitutes and more time → more elastic.
When is demand elastic vs inelastic?
Answer: Elastic: |E| > 1 (quantity responds a lot). Inelastic: |E| < 1 (quantity responds little).
Explanation
Unit elastic when |E| = 1.
How is price elasticity of demand calculated?
Answer: Percentage change in quantity demanded divided by percentage change in price.
Explanation
Use the midpoint method for arc elasticity.
Market structures
What is an oligopoly?
Answer: A market dominated by a few large firms whose decisions depend on each other.
Explanation
Analyzed with game theory; the prisoner's dilemma explains why cartels break down.
How does a monopoly set price and quantity?
Answer: Produces where MR = MC and charges the price on the demand curve at that quantity, above marginal cost.
Explanation
Creates deadweight loss relative to competition.
What are the characteristics of perfect competition?
Answer: Many firms, identical products, free entry and exit, price takers.
Explanation
Long-run economic profit is zero.
Firms
When should a firm shut down in the short run?
Answer: When price falls below average variable cost.
Explanation
Fixed costs are sunk in the short run.
What is the profit-maximizing rule for any firm?
Answer: Produce where marginal revenue equals marginal cost (MR = MC).
Explanation
For a perfectly competitive firm, MR equals the market price.
What is the law of diminishing marginal returns?
Answer: As more of a variable input is added to a fixed input, the additional output eventually falls.
Explanation
Explains why marginal cost rises in the short run.
Explicit vs implicit costs?
Answer: Explicit costs are out-of-pocket payments; implicit costs are opportunity costs of resources already owned.
Explanation
Economic profit subtracts both; accounting profit subtracts only explicit costs.
Market failure
What is the tragedy of the commons?
Answer: Overuse of a shared, rival but non-excludable resource because no one owns it.
Explanation
Example: overfishing.
What is a public good?
Answer: A good that is non-excludable and non-rival, such as national defense.
Explanation
Leads to the free-rider problem and underprovision by markets.
What is an externality?
Answer: A cost or benefit of a transaction that falls on a third party.
Explanation
Pollution is a negative externality; vaccination has positive externalities.
Welfare
Who bears the burden of a tax?
Answer: It is shared; the side of the market that is more inelastic bears more of it.
Explanation
Tax incidence does not depend on who legally pays.
What is deadweight loss?
Answer: The loss of total surplus caused by a market distortion such as a tax or price control.
Explanation
Shown as the triangle between supply and demand at the reduced quantity.
What is producer surplus?
Answer: The difference between the price received and the minimum sellers would accept.
Explanation
Area above the supply curve and below the price.
What is consumer surplus?
Answer: The difference between what buyers are willing to pay and what they actually pay.
Explanation
Area below the demand curve and above the price.
Foundations
What is scarcity?
Answer: The condition that resources are limited while wants are unlimited, forcing choices.
Explanation
The starting point of all economics.
What is marginal analysis?
Answer: Comparing the additional benefit of an action with its additional cost.
Explanation
Do something if marginal benefit ≥ marginal cost.
Absolute vs comparative advantage?
Answer: Absolute: producing more with the same resources. Comparative: producing at a lower opportunity cost.
Explanation
Trade is based on comparative advantage.
What does a production possibilities frontier show?
Answer: The maximum combinations of two goods an economy can produce with its resources and technology.
Explanation
Points inside are inefficient; outside are unattainable; its slope shows opportunity cost.
What is opportunity cost?
Answer: The value of the next-best alternative given up when making a choice.
Explanation
Includes implicit costs, not just money spent.
Supply & demand
What is a price floor and what does it cause when binding?
Answer: A legal minimum price set above equilibrium; it causes a surplus.
Explanation
Example: minimum wage in a labor market.
What is a price ceiling and what does it cause when binding?
Answer: A legal maximum price set below equilibrium; it causes a shortage.
Explanation
Example: rent control.
Normal vs inferior goods?
Answer: Demand for normal goods rises with income; demand for inferior goods falls with income.
Explanation
Example of inferior good: instant noodles for many consumers.
What is market equilibrium?
Answer: The price where quantity demanded equals quantity supplied.
Explanation
Above it there is a surplus; below it a shortage.
What shifts the supply curve?
Answer: Input prices, technology, expectations, the number of sellers, taxes and subsidies.
Explanation
Lower costs shift supply to the right.
What shifts the demand curve?
Answer: Income, prices of related goods (substitutes and complements), tastes, expectations, and the number of buyers.
Explanation
A change in the good's own price moves along the curve, not a shift.
State the law of supply.
Answer: Other things equal, as price rises the quantity supplied rises.
Explanation
Supply curves slope upward.
State the law of demand.
Answer: Other things equal, as price rises the quantity demanded falls.
Explanation
Demand curves slope downward.
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