Microeconomics: Consumer Choice, Costs and Market Structure
The Microeconomics domain of the Panhellenic Economics & Informatics exam (the microeconomic chapters of Αρχές Οικονομικής Θεωρίας) tests your ability to move fluently between a market story, its diagram and its algebra, and to draw the welfare conclusion that follows. Expect consumer optimum, short-run cost curves, the four market structures and elasticity-driven pricing.
Core rules
- Consumer optimum: tangency condition MRS = Px/Py; a corner solution arises when the MRS never equals the price ratio.
- Slutsky decomposition: the substitution effect always moves quantity opposite to the price change; the income effect decides the sign of the total effect. A Giffen good is inferior with a dominant income effect.
- Point elasticity ε = (dQ/dP)(P/Q). Along a linear demand curve |ε| falls as price falls, and total revenue peaks exactly where |ε| = 1.
- Short-run costs: MC cuts AVC and ATC at their minimum points; ATC = AFC + AVC; MC is independent of fixed cost.
- Perfect competition: P = MC; shut down below min AVC; long-run equilibrium at P = min ATC.
- Monopoly: MR = MC, with MR below demand and twice as steep when demand is linear. MR = P(1 − 1/|ε|), so the Lerner index (P − MC)/P equals 1/|ε|.
Worked example
Demand Q = 100 − 2P, cost TC = 20Q. Invert demand: P = 50 − 0.5Q, so TR = 50Q − 0.5Q² and MR = 50 − Q. Setting MR = MC gives 50 − Q = 20, hence Q* = 30 and P* = 35. Profit = 30 × (35 − 20) = 450. Cross-check with the markup rule: ε = −2 × (35/30) = −2.33, so 1/|ε| = 0.429 = (35 − 20)/35. Under perfect competition P = MC = 20 and Q = 60; the deadweight loss triangle is ½ × (35 − 20) × (60 − 30) = 225.
Traps that cost marks
Shifting the demand curve when the question describes a movement along it; applying P = MC to a monopolist; maximising revenue (MR = 0) when the question asks for profit; treating fixed cost as a reason to shut down; claiming a price ceiling above equilibrium binds; and saying a monopolist produces where ATC is minimised. Also watch the sign convention on elasticity - Greek papers often ask for the absolute value.