Microeconomics
Microeconomics is the HKDSE Economics domain that examines how consumers and producers allocate scarce resources. Paper 1 multiple-choice and Paper 2 short/data-response questions test definitions, curve shifts, elasticity calculations, tax incidence, cost curves and market structures; essay questions may require evaluation of government intervention.
Core rules
- Scarcity forces choice. Opportunity cost is the value of the highest-valued alternative forgone, including non-money costs; sunk costs are not opportunity costs.
- A change in price moves along a demand or supply curve; a change in a non-price determinant shifts it. Income, tastes, related-good prices, expectations and number of buyers shift demand; input prices, technology, taxes/subsidies, expectations and number of sellers shift supply.
- Price elasticity of demand = %ΔQd ÷ %ΔP. Demand is more elastic with close substitutes, luxury status, a large budget share and a longer time horizon. With elastic demand, a price rise lowers total revenue.
- A specific tax shifts supply upward by the tax per unit. The more inelastic side bears the larger share of the tax; statutory incidence does not determine economic incidence.
- A binding price ceiling creates a shortage, non-price rationing and deadweight loss; a binding price floor creates a surplus.
- In the short run, marginal cost cuts average cost at minimum average cost. Profit is maximised where MR = MC, not where revenue is maximised.
Worked example
Demand: P = 100 − 2Q. Supply: P = 20 + 2Q. Without tax, 100 − 2Q = 20 + 2Q, so Q = 20 and P = 60. A specific tax of $8 per unit shifts supply to P = 28 + 2Q. Equating gives Q = 18 and P = 64. Consumers pay $4 more; sellers receive 64 − 8 = $56, $4 less. The tax is shared equally because the absolute slopes are equal. Tax revenue = 8 × 18 = $144. Deadweight loss = ½ × 8 × (20 − 18) = $8.
Traps that cost marks
- Confusing a movement along a curve with a shift.
- Using the wrong base in percentage-change elasticity; follow the instruction on initial or average values.
- Assuming the seller pays the whole tax.
- Treating normal profit as excess profit; it is included in cost.
- Saying a monopoly always produces at minimum AC; that describes perfect competition in long-run equilibrium.
- Forgetting that a price ceiling above equilibrium is non-binding.