Microeconomics: Consumer and Producer Behaviour, Markets and Prices
Core concepts
A candidate must master utility and indifference curves, the budget constraint, and the marginal-utility rule for consumer equilibrium (MUx/Px = MUy/Py). On the producer side: production functions, short-run vs long-run costs, fixed vs variable costs, marginal and average cost, and profit maximisation where MC = MR. Demand and supply curves, the ceteris paribus assumption, and the difference between a movement along a curve (price change) and a shift of a curve (income, tastes, prices of related goods, expectations, number of buyers) are exam staples.
Elasticity and market structures
Know price, income and cross elasticity, and the link between elasticity and total revenue: if demand is elastic, a price cut raises revenue; if inelastic, it lowers it. In market structures, distinguish perfect competition (price taker, P = MC, free entry), monopoly (price maker, barriers to entry), monopolistic competition (differentiated products) and oligopoly (interdependence, kinked demand).
Traps
- Confusing a shift in demand with a shift in supply when both price and quantity move.
- Treating elasticity as slope; elasticity changes along a straight-line demand curve.
- Forgetting that in perfect competition the firm's demand curve is horizontal.
- Mixing accounting profit with economic profit (which subtracts opportunity cost).
Worked rule of thumb
If price rises from 10 to 12 and quantity falls from 100 to 80: %ΔQ = −20%, %ΔP = +20%, so |Ed| = 1 (unit elastic) and total revenue is unchanged (1000 → 960 is a rounding case; check carefully). Always compute percentage changes relative to the original value unless told otherwise.