Microeconomics studies how individual consumers, producers, and markets make choices when resources are limited. This cheat sheet helps students organize the most important ideas behind prices, production, competition, and efficiency. It is useful for reviewing graphs, formulas, and decision rules that appear often in economics problems and real-world examples.
The core ideas include supply and demand, market equilibrium, price elasticity, marginal benefit and marginal cost, and the difference between fixed, variable, total, average, and marginal costs. Students should understand how shifts in curves change price and quantity, how firms decide output, and why markets sometimes fail. These tools help explain consumer behavior, business decisions, taxes, shortages, surpluses, and government policies.
Key Facts
- Demand usually follows the law of demand: as price rises, quantity demanded falls, all else equal.
- Supply usually follows the law of supply: as price rises, quantity supplied rises, all else equal.
- Market equilibrium occurs where quantity demanded equals quantity supplied, so Qd = Qs.
- A shortage occurs when quantity demanded is greater than quantity supplied at the current price.
- A surplus occurs when quantity supplied is greater than quantity demanded at the current price.
- Price elasticity of demand is Ed = percent change in quantity demanded / percent change in price.
- Total revenue is TR = P x Q, where P is price and Q is quantity sold.
- A rational firm produces where marginal revenue equals marginal cost, so MR = MC.
Vocabulary
- Scarcity
- Scarcity is the condition of having limited resources to satisfy unlimited wants.
- Opportunity Cost
- Opportunity cost is the value of the next best alternative given up when a choice is made.
- Demand
- Demand is the amount of a good or service consumers are willing and able to buy at different prices.
- Supply
- Supply is the amount of a good or service producers are willing and able to sell at different prices.
- Equilibrium Price
- Equilibrium price is the price at which quantity demanded equals quantity supplied.
- Marginal Cost
- Marginal cost is the additional cost of producing one more unit of a good or service.
Common Mistakes to Avoid
- Confusing a change in demand with a change in quantity demanded is wrong because only price causes movement along the demand curve, while non-price factors shift the entire curve.
- Mixing up shortage and surplus is wrong because a shortage means Qd is greater than Qs, while a surplus means Qs is greater than Qd.
- Forgetting to use percent changes in elasticity is wrong because elasticity compares relative changes, not just raw changes in price and quantity.
- Assuming higher total revenue always means higher profit is wrong because profit also depends on costs, so profit = total revenue minus total cost.
- Thinking firms should always produce as much as possible is wrong because the profit-maximizing output is where MR = MC, not necessarily the highest output level.
Practice Questions
- 1 A market has Qd = 100 - 5P and Qs = 20 + 3P. Find the equilibrium price and quantity.
- 2 A store raises price from 12, and quantity demanded falls from 80 units to 60 units. Calculate the price elasticity of demand using percent change from the original values.
- 3 A firm sells 50 units at 300. Calculate total revenue and profit.
- 4 Explain why a price ceiling below equilibrium usually creates a shortage, using supply and demand reasoning.
Understanding Microeconomics Fundamentals
A graph tells a story only when you identify what caused the change. A change in a product's own price creates movement along an existing curve. For example, a sale on notebooks changes how many notebooks buyers choose at each listed price.
A shift means that the whole relationship has changed. Income, tastes, population, prices of related goods, production technology, input costs, and expectations can shift curves. If movie tickets become cheaper, demand for popcorn may rise because the goods are used together.
If the price of tea rises, some buyers may switch toward coffee. Students should label the cause before deciding the direction of a shift. This avoids a common mistake of moving a curve when it should shift.
Elasticity measures how strongly people or firms react to a change. It is not enough to know that buyers purchase less after a price increase. The important issue is how much less.
Demand tends to be less elastic for necessities, products with few substitutes, or purchases that take a small share of income. Demand tends to be more elastic when buyers have time to adjust or can easily choose another product. This idea helps explain total revenue.
When demand is elastic, a price cut can raise total revenue because quantity sold rises by a larger percentage. When demand is inelastic, a price increase can raise total revenue because sales fall by a smaller percentage. Taxes often place more of the burden on the less responsive side of a market, whether that side is buyers or sellers.
Marginal thinking focuses on the next unit, not the whole total. A student deciding whether to work one extra hour compares the extra pay with the value of lost free time. A firm compares the money earned from one more unit with the extra cost of making it.
Fixed costs do not change with output in the short run. Rent for a shop is a common example. Variable costs change as output changes, such as ingredients or hourly labor.
Average cost can fall when fixed costs are spread across more units, though it can later rise if a business becomes crowded or inefficient. Sunk costs are costs already paid that cannot be recovered. Good decisions should not be based on trying to recover a sunk cost.
Market structure changes the choices available to firms. A highly competitive firm has little control over price because many sellers offer nearly identical goods. A monopoly faces less competition and may restrict output to charge a higher price.
Real markets often fall between these cases, with brands, advertising, location, or product differences giving firms some pricing power. Markets can produce results that leave out important costs or benefits. Factory pollution can harm nearby residents without appearing in the factory's costs.
Vaccines can protect people beyond the person receiving one. Public goods such as street lighting may be underprovided because nonpayers can still benefit. Policies such as taxes, subsidies, rules, and public provision attempt to address these cases, though each policy has tradeoffs and imperfect results.