Microeconomics cheat sheet

Opportunity cost

Opportunity cost is the value of the next best alternative forgone. It is not necessarily the same as the money paid.

Using an hour for one activity means giving up its best alternative use.

Demand and supply

In a basic market model, a price change moves along a curve; a change in another determinant can shift the curve.

A change in income can shift demand rather than move along the original curve.

Marginal analysis

Marginal analysis compares the additional benefit and additional cost of a small change. Total and marginal quantities answer different questions.

Consider the extra cost of producing one more unit.

Elasticity

Price elasticity of demand compares a percentage change in quantity demanded with a percentage change in price. State the calculation convention.

If quantity falls 10% while price rises 5%, the simple elasticity estimate is −2.

Movements and shifts

A change in a good’s own price causes movement along a given demand curve. Changes in other determinants, such as income or substitutes’ prices, can shift demand.

A higher own price alone is not described as a decrease in demand.

Fixed, variable and marginal costs

Fixed costs do not vary with output within the defined period and range. Variable costs do; marginal cost is the additional cost of another unit or small output change.

Average total cost = total cost/output, while marginal cost concerns a change in total cost.

Comparative advantage

Comparative advantage concerns lower opportunity cost, not simply producing more per hour. Specialisation possibilities depend on what must be forgone.

A producer can have absolute advantage in two goods but comparative advantage in only one.

External effects

An externality affects a third party outside the transaction and is not fully reflected in the private decision’s costs or benefits. Analyse the relevant marginal private and social quantities.

A production external cost can make private marginal cost lower than social marginal cost.

Worked example: opportunity cost

In one hour, a workshop can make either 10 cups or 2 plates using the same resources. One plate has an opportunity cost of 5 cups along this linear production trade-off.

The reciprocal cost is 0.2 plates per cup, under the stated fixed trade-off.

Common mistake: efficient means equitable

Efficiency and equity ask different questions about allocation. A model’s total-surplus result does not determine whether the distribution is fair.

State the efficiency criterion and distributional concern separately.

Check your understanding

Does a fall in a good’s own price shift its demand curve?

Not by itself. It produces a movement along a given demand curve, with other determinants held constant.

Curriculum connections

Sources