3rd Semester Economics: Microeconomics Concepts

Key Concepts in 3rd Semester Economics

Microeconomics

• Demand and Supply

  • Law of Demand: Inverse relationship between price and quantity demanded.
  • Law of Supply: Direct relationship between price and quantity supplied.
  • Market Equilibrium: Point where demand equals supply.

• Elasticity

  • Price Elasticity of Demand: Measure of responsiveness of quantity demanded to price changes.
    • Types: Elastic (>1), Inelastic (<1), Unit elastic (=1).
  • Income Elasticity: Response of demand to changes in consumer income.
  • Cross-Price Elasticity: Responsiveness of demand for one good to the price change of another.

• Consumer Behavior

  • Utility: Satisfaction derived from consumption.
  • Marginal Utility: Additional satisfaction from consuming one more unit.
  • Budget Constraints: Limits on consumer choices based on income and prices.

• Production and Costs

  • Short-run vs. Long-run: Short-run has fixed inputs; long-run all inputs are variable.
  • Total, Average, and Marginal Costs: Total cost = fixed + variable costs; average cost = total cost/quantity; marginal cost = change in total cost/change in quantity.

Macroeconomics

• National Income Accounting

  • Gross Domestic Product (GDP): Total value of goods and services produced in a country.
    • Real vs. Nominal GDP: Real adjusted for inflation; nominal not adjusted.
  • GNP vs. GDP: GNP includes net income from abroad; GDP does not.

• Inflation

  • Measurement: Consumer Price Index (CPI) and Producer Price Index (PPI).
  • Types: Demand-pull (excess demand) and Cost-push (rising costs of production).

• Unemployment

  • Types: Frictional (short-term), Structural (mismatch of skills), Cyclical (due to economic downturn).
  • Natural Rate of Unemployment: Long-term rate unaffected by economic fluctuations.

• Monetary and Fiscal Policy

  • Monetary Policy: Central bank decisions on money supply and interest rates to influence the economy.
  • Fiscal Policy: Government spending and taxation decisions to influence economic activity.

Market Structures

• Perfect Competition

  • Many buyers and sellers.
  • Homogeneous products.
  • Free entry and exit in the market.

• Monopoly

  • Single seller controls the market.
  • Unique product with no close substitutes.
  • High barriers to entry.

• Oligopoly

  • Few sellers dominate the market.
  • Products may be homogeneous or differentiated.
  • Interdependence among firms.

• Monopolistic Competition

  • Many sellers with differentiated products.
  • Some market power due to product differentiation.
  • Free entry and exit in the market.

Key Formulas

• GDP: C + I + G + (X - M)
  • C = Consumption, I = Investment, G = Government Spending, X = Exports, M = Imports.
• Price Elasticity of Demand: % Change in Quantity Demanded / % Change in Price
• Marginal Cost: Change in Total Cost / Change in Quantity

Important Theories

• Keynesian Economics: Advocates for active government intervention to manage economic cycles.
• Classical Economics: Emphasizes free markets, with minimal government intervention.
• Supply-Side Economics: Focuses on boosting supply through tax cuts and deregulation.

Microeconomics

• Demand and Supply

  • Law of Demand: When prices decrease, the quantity demanded increases, and vice versa.
  • Law of Supply: As prices increase, the quantity supplied also increases, demonstrating a direct correlation.
  • Market Equilibrium: Achieved when the quantity demanded by consumers equals the quantity supplied by producers, determining the market price.

• Elasticity

  • Price Elasticity of Demand: Indicates how sensitive the quantity demanded is to changes in price.
    • Elastic Demand: Occurs when elasticity is greater than 1, meaning consumers significantly alter their purchasing habits with price fluctuation.
    • Inelastic Demand: Occurs when elasticity is less than 1, indicating consumers are less responsive to price changes and continue purchasing despite increases in price.

This quiz covers essential microeconomic concepts from the 3rd semester, including demand and supply, elasticity, consumer behavior, and production costs. Test your understanding of key terms and principles that govern microeconomic theory and real-world applications.