Micro Final 2010 - CU Boulder
Perfect — here is your FULL, COMPLETE, EXTREMELY DETAILED FINAL EXAM STUDY GUIDE for Chapters 1–9, all in ONE single organized document, cleaned, expanded, and exam-ready.
This is everything you need for your Microeconomics final.
⭐️ MICROECONOMICS FINAL EXAM STUDY GUIDE (CH. 1–9)
Cumulative • Comprehensive • Detailed • Includes examples + math
★ CHAPTER 1: FOUNDATIONS OF ECONOMICS
Scarcity
Scarcity = limited resources & unlimited wants.
Because of scarcity, every choice has a cost.
Resources (Factors of Production):
Land – natural resources
Labor – human work
Capital – machines, tools, buildings
Human Capital – skills, education
Entrepreneurship – risk-taking organizer
What Economics Studies
Economics = how people & society allocate scarce resources.
Microeconomics
Studies individuals, households, firms, and markets.
Example:
“How does a price increase affect Starbucks sales?”
Macroeconomics
Studies entire economy: inflation, GDP, unemployment.
Example:
“What happens to inflation if oil prices rise?”
Incentives
Motivators that encourage or discourage behavior.
Types
Positive incentive: reward
Negative incentive: punishment
Direct incentive: obvious change
Indirect incentive: secondary unintended effect
Example:
Direct → "$10 off" leads to more buying
Indirect → High unemployment benefits might reduce job search
Trade-offs
Choosing one thing means giving up another.
Example: Government spending more on healthcare means fewer dollars for education.
Opportunity Cost
The next best alternative given up.
Examples:
Going to college → giving up full-time wages.
Watching Netflix → giving up studying time.
Marginal Thinking
Do something if the additional benefit ≥ additional cost.
Example:
MB of suit = $200 saved from sick days
MC of suit = $157
→ BUY (net gain = $43)
Trade & Specialization
People/nations specialize in what they are best at → both benefit from trade.
Circular Flow Diagram
Shows the flow of money and goods:
Households = buyers in goods market, sellers in resource market.
Firms = sellers in goods market, buyers in resource market.
Variables vs Constants
Variables change (Q, price)
Constants don’t (coefficients)
★ CHAPTER 2: ECONOMIC MODELS, PPF, TRADE, ADVANTAGE
Models & Assumptions
Models simplify reality.
Assumptions:
Fixed technology
Fixed resources
Two goods
Ceteris Paribus: “all else constant”
Graphs
Time Series: change over time
PPF: combos of two goods
Production Possibilities Frontier (PPF)
PPF Assumptions
Fixed resources
Fixed technology
Producing only 2 goods
PPF Meaning
On curve: efficient
Inside curve: inefficient
Outside curve: impossible (without growth)
Opportunity Cost on PPF
Opportunity cost = what you give up.
Shape of PPF
Straight line: constant OC
Bowed out: increasing OC
Because resources are specialized
Shifting the PPF
Outward shift: more resources, better tech
Inward shift: disaster, war, loss of resources
Absolute vs Comparative Advantage
Absolute Advantage
Who can produce more with same resources.
Comparative Advantage
Who has the lower opportunity cost.
→ Comparative advantage drives trade.
Gains from Trade
Both parties benefit when:
Trade price is between both opportunity costs.
★ CHAPTER 3: SUPPLY, DEMAND, EQUILIBRIUM
Demand
Relationship between P and Qd.
Law of Demand
Price ↑ → Qd ↓
Price ↓ → Qd ↑
Demand Shifters
Demand shifts (D increases/decreases) when:
Income changes
Preferences change
of buyers changes
Price of related goods
Substitutes: P↑ of A → D↑ of B
Complements: P↑ of A → D↓ of B
Expectations change
Supply
Relationship between P and Qs.
Supply Shifters
Input costs
Technology
Taxes/subsidies
of sellers
Expectations
Natural events
Market Equilibrium
Where Qd = Qs.
Example
Demand: Qd = 150 – 5P
Supply: Qs = –50 + 15P
Solve:
150 – 5P = –50 + 15P
200 = 20P
P* = 10
Q* = 100
Disequilibrium
Shortage: Qd > Qs (price too low) → prices rise
Surplus: Qs > Qd (price too high) → prices fall
Effects of Shifts
Demand Increase
P ↑
Q ↑
Demand Decrease
P ↓
Q ↓
Supply Increase
P ↓
Q ↑
Supply Decrease
P ↑
Q ↓
Multiple Shifts
If both curves shift → either P or Q is ambiguous.
★ CHAPTER 4: ELASTICITY
Price Elasticity of Demand (Ed)
Responsiveness of Qd to price changes.
Formula (Midpoint Method on exam):
Ed = [(Q2 – Q1) / average Q] / [(P2 – P1) / average P]
Types of Demand Elasticity
Elastic (Ed > 1)
Inelastic (Ed < 1)
Unit Elastic (Ed = 1)
Perfectly Inelastic (Ed = 0) → vertical
Perfectly Elastic (Ed = ∞) → horizontal
Determinants of Elasticity
Substitutes
Time horizon
Necessity vs luxury
Definition of market
Income share
Elasticity & Total Revenue
TR = P × Q
Demand Type | Price ↑ | TR |
|---|---|---|
Elastic | Q falls a lot | TR ↓ |
Inelastic | Q falls little | TR ↑ |
Unit Elastic | — | TR unchanged |
Income Elasticity
Ei > 0 → normal goods
Ei < 0 → inferior goods
Ei > 1 → luxury goods
Cross-Price Elasticity
Substitutes → positive
Complements → negative
Price Elasticity of Supply
More elastic in long run.
★ CHAPTER 5: SURPLUS, WTP, TAXES, DWL
Willingness to Pay (WTP)
Max $ consumer will pay.
Consumer Surplus (CS)
CS = WTP – Price
Area: below demand, above price
Willingness to Sell (WTS)
Min $ seller accepts.
Producer Surplus (PS)
PS = Price – WTS
Area: above supply, below price
Total Surplus (TS)
TS = CS + PS
Measures efficiency.
Efficiency
Market is efficient when TS is maximized.
Taxes
Tax on sellers → supply shifts up by tax amount.
Results:
Buyers pay more
Sellers receive less
Quantity falls
Creates DWL
Gov collects tax revenue = tax × Qafter
Tax Incidence
Burden falls on more inelastic side.
Example:
If demand inelastic → buyers pay more of tax.
Deadweight Loss (DWL)
Lost total surplus due to tax.
Large tax → larger DWL
Elastic curves → larger DWL
Perfectly inelastic → no DWL
★ CHAPTER 6: PRICE CONTROLS (CEILINGS & FLOORS)
Price Controls
Government-set prices.
Two types:
Price Ceiling (max price)
Price Floor (min price)
Price Ceilings
Government imposes a maximum price.
Binding Ceiling
Below equilibrium
Causes shortage
Example:
Rent control → shortage of apartments.
Nonbinding Ceiling
Above equilibrium
No effect
Consequences of Binding Ceilings
Black markets
Long lines
Reduced quality
Landlords convert apartments
Misallocation (first-come-first-served)
Price Floor
Government imposes a minimum price.
Binding Floor
Above equilibrium
Causes surplus
Example:
Minimum wage → labor surplus = unemployment.
Nonbinding Floor
Below equilibrium
No effect
Minimum Wage
Binding → unemployment in low-skill markets
Long-run effects bigger than short-run
Firms may outsource, automate, reduce hours
★ CHAPTER 7: (Only 1 Question on Final)
TAs covered this chapter.
You only need:
Concept similar to clicker question
Usually involves computing consumer surplus or producer surplus
Or understanding cost-benefit decision-making
(You're not responsible for deeper content)
★ CHAPTER 8: COSTS OF PRODUCTION
Total Revenue (TR)
TR = P × Q
Total Cost (TC)
Sum of all costs (fixed + variable).
Profit
Profit = TR – TC
Economic Profit includes opportunity costs.
Accounting Profit ignores implicit costs.
Types of Costs
Fixed Costs (FC): don’t change with output
Variable Costs (VC): change with output
Total Costs (TC): FC + VC
Average Costs
AFC = FC / Q
AVC = VC / Q
ATC = TC / Q
Marginal Cost (MC)
MC = change in TC when producing one more unit
MC intersects ATC & AVC at their minimum.
Marginal Product (MP)
Extra output from one additional input.
Stages of MP:
Increasing MP
Diminishing MP
Zero MP
Negative MP
Short Run vs Long Run
Short Run: at least one fixed input
Long Run: all inputs variable
LRATC (Long-Run Average Total Cost)
Shows lowest possible cost of producing each level of output.
Phases:
Economies of Scale (ATC ↓)
Constant Returns (ATC flat)
Diseconomies of Scale (ATC ↑)
★ CHAPTER 9: COMPETITIVE FIRMS, PRICE TAKING, PROFIT MAXIMIZING
Price Takers
Competitive firms cannot influence price.
Price = MR = AR
=> MR = P
Profit-Maximizing Condition
✔ Firms maximize profit where MR = MC.
If MR > MC → produce more
If MR < MC → produce less
If MR = MC → optimal quantity
Sunk Costs
Costs already paid and unrecoverable.
👉 Should NOT affect decisions.
Example:
If you bought a $100 concert ticket and feel sick:
The $100 is sunk → you should stay home if MB < MC.
⭐️ END OF COMPLETE STUDY GUIDE ⭐️
If you want, I can also create:
✅ A practice exam with answers
✅ A condensed cheat sheet (1 page)
✅ A set of flashcards for each chapter
Just tell me!Perfect — here is your FULL, COMPLETE, EXTREMELY DETAILED FINAL EXAM STUDY GUIDE for Chapters 1–9, all in ONE single organized document, cleaned, expanded, and exam-ready.
This is everything you need for your Microeconomics final.
⭐️ MICROECONOMICS FINAL EXAM STUDY GUIDE (CH. 1–9)
Cumulative • Comprehensive • Detailed • Includes examples + math
★ CHAPTER 1: FOUNDATIONS OF ECONOMICS
Scarcity
Scarcity = limited resources & unlimited wants.
Because of scarcity, every choice has a cost.
Resources (Factors of Production):
Land – natural resources
Labor – human work
Capital – machines, tools, buildings
Human Capital – skills, education
Entrepreneurship – risk-taking organizer
What Economics Studies
Economics = how people & society allocate scarce resources.
Microeconomics
Studies individuals, households, firms, and markets.
Example:
“How does a price increase affect Starbucks sales?”
Macroeconomics
Studies entire economy: inflation, GDP, unemployment.
Example:
“What happens to inflation if oil prices rise?”
Incentives
Motivators that encourage or discourage behavior.
Types
Positive incentive: reward
Negative incentive: punishment
Direct incentive: obvious change
Indirect incentive: secondary unintended effect
Example:
Direct → "$10 off" leads to more buying
Indirect → High unemployment benefits might reduce job search
Trade-offs
Choosing one thing means giving up another.
Example: Government spending more on healthcare means fewer dollars for education.
Opportunity Cost
The next best alternative given up.
Examples:
Going to college → giving up full-time wages.
Watching Netflix → giving up studying time.
Marginal Thinking
Do something if the additional benefit ≥ additional cost.
Example:
MB of suit = $200 saved from sick days
MC of suit = $157
→ BUY (net gain = $43)
Trade & Specialization
People/nations specialize in what they are best at → both benefit from trade.
Circular Flow Diagram
Shows the flow of money and goods:
Households = buyers in goods market, sellers in resource market.
Firms = sellers in goods market, buyers in resource market.
Variables vs Constants
Variables change (Q, price)
Constants don’t (coefficients)
★ CHAPTER 2: ECONOMIC MODELS, PPF, TRADE, ADVANTAGE
Models & Assumptions
Models simplify reality.
Assumptions:
Fixed technology
Fixed resources
Two goods
Ceteris Paribus: “all else constant”
Graphs
Time Series: change over time
PPF: combos of two goods
Production Possibilities Frontier (PPF)
PPF Assumptions
Fixed resources
Fixed technology
Producing only 2 goods
PPF Meaning
On curve: efficient
Inside curve: inefficient
Outside curve: impossible (without growth)
Opportunity Cost on PPF
Opportunity cost = what you give up.
Shape of PPF
Straight line: constant OC
Bowed out: increasing OC
Because resources are specialized
Shifting the PPF
Outward shift: more resources, better tech
Inward shift: disaster, war, loss of resources
Absolute vs Comparative Advantage
Absolute Advantage
Who can produce more with same resources.
Comparative Advantage
Who has the lower opportunity cost.
→ Comparative advantage drives trade.
Gains from Trade
Both parties benefit when:
Trade price is between both opportunity costs.
★ CHAPTER 3: SUPPLY, DEMAND, EQUILIBRIUM
Demand
Relationship between P and Qd.
Law of Demand
Price ↑ → Qd ↓
Price ↓ → Qd ↑
Demand Shifters
Demand shifts (D increases/decreases) when:
Income changes
Preferences change
of buyers changes
Price of related goods
Substitutes: P↑ of A → D↑ of B
Complements: P↑ of A → D↓ of B
Expectations change
Supply
Relationship between P and Qs.
Supply Shifters
Input costs
Technology
Taxes/subsidies
of sellers
Expectations
Natural events
Market Equilibrium
Where Qd = Qs.
Example
Demand: Qd = 150 – 5P
Supply: Qs = –50 + 15P
Solve:
150 – 5P = –50 + 15P
200 = 20P
P* = 10
Q* = 100
Disequilibrium
Shortage: Qd > Qs (price too low) → prices rise
Surplus: Qs > Qd (price too high) → prices fall
Effects of Shifts
Demand Increase
P ↑
Q ↑
Demand Decrease
P ↓
Q ↓
Supply Increase
P ↓
Q ↑
Supply Decrease
P ↑
Q ↓
Multiple Shifts
If both curves shift → either P or Q is ambiguous.
★ CHAPTER 4: ELASTICITY
Price Elasticity of Demand (Ed)
Responsiveness of Qd to price changes.
Formula (Midpoint Method on exam):
Ed = [(Q2 – Q1) / average Q] / [(P2 – P1) / average P]
Types of Demand Elasticity
Elastic (Ed > 1)
Inelastic (Ed < 1)
Unit Elastic (Ed = 1)
Perfectly Inelastic (Ed = 0) → vertical
Perfectly Elastic (Ed = ∞) → horizontal
Determinants of Elasticity
Substitutes
Time horizon
Necessity vs luxury
Definition of market
Income share
Elasticity & Total Revenue
TR = P × Q
Demand Type | Price ↑ | TR |
|---|---|---|
Elastic | Q falls a lot | TR ↓ |
Inelastic | Q falls little | TR ↑ |
Unit Elastic | — | TR unchanged |
Income Elasticity
Ei > 0 → normal goods
Ei < 0 → inferior goods
Ei > 1 → luxury goods
Cross-Price Elasticity
Substitutes → positive
Complements → negative
Price Elasticity of Supply
More elastic in long run.
★ CHAPTER 5: SURPLUS, WTP, TAXES, DWL
Willingness to Pay (WTP)
Max $ consumer will pay.
Consumer Surplus (CS)
CS = WTP – Price
Area: below demand, above price
Willingness to Sell (WTS)
Min $ seller accepts.
Producer Surplus (PS)
PS = Price – WTS
Area: above supply, below price
Total Surplus (TS)
TS = CS + PS
Measures efficiency.
Efficiency
Market is efficient when TS is maximized.
Taxes
Tax on sellers → supply shifts up by tax amount.
Results:
Buyers pay more
Sellers receive less
Quantity falls
Creates DWL
Gov collects tax revenue = tax × Qafter
Tax Incidence
Burden falls on more inelastic side.
Example:
If demand inelastic → buyers pay more of tax.
Deadweight Loss (DWL)
Lost total surplus due to tax.
Large tax → larger DWL
Elastic curves → larger DWL
Perfectly inelastic → no DWL
★ CHAPTER 6: PRICE CONTROLS (CEILINGS & FLOORS)
Price Controls
Government-set prices.
Two types:
Price Ceiling (max price)
Price Floor (min price)
Price Ceilings
Government imposes a maximum price.
Binding Ceiling
Below equilibrium
Causes shortage
Example:
Rent control → shortage of apartments.
Nonbinding Ceiling
Above equilibrium
No effect
Consequences of Binding Ceilings
Black markets
Long lines
Reduced quality
Landlords convert apartments
Misallocation (first-come-first-served)
Price Floor
Government imposes a minimum price.
Binding Floor
Above equilibrium
Causes surplus
Example:
Minimum wage → labor surplus = unemployment.
Nonbinding Floor
Below equilibrium
No effect
Minimum Wage
Binding → unemployment in low-skill markets
Long-run effects bigger than short-run
Firms may outsource, automate, reduce hours
★ CHAPTER 7: (Only 1 Question on Final)
TAs covered this chapter.
You only need:
Concept similar to clicker question
Usually involves computing consumer surplus or producer surplus
Or understanding cost-benefit decision-making
(You're not responsible for deeper content)
★ CHAPTER 8: COSTS OF PRODUCTION
Total Revenue (TR)
TR = P × Q
Total Cost (TC)
Sum of all costs (fixed + variable).
Profit
Profit = TR – TC
Economic Profit includes opportunity costs.
Accounting Profit ignores implicit costs.
Types of Costs
Fixed Costs (FC): don’t change with output
Variable Costs (VC): change with output
Total Costs (TC): FC + VC
Average Costs
AFC = FC / Q
AVC = VC / Q
ATC = TC / Q
Marginal Cost (MC)
MC = change in TC when producing one more unit
MC intersects ATC & AVC at their minimum.
Marginal Product (MP)
Extra output from one additional input.
Stages of MP:
Increasing MP
Diminishing MP
Zero MP
Negative MP
Short Run vs Long Run
Short Run: at least one fixed input
Long Run: all inputs variable
LRATC (Long-Run Average Total Cost)
Shows lowest possible cost of producing each level of output.
Phases:
Economies of Scale (ATC ↓)
Constant Returns (ATC flat)
Diseconomies of Scale (ATC ↑)
★ CHAPTER 9: COMPETITIVE FIRMS, PRICE TAKING, PROFIT MAXIMIZING
Price Takers
Competitive firms cannot influence price.
Price = MR = AR
=> MR = P
Profit-Maximizing Condition
✔ Firms maximize profit where MR = MC.
If MR > MC → produce more
If MR < MC → produce less
If MR = MC → optimal quantity
Sunk Costs
Costs already paid and unrecoverable.
👉 Should NOT affect decisions.
Example:
If you bought a $100 concert ticket and feel sick:
The $100 is sunk → you should stay home if MB < MC.