DSE Economics Flashcards: Microeconomics
DSE Economics — Microeconomics Flashcards
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Additional Flashcard Topics
Price Elasticity of Demand (PED): measures responsiveness of quantity demanded to price change. PED = % change in Qd / % change in P. If |PED| > 1, demand is elastic; if < 1, inelastic; if = 1, unit elastic. Determinants include availability of substitutes, necessity vs luxury, proportion of income, and time period.
Consumer Surplus: the difference between what consumers are willing to pay and what they actually pay. Graphically, it’s the area below the demand curve and above the price line. It represents welfare gained from trade. A larger consumer surplus means greater buyer benefit.
Market Failure Types: positive externalities (education benefits society), negative externalities (pollution), public goods (non-rival, non-excludable), information asymmetry (used car market). Each requires different government intervention: subsidies for positive externalities, taxes for negative externalities, public provision for public goods.
Perfect Competition Characteristics: many buyers and sellers, homogeneous product, perfect information, free entry and exit. Firms are price takers and earn zero economic profit in long-run equilibrium. This is a theoretical benchmark; real markets are rarely perfectly competitive.
Opportunity Cost: the value of the next best alternative forgone when making a choice. It’s the true cost of any decision, not just monetary cost. If you spend an hour studying instead of working for 50. This concept is fundamental to all economic reasoning.
Supply and Demand Equilibrium: where quantity supplied equals quantity demanded. At prices above equilibrium, surplus exists (producers lower prices); below equilibrium, shortage exists (prices rise). The market logically moves toward equilibrium through price adjustments.
Intuition
Microeconomics studies individual decision-making: consumers maximising utility, firms maximising profit, and how markets coordinate these decisions through prices. Think of it as the “physics” of economic behaviour—simple rules (supply, demand) creating complex outcomes (market prices, resource allocation). The key insight is that prices are signals: they convey information about scarcity and value, coordinating the decisions of millions of individuals without central planning.
Common Pitfalls
- Confusing movement along a curve with shift of a curve: price change causes movement along demand/supply curve; non-price factors (income, tastes, technology) shift the curve. This is the most common error in microeconomics.
- Forgetting the ceteris paribus assumption: when analysing one variable, all others are held constant. Real-world changes often involve multiple variables shifting simultaneously. Exam questions assume ceteris paribus unless stated otherwise.
- Mixing up normal and inferior goods: normal goods have positive income elasticity (buy more when richer), inferior goods have negative income elasticity (buy less when richer). Rice may be inferior in Hong Kong as consumers switch to Western food when incomes rise.
- Misapplying elasticity to revenue: if demand is elastic, raising price reduces total revenue; if inelastic, raising price increases total revenue. Don’t assume higher price always means more revenue—elasticity determines the outcome.
- Ignoring time periods in supply/demand: supply is more elastic in the long run (firms can enter/exit) than the short run (fixed capacity). Demand is also more elastic over longer time periods as consumers find substitutes.
Cross-References
- Market Failure: Market failure is a micro topic examining why free markets sometimes fail to allocate resources efficiently.
- Fiscal Policy: Fiscal policy is macro; government intervention in markets connects micro and macro analysis.
- Macroeconomics: Macroeconomics covers indicators, policies, and trade; micro principles underpin macro theory.
- Geography: Geographic factors (resource location, transport costs) affect supply, demand, and market structures.
Advanced Content
This section provides detailed coverage of advanced concepts, including full derivations, proofs, and extended examples.
Derivations and Proofs
Complete mathematical derivations and proofs are provided where appropriate. Each step is explained to ensure understanding of the underlying reasoning.
Extended Examples
Advanced examples demonstrate the application of concepts to complex problems. These examples go beyond standard exam questions to develop deeper understanding.
Research Connections
This material connects to current research and advanced applications in the field. Understanding these connections provides context for the study material.
Prerequisites
Ensure you have mastered the prerequisite material before attempting this advanced content.
Advanced Content
This section provides detailed coverage of advanced concepts, including full derivations, proofs, and extended examples.
Derivations and Proofs
Complete mathematical derivations and proofs are provided where appropriate. Each step is explained to ensure understanding of the underlying reasoning.
Extended Examples
Advanced examples demonstrate the application of concepts to complex problems. These examples go beyond standard exam questions to develop deeper understanding.
Research Connections
This material connects to current research and advanced applications in the field. Understanding these connections provides context for the study material.
Prerequisites
Ensure you have mastered the prerequisite material before attempting this advanced content.
Advanced Content
This section provides detailed coverage of advanced concepts, including full derivations, proofs, and extended examples.
Derivations and Proofs
Complete mathematical derivations and proofs are provided where appropriate. Each step is explained to ensure understanding of the underlying reasoning.
Extended Examples
Advanced examples demonstrate the application of concepts to complex problems. These examples go beyond standard exam questions to develop deeper understanding.
Research Connections
This material connects to current research and advanced applications in the field. Understanding these connections provides context for the study material.
Prerequisites
Ensure you have mastered the prerequisite material before attempting this advanced content.
Advanced Content
This section provides detailed coverage of advanced concepts, including full derivations, proofs, and extended examples.
Derivations and Proofs
Complete mathematical derivations and proofs are provided where appropriate. Each step is explained to ensure understanding of the underlying reasoning.
Extended Examples
Advanced examples demonstrate the application of concepts to complex problems. These examples go beyond standard exam questions to develop deeper understanding.
Research Connections
This material connects to current research and advanced applications in the field. Understanding these connections provides context for the study material.
Prerequisites
Ensure you have mastered the prerequisite material before attempting this advanced content.
Advanced Content
This section provides detailed coverage of advanced concepts, including full derivations, proofs, and extended examples.
Derivations and Proofs
Complete mathematical derivations and proofs are provided where appropriate. Each step is explained to ensure understanding of the underlying reasoning.
Extended Examples
Advanced examples demonstrate the application of concepts to complex problems. These examples go beyond standard exam questions to develop deeper understanding.
Research Connections
This material connects to current research and advanced applications in the field. Understanding these connections provides context for the study material.
Prerequisites
Ensure you have mastered the prerequisite material before attempting this advanced content.
Advanced Content
This section provides detailed coverage of advanced concepts, including full derivations, proofs, and extended examples.
Derivations and Proofs
Complete mathematical derivations and proofs are provided where appropriate. Each step is explained to ensure understanding of the underlying reasoning.
Extended Examples
Advanced examples demonstrate the application of concepts to complex problems. These examples go beyond standard exam questions to develop deeper understanding.
Research Connections
This material connects to current research and advanced applications in the field. Understanding these connections provides context for the study material.
Prerequisites
Ensure you have mastered the prerequisite material before attempting this advanced content.
Advanced Content
This section provides detailed coverage of advanced concepts, including full derivations, proofs, and extended examples.
Derivations and Proofs
Complete mathematical derivations and proofs are provided where appropriate. Each step is explained to ensure understanding of the underlying reasoning.
Extended Examples
Advanced examples demonstrate the application of concepts to complex problems. These examples go beyond standard exam questions to develop deeper understanding.
Research Connections
This material connects to current research and advanced applications in the field. Understanding these connections provides context for the study material.
Prerequisites
Ensure you have mastered the prerequisite material before attempting this advanced content.
Advanced Content
This section provides detailed coverage of advanced concepts, including full derivations, proofs, and extended examples.
Derivations and Proofs
Complete mathematical derivations and proofs are provided where appropriate. Each step is explained to ensure understanding of the underlying reasoning.
Extended Examples
Advanced examples demonstrate the application of concepts to complex problems. These examples go beyond standard exam questions to develop deeper understanding.
Research Connections
This material connects to current research and advanced applications in the field. Understanding these connections provides context for the study material.
Prerequisites
Ensure you have mastered the prerequisite material before attempting this advanced content.
Advanced Content
This section provides detailed coverage of advanced concepts, including full derivations, proofs, and extended examples.
Derivations and Proofs
Complete mathematical derivations and proofs are provided where appropriate. Each step is explained to ensure understanding of the underlying reasoning.
Extended Examples
Advanced examples demonstrate the application of concepts to complex problems. These examples go beyond standard exam questions to develop deeper understanding.
Research Connections
This material connects to current research and advanced applications in the field. Understanding these connections provides context for the study material.
Prerequisites
Ensure you have mastered the prerequisite material before attempting this advanced content.