Study sheet: Fundamentals of Micro and Macroeconomics

Microeconomics & Macroeconom Revision

1. 📌 Essentials

• Microeconomics studies individual agents (households, firms) and markets.
• Macroeconomics analyzes aggregate economic variables (GDP, inflation, unemployment).
• Market structures: perfect competition, monopolistic competition, oligopoly, monopoly.
• Scarcity: limited resources vs unlimited wants.
• Opportunity cost: value of the next best alternative foregone.
• Law of demand: inverse relationship between price and quantity demanded.
• Law of supply: direct relationship between price and quantity supplied.
• Equilibrium: where supply equals demand; determines market price and quantity.
• Elasticity: responsiveness of demand or supply to price changes.
• Price controls: ceilings (shortages) and floors (surpluses) distort markets.

2. 🧩 Key Structures & Components

• Demand Curve — shows quantity consumers want at each price; slopes downward.
• Supply Curve — shows quantity firms are willing to sell at each price; slopes upward.
• Market Equilibrium — intersection point of supply and demand.
• Price Elasticity of Demand (PED) — measures demand responsiveness to price.
• Production Possibility Frontier (PPF) — illustrates maximum output combinations given resources.
• Externalities — costs or benefits affecting third parties (positive or negative).
• Market Power — firms' ability to influence prices (monopoly, oligopoly).
• Government Price Controls — ceilings and floors affecting market outcomes.

3. 🔬 Functions, Mechanisms & Relationships

• Demand and supply interact to establish market price and quantity.
• Elasticity influences how quantity demanded or supplied reacts to price changes.
• Price elasticity of demand:
  • Elastic (>1): quantity responds strongly; TR moves opposite to price change.
  • Inelastic (<1): quantity responds weakly; TR moves with price.
• Total Revenue (TR):
  • Inelastic demand: price increase → TR increase.
  • Elastic demand: price increase → TR decrease.
• Market failure occurs when externalities or market power distort efficiency.
• Government interventions aim to correct market failures via price controls or taxes.

4. 📊 Comparative Table

Item	Key Features	Notes / Differences
Perfect Competition	Many firms, identical products, free entry/exit	No market power, price takers
Monopoly	Single firm, high barriers, unique product	Price setter, high market power
Oligopoly	Few firms, interdependent pricing	Collusion possible, strategic behavior
Monopolistic Competition	Many firms, differentiated products	Some market power, advertising
Price Ceiling	Max legal price, causes shortages	Binding if below equilibrium
Price Floor	Min legal price, causes surpluses	Binding if above equilibrium

5. 🗂️ Hierarchical Diagram

Economics
 ├─ Microeconomics
 │    ├─ Market Structures
 │    │    ├─ Perfect Competition
 │    │    ├─ Monopoly
 │    │    ├─ Oligopoly
 │    │    └─ Monopolistic Competition
 │    ├─ Supply & Demand
 │    │    ├─ Demand Curve
 │    │    ├─ Supply Curve
 │    │    └─ Equilibrium
 │    ├─ Elasticity
 │    │    ├─ Price Elasticity of Demand
 │    │    ├─ Income Elasticity
 │    │    └─ Price Elasticity of Supply
 │    └─ Market Failures
 │         ├─ Externalities
 │         └─ Market Power
 └─ Macroeconomics
      ├─ National Income
      ├─ Inflation
      ├─ Unemployment
      └─ Fiscal & Monetary Policy

6. ⚠️ High-Yield Pitfalls & Confusions

• Confusing elasticity categories; remember PED >1 = elastic, <1 = inelastic.
• Mistaking market equilibrium as always stable; it can be disrupted by shocks.
• Overlooking externalities as causes of market failure.
• Assuming price controls always improve welfare; often cause shortages or surpluses.
• Confusing demand shifts (income, preferences) with supply shifts (costs, technology).
• Forgetting opportunity cost is subjective and varies per individual.
• Misinterpreting total revenue effects under elastic/inelastic demand.
• Ignoring time as a factor influencing elasticity.

7. ✅ Final Exam Checklist

• Understand the difference between micro and macroeconomics.
• Know the main market structures and their characteristics.
• Be able to draw and interpret demand and supply curves.
• Identify equilibrium price and quantity.
• Calculate and interpret price elasticity of demand and supply.
• Recognize factors causing shifts in demand and supply.
• Explain the effects of price elasticity on total revenue.
• Describe externalities and market failures.
• Understand government interventions: price ceilings and floors.
• Know the concepts of opportunity cost and marginal analysis.
• Be familiar with the production possibilities frontier.
• Recognize the causes and effects of inflation and unemployment.
• Understand the circular flow diagram and basic macroeconomic indicators.
• Be aware of the difference between positive and normative economics.
• Know how market power influences prices and output.
• Be able to analyze the impact of taxes, subsidies, and regulations.

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