Title: Microeconomics — LearnCoachAssist

Q: What is the law of demand?
A: The law of demand states that, ceteris paribus, as the price of a good increases, the quantity demanded decreases, and vice versa.

Q: What is the law of supply?
A: The law of supply states that, ceteris paribus, as the price of a good increases, the quantity supplied increases, and vice versa.

Q: What is equilibrium price?
A: The equilibrium price is the price at which the quantity demanded equals the quantity supplied in a market.

Q: What causes a shift in the demand curve?
A: Factors such as changes in income, tastes, prices of related goods, expectations, and the number of buyers shift the demand curve.

Q: What causes a shift in the supply curve?
A: Factors such as changes in input prices, technology, expectations, number of sellers, and government policies shift the supply curve.

Q: What is a price ceiling?A price ceiling is a government-imposed maximum price that can be charged for a good
A: if set below equilibrium, it causes a shortage.

Q: What is a price floor?A price floor is a government-imposed minimum price
A: if set above equilibrium, it causes a surplus. Example: minimum wage.

Q: What is consumer surplus?
A: Consumer surplus is the difference between what consumers are willing to pay and what they actually pay, represented by the area below the demand curve and above the price.

Q: What is producer surplus?
A: Producer surplus is the difference between the market price and the minimum price producers are willing to accept, represented by the area above the supply curve and below the price.

Q: What is deadweight loss?
A: Deadweight loss is the reduction in total surplus that results from a market distortion such as a tax, price control, or monopoly pricing.

Q: What is price elasticity of demand (PED)?
A: PED measures the responsiveness of quantity demanded to a change in price: PED = % change in Qd / % change in P.

Q: What does it mean if PED > 1?
A: Demand is elastic: quantity demanded changes by a larger percentage than the price change. Consumers are highly responsive to price.

Q: What does it mean if PED < 1?
A: Demand is inelastic: quantity demanded changes by a smaller percentage than the price change. Consumers are less responsive to price.

Q: What is unit elastic demand?
A: Demand is unit elastic when PED = 1, meaning the percentage change in quantity demanded equals the percentage change in price.

Q: What is perfectly inelastic demand?Perfectly inelastic demand means PED = 0
A: quantity demanded does not change regardless of price. The demand curve is vertical.

Q: What is perfectly elastic demand?Perfectly elastic demand means PED = ∞
A: any price increase causes quantity demanded to drop to zero. The demand curve is horizontal.

Q: What factors affect price elasticity of demand?
A: Key factors include availability of substitutes, necessity vs. luxury, proportion of income spent, and time horizon.

Q: What is cross-price elasticity of demand?
A: It measures how the quantity demanded of one good responds to a price change in another: XED = % change in Qd of good A / % change in P of good B.

Q: How do you interpret positive vs. negative cross-price elasticity?Positive XED indicates substitute goods
A: negative XED indicates complementary goods.

Q: What is income elasticity of demand (YED)?
A: YED measures the responsiveness of quantity demanded to a change in income: YED = % change in Qd / % change in income.

Q: How do you classify goods using income elasticity?Normal goods have YED &gt
A: 0 (demand rises with income); inferior goods have YED < 0 (demand falls with income). Luxury goods have YED > 1.

Q: What is price elasticity of supply?
A: It measures the responsiveness of quantity supplied to a price change: PES = % change in Qs / % change in P.

Q: What are the characteristics of perfect competition?
A: Many buyers and sellers, homogeneous products, free entry and exit, perfect information, and firms are price takers.

Q: What is the profit-maximizing rule for a firm?
A: A firm maximizes profit where marginal revenue (MR) equals marginal cost (MC), i.e., MR = MC.

Q: What is the shutdown condition for a perfectly competitive firm in the short run?A firm should shut down if the price falls below average variable cost (AVC): P &lt
A: AVC.

Q: What is the long-run equilibrium in perfect competition?
A: In long-run equilibrium, firms earn zero economic profit because P = MC = minimum ATC and there is no incentive for entry or exit.

Q: What is a monopoly?
A: A monopoly is a market structure with a single seller, no close substitutes, and significant barriers to entry.

Q: What are common barriers to entry in a monopoly?
A: Barriers include patents, control of key resources, economies of scale (natural monopoly), government licenses, and high startup costs.

Q: How does a monopolist set its price?
A: A monopolist maximizes profit at MR = MC and then charges the price on the demand curve corresponding to that quantity.

Q: Why is marginal revenue less than price for a monopolist?
A: Because the monopolist must lower the price on all units to sell one more unit, so MR falls faster than the demand curve.

Q: What is the deadweight loss of monopoly?
A: Monopoly deadweight loss arises because the monopolist produces less than the socially efficient quantity, reducing total surplus compared to perfect competition.

Q: What is a natural monopoly?
A: A natural monopoly occurs when one firm can supply the entire market at a lower average cost than two or more firms due to economies of scale.

Q: What is an oligopoly?An oligopoly is a market structure with a few large firms whose decisions are interdependent
A: each firm considers rivals' reactions.

Q: What is a cartel?
A: A cartel is a group of firms that collude to restrict output and raise prices, acting like a monopoly. Example: OPEC.

Q: What is the kinked demand curve model?
A: The kinked demand curve model assumes rivals match price cuts but not price increases, creating a kink at the current price and a discontinuity in the MR curve, explaining price rigidity.

Q: What is monopolistic competition?
A: A market with many firms selling differentiated products, free entry and exit, and some degree of market power due to product differentiation.

Q: What is the long-run outcome in monopolistic competition?
A: Firms earn zero economic profit in the long run, but produce at a quantity less than minimum ATC, resulting in excess capacity.

Q: What is a utility function?
A: A utility function assigns a numerical value to consumption bundles to represent a consumer's preferences.

Q: What is marginal utility?
A: Marginal utility is the additional satisfaction a consumer receives from consuming one more unit of a good.

Q: What is the law of diminishing marginal utility?
A: As a consumer consumes more of a good, the marginal utility from each additional unit decreases, holding consumption of other goods constant.

Q: What is the budget constraint?
A: The budget constraint shows all combinations of goods a consumer can afford given their income and the prices of goods: P₁Q₁ + P₂Q₂ = Income.

Q: What is an indifference curve?
A: An indifference curve shows all combinations of two goods that give a consumer the same level of utility.

Q: What is the marginal rate of substitution (MRS)?The MRS is the rate at which a consumer is willing to trade one good for another while maintaining the same utility level
A: it equals the slope of the indifference curve.

Q: What is the consumer's optimal choice?
A: The consumer's optimum is where the budget constraint is tangent to the highest indifference curve, meaning MRS = P₁/P₂.

Q: What is the substitution effect?
A: The substitution effect is the change in quantity demanded due to a relative price change, holding utility constant (consumer substitutes toward the cheaper good).

Q: What is the income effect?
A: The income effect is the change in quantity demanded due to a change in purchasing power caused by a price change.

Q: What is a Giffen good?
A: A Giffen good is an inferior good where the income effect dominates the substitution effect, so quantity demanded increases when its price rises.

Q: What are explicit costs vs. implicit costs?
A: Explicit costs are direct monetary payments (e.g., wages, rent). Implicit costs are opportunity costs of using owned resources (e.g., forgone salary).

Q: What is economic profit?
A: Economic profit = Total revenue − Total costs (explicit + implicit). It differs from accounting profit, which ignores implicit costs.

Q: What are fixed costs and variable costs?
A: Fixed costs do not change with output (e.g., rent). Variable costs change with output (e.g., raw materials, hourly labor).

Q: What is marginal cost?
A: Marginal cost (MC) is the additional cost of producing one more unit: MC = ΔTC / ΔQ.

Q: What is the relationship between MC and ATC?MC intersects ATC at its minimum point. When MC &lt
A: ATC, ATC is falling; when MC > ATC, ATC is rising.

Q: What are economies of scale?
A: Economies of scale occur when long-run average total cost decreases as output increases, due to specialization, bulk purchasing, or spreading fixed costs.

Q: What are diseconomies of scale?
A: Diseconomies of scale occur when long-run average total cost increases as output increases, often due to coordination problems and bureaucracy.

Q: What is the short run vs. the long run in production?
A: In the short run, at least one input is fixed. In the long run, all inputs are variable and firms can enter or exit the market.

Q: What is the law of diminishing marginal returns?
A: As more of a variable input is added to a fixed input, the marginal product of the variable input eventually decreases.

Q: What is the marginal product of labor?
A: The marginal product of labor (MPL) is the additional output produced by one more unit of labor: MPL = ΔQ / ΔL.

Q: What is average total cost (ATC)?
A: ATC = TC / Q, or equivalently, ATC = AFC + AVC. The ATC curve is typically U-shaped.

Q: What is game theory?
A: Game theory is the study of strategic decision-making where the outcome for each participant depends on the actions of all participants.

Q: What is a Nash equilibrium?
A: A Nash equilibrium is a set of strategies where no player can improve their payoff by unilaterally changing their strategy.

Q: What is the Prisoner's Dilemma?
A: A game where two players acting in their own self-interest reach an outcome that is worse for both than if they had cooperated.

Q: Why is the Prisoner's Dilemma relevant to oligopoly?
A: It shows why firms in an oligopoly have an incentive to cheat on collusive agreements — individual profit maximization leads to a Nash equilibrium inferior to joint profit maximization.

Q: What is a dominant strategy?
A: A dominant strategy is one that yields the best payoff for a player regardless of what the other players do.

Q: What is a mixed strategy?
A: A mixed strategy involves randomizing over possible actions according to specific probabilities, used when no pure strategy Nash equilibrium exists.

Q: What is a sequential game?A game where players move in turns
A: analyzed using a game tree and solved by backward induction.

Q: What is backward induction?
A: Backward induction solves sequential games by starting at the final decision nodes and working backward to determine the optimal strategy at each stage.

Q: What is a credible threat in game theory?A credible threat is one that is in the threatener's interest to carry out
A: non-credible threats are ignored in equilibrium analysis.

Q: What is a repeated game?
A: A game played multiple times, which can sustain cooperation through strategies like tit-for-tat because players consider future payoffs.

Q: What is a positive externality?
A: A positive externality occurs when a third party benefits from a transaction they are not part of. Example: education, vaccinations.

Q: What is a negative externality?
A: A negative externality occurs when a third party bears costs from a transaction they are not part of. Example: pollution from a factory.

Q: How do negative externalities lead to market failure?
A: With negative externalities, the social cost exceeds the private cost, so the market produces more than the socially optimal quantity, causing deadweight loss.

Q: How do positive externalities lead to market failure?
A: With positive externalities, the social benefit exceeds the private benefit, so the market produces less than the socially optimal quantity.

Q: What is a Pigovian tax?
A: A Pigovian tax is a tax equal to the external cost per unit, designed to internalize a negative externality and bring output to the socially optimal level.

Q: What is a Pigovian subsidy?
A: A Pigovian subsidy is a payment equal to the external benefit per unit, designed to internalize a positive externality and increase output to the socially optimal level.

Q: What is the Coase Theorem?
A: The Coase Theorem states that if property rights are well-defined and transaction costs are low, private bargaining can resolve externalities efficiently regardless of initial allocation.

Q: What is a public good?
A: A public good is both non-excludable (cannot prevent people from using it) and non-rivalrous (one person's use does not reduce availability). Example: national defense.

Q: What is the free-rider problem?
A: The free-rider problem occurs when individuals benefit from a public good without paying for it, leading to under-provision by private markets.

Q: What is a common resource?
A: A common resource is rivalrous but non-excludable, leading to overuse. Example: fish in the ocean.

Q: What is the tragedy of the commons?
A: The tragedy of the commons occurs when individuals overuse a shared resource because they do not bear the full cost, leading to depletion.

Q: What is a club good?
A: A club good is excludable but non-rivalrous (up to a point). Example: cable TV, toll roads with low congestion.

Q: What is first-degree price discrimination?
A: First-degree (perfect) price discrimination charges each consumer their maximum willingness to pay, capturing all consumer surplus as profit.

Q: What is second-degree price discrimination?
A: Second-degree price discrimination charges different prices based on quantity consumed or product version. Examples: bulk discounts, tiered pricing.

Q: What is third-degree price discrimination?
A: Third-degree price discrimination charges different prices to different market segments (e.g., student discounts, senior pricing) based on identifiable characteristics.

Q: What conditions are needed for price discrimination?
A: The firm must have market power, be able to identify different groups with different elasticities, and prevent resale (arbitrage) between groups.

Q: What is total revenue and how does elasticity affect it?
A: TR = P × Q. If demand is elastic, a price decrease increases TR. If demand is inelastic, a price decrease decreases TR.

Q: What is the midpoint method for calculating elasticity?
A: PED = (Q₂ − Q₁)/[(Q₂ + Q₁)/2] ÷ (P₂ − P₁)/[(P₂ + P₁)/2]. It gives the same result regardless of the direction of change.

Q: What is an inferior good?An inferior good is a good for which demand decreases as consumer income rises (YED &lt
A: 0). Examples: instant noodles, bus travel.

Q: What is a normal good?A normal good is a good for which demand increases as consumer income rises (YED &gt
A: 0). Most goods are normal goods.

Q: What are substitute goods?Substitute goods are goods that can replace each other
A: an increase in the price of one leads to an increase in demand for the other (positive cross-price elasticity).

Q: What are complementary goods?Complementary goods are consumed together
A: an increase in the price of one leads to a decrease in demand for the other (negative cross-price elasticity).

Q: What is marginal revenue?
A: Marginal revenue (MR) is the additional revenue from selling one more unit: MR = ΔTR / ΔQ.

Q: What is allocative efficiency?
A: Allocative efficiency occurs when resources are distributed such that P = MC, maximizing total surplus in the market.

Q: What is productive efficiency?
A: Productive efficiency occurs when a firm produces at the minimum of its ATC curve, using the least resources for a given output.

Q: What is the difference between accounting profit and economic profit?
A: Accounting profit = TR − explicit costs. Economic profit = TR − explicit costs − implicit costs. Zero economic profit means the firm earns a normal return.

Q: What is the total cost formula?
A: TC = FC + VC, where FC is fixed cost and VC is variable cost. In the long run, all costs are variable.

Q: What is the market demand curve?
A: The market demand curve is the horizontal summation of all individual consumers' demand curves at each price level.

Q: What is the supply curve of a perfectly competitive firm?
A: In the short run, the firm's supply curve is the portion of the MC curve above the AVC curve.

Q: What is the Herfindahl-Hirschman Index (HHI)?
A: The HHI measures market concentration by summing the squares of each firm's market share: HHI = Σ(sᵢ)². Higher HHI indicates less competition.

Q: What is the Lerner Index?
A: The Lerner Index measures market power: L = (P − MC) / P. It ranges from 0 (perfect competition) to 1. Higher values mean more market power.

Q: What is the concept of opportunity cost?
A: Opportunity cost is the value of the next best alternative forgone when a choice is made. It is central to economic decision-making.