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Memory tricks for microeconomics

Supply, demand, elasticity, consumer theory, production costs, market structures, and market failure โ€” microeconomics made memorable.

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๐Ÿ“Š Microeconomics

Memory Tricks

Proven Mnemonics & Acronyms โ€” fast to learn, hard to forget.

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Demand
Law of Demand: Price UP = Quantity DOWN โ€” inverse relationship
All else equal, as price rises, quantity demanded falls
All else equal, as price rises, quantity demanded falls
The demand curve slopes downward: higher prices reduce quantity demanded. Substitution effect (buy cheaper alternatives) and income effect (less purchasing power). Demand SHIFTS when non-price factors change: income, preferences, related goods prices, expectations, number of buyers.
Demand shifters
Income, preferences, prices of substitutes and complements, expectations, number of buyers. These shift the curve, not movement along it.
Normal vs inferior goods
Normal: demand rises with income. Inferior: demand falls with income (ramen, bus rides).
Substitutes vs complements
Substitutes: price of one rises, demand for other rises. Complements: price of one rises, demand for other falls.
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๐Ÿƒ Demand
Law of demand โ€” the relationship?
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๐Ÿƒ Answer
Law of Demand: Price UP = Quantity DOWN โ€” inverse relationship
Demand shiftersIncome, preferences, prices of substitutes and complements, expectations, number of buyers. These shift the curve, not movement along it.
Normal vs inferior goodsNormal: demand rises with income. Inferior: demand falls with income (ramen, bus rides).
Substitutes vs complementsSubstitutes: price of one rises, demand for other rises. Complements: price of one rises, demand for other falls.
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Supply
Law of Supply: Price UP = Quantity UP โ€” direct relationship
All else equal, as price rises, quantity supplied increases
All else equal, as price rises, quantity supplied increases
The supply curve slopes upward: higher prices increase quantity supplied. Supply shifts when non-price factors change: input costs, technology, number of sellers, taxes/subsidies, expectations.
Supply shifters
Input costs, technology, number of sellers, taxes/subsidies, expectations, other goods prices.
Technology
Improvement lowers costs โ€” supply increases (right shift). Explains falling electronics prices.
Input costs
Rising wages or material costs shift supply left. Higher costs reduce profit at each price.
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๐Ÿƒ Supply
Law of supply โ€” the relationship?
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๐Ÿƒ Answer
Law of Supply: Price UP = Quantity UP โ€” direct relationship
Supply shiftersInput costs, technology, number of sellers, taxes/subsidies, expectations, other goods prices.
TechnologyImprovement lowers costs โ€” supply increases (right shift). Explains falling electronics prices.
Input costsRising wages or material costs shift supply left. Higher costs reduce profit at each price.
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Equilibrium
Equilibrium: Qd = Qs โ€” where supply meets demand, no surplus or shortage
Market self-corrects to equilibrium through price mechanism
Market self-corrects to equilibrium through price mechanism
Equilibrium: quantity demanded = quantity supplied. Above equilibrium: surplus โ†’ price falls. Below: shortage โ†’ price rises. Markets are self-correcting. Changes in supply or demand shift equilibrium.
Surplus
Price too high: Qs > Qd. Sellers cut prices to clear inventory.
Shortage
Price too low: Qd > Qs. Sellers raise prices or ration.
Price controls
Ceiling below equilibrium = shortage. Floor above equilibrium = surplus. Minimum wage = surplus of labor in simple model.
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๐Ÿƒ Equilibrium
Market equilibrium โ€” what is it?
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๐Ÿƒ Answer
Equilibrium: Qd = Qs โ€” where supply meets demand, no surplus or shortage
SurplusPrice too high: Qs > Qd. Sellers cut prices to clear inventory.
ShortagePrice too low: Qd > Qs. Sellers raise prices or ration.
Price controlsCeiling below equilibrium = shortage. Floor above equilibrium = surplus. Minimum wage = surplus of labor in simple model.
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Elasticity
PED (Price Elasticity of Demand) = % change Qd / % change P โ€” elastic > 1, inelastic < 1
Measures responsiveness of quantity to price changes
Measures responsiveness of quantity to price changes
Price Elasticity of Demand = %ฮ”Qd / %ฮ”P. Elastic (>1): luxuries, many substitutes. Inelastic (<1): necessities, addictive goods, few substitutes. Unit elastic (=1): equal percentage changes.
Revenue test
Elastic: price up, revenue falls. Inelastic: price up, revenue rises. Unit elastic: no effect on revenue.
Determinants
More elastic: many substitutes, luxury, narrow market, long time horizon, large share of income.
Cross-price elasticity
Positive = substitutes. Negative = complements. Zero = unrelated goods.
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๐Ÿƒ Elasticity
PED
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๐Ÿƒ Answer
PED (Price Elasticity of Demand) = % change Qd / % change P โ€” elastic > 1, inelastic < 1
Revenue testElastic: price up, revenue falls. Inelastic: price up, revenue rises. Unit elastic: no effect on revenue.
DeterminantsMore elastic: many substitutes, luxury, narrow market, long time horizon, large share of income.
Cross-price elasticityPositive = substitutes. Negative = complements. Zero = unrelated goods.
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Market Structures
PC (Perfect Competition) โ†’ Monopolistic Competition โ†’ Oligopoly โ†’ Monopoly: decreasing competition
Four structures from perfect competition to monopoly
Four structures from perfect competition to monopoly
Perfect Competition: many sellers, identical products, price takers. Monopolistic Competition: many sellers, differentiated products. Oligopoly: few large firms, interdependent. Monopoly: single seller, no close substitutes.
Perfect competition
P = MC = minimum ATC in long run. Zero economic profit. Maximum efficiency.
Monopoly
MR < P. Produces where MR = MC, charges from demand curve. Creates deadweight loss. Economic profit persists.
Oligopoly
Game theory applies. Nash equilibrium. Kinked demand curve explains price rigidity.
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๐Ÿƒ Market Structures
The four market structures โ€” most to least competitive?
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๐Ÿƒ Answer
PC (Perfect Competition) โ†’ Monopolistic Competition โ†’ Oligopoly โ†’ Monopoly: decreasing competition
Perfect competitionP = MC = minimum ATC in long run. Zero economic profit. Maximum efficiency.
MonopolyMR < P. Produces where MR = MC, charges from demand curve. Creates deadweight loss. Economic profit persists.
OligopolyGame theory applies. Nash equilibrium. Kinked demand curve explains price rigidity.
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Consumer Theory
Utility maximization: MU1/P1 = MU2/P2 โ€” equimarginal principle
Consumers maximize utility by equalizing marginal utility per dollar
Consumers maximize utility by equalizing marginal utility per dollar
Marginal utility (MU) = additional satisfaction from one more unit. Diminishing MU: falls as consumption increases. Equilibrium: MU of A / Price A = MU of B / Price B. Last dollar on each good gives equal MU.
Diminishing MU
First slice great, fourth slice not so much. Explains downward-sloping demand curve.
Consumer surplus
Difference between WTP and actual price. Area above price, below demand curve.
Substitution and income effects
Price decrease: buy more of cheaper good (substitution) and real income rises (income effect).
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๐Ÿƒ Consumer Theory
Utility maximization โ€” the rule?
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๐Ÿƒ Answer
Utility maximization: MU1/P1 = MU2/P2 โ€” equimarginal principle
Diminishing MUFirst slice great, fourth slice not so much. Explains downward-sloping demand curve.
Consumer surplusDifference between WTP and actual price. Area above price, below demand curve.
Substitution and income effectsPrice decrease: buy more of cheaper good (substitution) and real income rises (income effect).
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Production & Costs
TC (Total Cost) = FC (Fixed Cost) + VC (Variable Cost) ยท Profit maximized where MR = MC
Short run: fixed + variable costs. Long run: all costs variable.
Short run: fixed + variable costs. Long run: all costs variable.
Short run: Total Cost = Fixed Cost + Variable Cost. Marginal Cost = cost of one more unit. Long run: all inputs variable. Economies of scale: ATC falls as output rises. Minimum efficient scale = lowest LRAC point.
Cost curve relationships
MC intersects ATC and AVC at their minimums. When MC < ATC, ATC falls. When MC > ATC, ATC rises.
Profit max rule
All firms maximize profit where MR = MC. Shut down short-run if P < AVC.
Economies of scale
ATC falls with output: specialization, bulk purchasing, spreading fixed costs.
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๐Ÿƒ Production & Costs
Costs โ€” total cost, and where is profit maximized?
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๐Ÿƒ Answer
TC (Total Cost) = FC (Fixed Cost) + VC (Variable Cost) ยท Profit maximized where MR = MC
Cost curve relationshipsMC intersects ATC and AVC at their minimums. When MC < ATC, ATC falls. When MC > ATC, ATC rises.
Profit max ruleAll firms maximize profit where MR = MC. Shut down short-run if P < AVC.
Economies of scaleATC falls with output: specialization, bulk purchasing, spreading fixed costs.
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Market Failure
MEPG (M=Monopoly power, E=Externalities, P=Public goods, G=Government failure)
Markets fail to achieve efficient allocation in four ways
Markets fail to achieve efficient allocation in four ways
Markets fail when producing inefficient outcomes. Monopoly power, externalities (costs/benefits not in price), public goods (non-excludable, non-rival), information asymmetry. Government intervention may be justified.
Negative externalities
Social cost > private cost. Market overproduces. Carbon tax corrects. Cap-and-trade creates market for pollution rights.
Positive externalities
Social benefit > private benefit. Market underproduces. Government subsidies encourage more. Education, vaccination.
Public goods
Non-excludable + non-rival. National defense, public fireworks. Market underprovides โ€” free rider problem.
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๐Ÿƒ Market Failure
MEPG
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MEPG (M=Monopoly power, E=Externalities, P=Public goods, G=Government failure)
Negative externalitiesSocial cost > private cost. Market overproduces. Carbon tax corrects. Cap-and-trade creates market for pollution rights.
Positive externalitiesSocial benefit > private benefit. Market underproduces. Government subsidies encourage more. Education, vaccination.
Public goodsNon-excludable + non-rival. National defense, public fireworks. Market underprovides โ€” free rider problem.
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Labor Markets
Wage = MRP (Marginal Revenue Product): workers paid their marginal contribution to revenue
In competitive labor markets, wages equal the value of marginal product
In competitive labor markets, wages equal the value of marginal product
Firms hire until W = MRP (marginal product x price). Labor supply determined by work-leisure tradeoff. Monopsony (single buyer of labor) pays below competitive wage. Human capital increases MRP and wages.
MRP
MRP = MP x P (for perfect competitors). Higher productivity or product price = higher wages.
Monopsony
Single buyer of labor. Pays below MRP, hires fewer workers. May explain why minimum wage does not reduce employment.
Economic rent
Payment above minimum to keep factor in current use. Much of superstar earnings is economic rent.
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๐Ÿƒ Labor Markets
What determines a worker's wage in a competitive market?
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๐Ÿƒ Answer
Wage = MRP (Marginal Revenue Product): workers paid their marginal contribution to revenue
MRPMRP = MP x P (for perfect competitors). Higher productivity or product price = higher wages.
MonopsonySingle buyer of labor. Pays below MRP, hires fewer workers. May explain why minimum wage does not reduce employment.
Economic rentPayment above minimum to keep factor in current use. Much of superstar earnings is economic rent.
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Opportunity Cost
TINSTAAFL โ€” There Is No Such Thing As A Free Lunch. Every choice costs the next-best alternative.
Opportunity cost is the value of the best forgone alternative โ€” the true cost of any decision
Opportunity cost includes implicit costs โ€” what you give up, not just what you pay
Opportunity cost = value of best forgone alternative. Explicit costs: actual money payments. Implicit costs: forgone income or value (owning a building instead of renting it out). Economic profit = revenue minus explicit AND implicit costs. Accounting profit ignores implicit costs. PPF: opportunity cost is the slope. Bowed-out shape reflects increasing opportunity costs as resources are specialized.
Explicit costs
Actual out-of-pocket payments โ€” wages, rent, materials
Implicit costs
Forgone alternatives โ€” your own time, owned resources
Economic vs accounting
Economic subtracts both. Accounting subtracts explicit only.
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๐Ÿƒ Opportunity Cost
TINSTAAFL
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๐Ÿƒ Answer
TINSTAAFL โ€” There Is No Such Thing As A Free Lunch. Every choice costs the next-best alternative.
Explicit costsActual out-of-pocket payments โ€” wages, rent, materials
Implicit costsForgone alternatives โ€” your own time, owned resources
Economic vs accountingEconomic subtracts both. Accounting subtracts explicit only.
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Marginal Analysis
MB = MC: produce until Marginal Benefit equals Marginal Cost โ€” the universal rule for optimal decisions
Every economic decision is made at the margin โ€” comparing extra benefit to extra cost
If MB greater than MC do more. If MC greater than MB do less. Stop where they are equal.
Marginal = additional. Marginal utility: extra satisfaction from one more unit. Law of diminishing marginal utility: each additional unit gives less extra utility. Firms maximize profit where MR = MC. Consumer maximizes utility where MU/P is equal across all goods. Sunk costs are irrelevant โ€” only future costs and benefits matter for marginal decisions.
MR = MC
Profit maximization rule for all market structures
Diminishing MU
Each extra unit gives less additional satisfaction
Sunk costs
Already spent โ€” irrelevant to current decisions, ignore them
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๐Ÿƒ Marginal Analysis
The universal rule for optimal decisions?
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๐Ÿƒ Answer
MB = MC: produce until Marginal Benefit equals Marginal Cost โ€” the universal rule for optimal decisions
MR = MCProfit maximization rule for all market structures
Diminishing MUEach extra unit gives less additional satisfaction
Sunk costsAlready spent โ€” irrelevant to current decisions, ignore them
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Production Costs
FC + VC = TC. ATC = TC/Q. MC = change in TC per unit. Shutdown: P less than AVC. Exit: P less than ATC.
Cost curves and the shutdown vs exit decision rules
Produce if price covers variable costs. Stay long-run only if price covers ALL costs.
Fixed costs (FC): do not change with output. Variable costs (VC): change with output. TC = FC + VC. ATC = TC/Q. AVC = VC/Q. MC = change in TC per additional unit. MC crosses ATC and AVC at their minimums. Short-run shutdown rule: P less than AVC. Long-run exit rule: P less than ATC.
Shutdown rule
P less than AVC โ€” shut down short run, lose only FC
Exit rule
P less than ATC โ€” exit long run, cannot cover total costs
MC and ATC
MC crosses ATC at minimum โ€” most efficient output level
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๐Ÿƒ Production Costs
Cost formulas โ€” and when to shut down vs exit?
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๐Ÿƒ Answer
FC + VC = TC. ATC = TC/Q. MC = change in TC per unit. Shutdown: P less than AVC. Exit: P less than ATC.
Shutdown ruleP less than AVC โ€” shut down short run, lose only FC
Exit ruleP less than ATC โ€” exit long run, cannot cover total costs
MC and ATCMC crosses ATC at minimum โ€” most efficient output level
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Market Failure Types
MOPE โ€” Monopoly power, Outcomes with externalities, Public goods, Externalities from information. Each justifies government intervention.
Four situations where free markets fail to allocate resources efficiently
Market failure justifies government intervention โ€” but intervention can also create government failure
Externalities: costs or benefits on third parties. Negative (pollution): overproduced โ€” Pigouvian tax corrects. Positive (education): underproduced โ€” subsidize. Public goods: non-excludable and non-rival (national defense) โ€” free-rider problem leads to underprovision. Information asymmetry: adverse selection (insurance), moral hazard. Market power: monopolies restrict output and raise prices creating deadweight loss.
Negative externality
Overproduced โ€” Pigouvian tax shifts supply left to efficient level
Public goods
Non-excludable plus non-rival equals free rider problem
Adverse selection
Hidden information before transaction โ€” lemons problem, insurance
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๐Ÿƒ Market Failure Types
MOPE
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๐Ÿƒ Answer
MOPE โ€” Monopoly power, Outcomes with externalities, Public goods, Externalities from information. Each justifies government intervention.
Negative externalityOverproduced โ€” Pigouvian tax shifts supply left to efficient level
Public goodsNon-excludable plus non-rival equals free rider problem
Adverse selectionHidden information before transaction โ€” lemons problem, insurance
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Labor Markets
MRP = MRC: hire workers until Marginal Revenue Product equals wage. Labor demand is derived from product demand.
Labor market equilibrium and the firm hiring rule
Wage equals MRP in competitive market. Monopsony pays below MRP and hires fewer workers.
Labor demand is derived from demand for the product. MRP (Marginal Revenue Product) = MP times MR. Hire until MRP equals wage. Minimum wage above equilibrium creates surplus of labor. Monopsony: single employer of labor pays below competitive wage and hires fewer workers. Union effects: increase wages and reduce employment in non-union sector.
MRP = MP x MR
Value of one more worker to the firm
Derived demand
Labor demand rises when product demand rises
Monopsony
Single buyer of labor โ€” wage below MRP, fewer hired
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๐Ÿƒ Labor Markets
MRP
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๐Ÿƒ Answer
MRP = MRC: hire workers until Marginal Revenue Product equals wage. Labor demand is derived from product demand.
MRP = MP x MRValue of one more worker to the firm
Derived demandLabor demand rises when product demand rises
MonopsonySingle buyer of labor โ€” wage below MRP, fewer hired
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Behavioral Economics
HALTS โ€” Heuristics, Anchoring, Loss aversion, Time inconsistency, Status quo bias. Why people deviate from rational choice.
Behavioral economics challenges the rational actor model with psychological insights
Loss aversion: losing 100 dollars feels twice as bad as gaining 100 dollars feels good.
Heuristics: mental shortcuts that lead to systematic errors. Anchoring: first number seen disproportionately influences judgment. Loss aversion: losses hurt more than equivalent gains feel good (about 2x). Present bias: overweight immediate costs and benefits. Status quo bias: default options matter hugely. Nudges: small design changes that guide behavior. Applications: retirement savings defaults, organ donation opt-out systems.
Loss aversion
Losses feel about 2x as painful as equivalent gains feel good
Anchoring
First number seen biases all subsequent judgments
Nudge
Default design guides behavior โ€” opt-out organ donation increases donors
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๐Ÿƒ Behavioral Economics
HALTS
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๐Ÿƒ Answer
HALTS โ€” Heuristics, Anchoring, Loss aversion, Time inconsistency, Status quo bias. Why people deviate from rational choice.
Loss aversionLosses feel about 2x as painful as equivalent gains feel good
AnchoringFirst number seen biases all subsequent judgments
NudgeDefault design guides behavior โ€” opt-out organ donation increases donors
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