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Microeconomics

[1]Microeconomics is another section that you can do well on with a decent amount of time but, I would not spend too much time on it. Most of the material is fairly basic and you should certainly aspire to do well here although it’s not a very important section of the exam (compared to others). Here are a few notions that you need to be familiar with in order to do well:

-Price elasticity of demand = variation quantity demanded / variation price

The principle is fairly simple. In general, when the price of a good increases, it results in less demand. That being said, the ratio is not the same for all products and that depends on a few factors. Two fairly extreme examples would be gas and chicken. Imagine that the price of gas increased by 50% tomorrow morning. Over time, the demand for gas would probably decrease but in the near future it wouldn’t. Why? Because consumers do not have much choice and would be stuck paying anyway. However, if the price of chicken increased by 50%, you can imagine that most chicken consumers would switch to other types of meat such as beef resulting in a very significant decrease in demand.

The general rule is that if the elasticity ratio is over 1, the good is deemed “elastic”. If it is less than 1, the demand is inelastic (gas). If the price elasticity is 1, the demand would be unit elastic.

What influences elasticity?

-Availability of substitutes (such as beef to chicken)
-Share of budget spent on the good (paying more for a can of beer will be a small problem compared to paying more for a car)

In all cases, elasticity is greater in the long run because it gives an opportunity for both suppliers and consumers to adapt and change if needed.

Accounting costs vs Economic costs: The difference between the two is that economic costs include opportunity costs.

Law of diminishing returns: Think of a kitchen…as you add more people, the output will generally increase but at some point, you reach the point where adding people in the kitchen increases the output but at a much smaller rate. Having 2 people cooking instead of 1 will have a much greater impact than having 6 instead of 5.

Competition

For each product, there exists a level of competition among suppliers. For some, there is only one alternative while others have many competitors. It is important to know the difference between them:

-Pure competition:
-large number of independent firms
-All firms produce a homogeneous product
-Each seller is small relative to the market
-Very low barriers to entry

-Monpolistic competition
-Large number of independent firms
-Each firm produces a different product
-Low barriers to entry

-Monopoly:
-High entry barriers
-No substitutes
-No competition

-Oligopoly
-Same as monopoly but with a few different players