MicroEconomics Reviewer

QUIZ 1

1. The quantity demanded of a good is the amount that buyers are willing and able to
purchase.

2. “Other things equal, when the price of a good rises, the quantity demanded of the good
falls, and when the price falls, the quantity demanded rises.” This relationship between
price and quantity demanded (ALL OF THE ABOVE): applies to most goods in the
economy & is represented by a downward-sloping demand curve & is referred to
as the law of demand.

3. Which of these statements best represents the law of supply? When the price of a
good decreases, sellers produce less of the good

4. Which of the following is a decision that economists study? (ALL OF THE ABOVE): how
much people work & what people buy & how much money people save.

5. The law of demand states that, other things equal, an increase in price causes quantity
demanded to decrease.

6. The English word that comes from the Greek word for "one who manages a household"
is economy.

7. In general, elasticity is a measure of how much buyers and sellers respond to

changes in market conditions.

8. Fundamentally, economics deals with scarcity.

9. Resources are scarce for households and scarce for economies.

10. In the broadest sense, economics is the study of how society manages its scarce
resources.

11. In considering how to allocate its scarce resources among its various members, a
household considers each member’s D-E-A (Desires, Efforts, & Abilities)

12. The overriding reason why households and societies face many decisions is that
resources are scarce.

13. A society allocates its scarce resources to various uses. These scarce resources include
Land, People, & Machines

14. An increase in quantity demanded results in a movement downward and to the right
along a demand curve.

15. The study of how society manages its scarce resources is most closely associated with
which field of study? Economics

16. The law of supply states that, other things equal, when the price of a good falls, the
quantity demanded of the good rises.

17. The word “economy” comes from the Greek word oikonomos, which means “one who
manages a household”.

18. A table that shows the relationship between the price of a good and the quantity
demanded of that good is called a demand schedule

19. Elasticity is a measure of how much buyers and sellers respond to changes in
market conditions.
 QUIZ 2

1. Economists assume that the goal of consumers is to maximize marginal utility. FALSE

2. Economists use the term utility to mean usefulness. FALSE

3. Marginal utility is always a positive number. FALSE

4. Adam Smith observed that often things that have the greatest value in use, or are the
most useful, have a relatively low price, and things that have little or no value in use
have a high price. TRUE

5. A difference curve shows all the combinations of bundles of two goods a person can
purchase given a fixed amount of income. FALSE

6. Consumer equilibrium occurs at the point where the slope of the budget constraint is
equal to the slope of the indifference curve. TRUE

7. Consumer equilibrium occurs at the point where the slope of the budget constraint is
equal to the slope of the indifference curve. FALSE

8. Marginal utility is computed by dividing total utility by quantity consumed of a good.

FALSE

9. It is possible for total utility to rise as marginal utility falls. TRUE

10. It is possible for total utility to rise as marginal utility falls. TRUE
 MT MICROEC Reviewer

T or F.
1. Prices allocate to a market economy’s scarce resources. - T

2. In a market economy, supply and demand determine both the quantity of each good produced
and the price at which it is sold. - T

3. A market is a group of buyers and sellers of a particular good or service. - T

4. The law of demand states that other things equal, when the price of a good rises, the quantity
demanded of the good falls, and when the price falls, the quantity demanded rises. - T

5. Individual demand curves are summed horizontally to obtain the market demand curve. - T

6. Individual demand curves are summed vertically to obtain the market demand curve. - F

7. Sellers as a group determine the demand for a product, and buyers as a group determine the
supply of a product. - F

8. The market demand curve shows how the total quantity demanded of a good varies as the
income of buyers varies, while all the other factors that affect how much consumers want to buy
are held constant. - F

9. The demand curve is the upward-sloping line relating to price and quantity demanded. - F

10. If something happens to alter the quantity demanded at any given price, then the demand
curve shifts. - T

11. The law of demand states that other things equal, when the price of a good rises, the quantity
demanded of the good rises, and when the price falls, the quantity demanded falls. - F

12. The marginal cost curve cuts the AVC, ATC, and AFC curves at their lowest points. - F
13. Economies of scale are exclusively a long-run phenomenon, while the law of diminishing
returns applies to both the short-run and to the long-run. - F

14. Minimum efficient scale refers to the output level where short-run average total cost is
lowest. - F

15. As the marginal physical product of a variable input increases, the marginal cost decreases. -
T

16. An example of an implicit cost is the foregone income that a business owner-manager could
have earned working for someone else. - T

17. All fixed costs are sunk costs. - F

18. Given that fixed costs are constant as output increases, average fixed costs are also constant.
-F

19. Economic profit is the difference between total revenue and implicit costs. - F

20. As marginal cost rises, average variable cost necessarily rises. - F

Multiple Choice.
1. If variable X goes down as variable Y goes down, then X and Y are
a. directly related.
b. negatively related.
c. inversely related.
2. Which of the following is not one of the broad categories of resources?
a. labor
b. government
c. capital
3. Produced goods used as inputs to produce other goods comprise the resource known as
a. natural resources.
b. services.
 c. capital.
4. Microeconomics is the branch of economics that deals with
a. highly aggregated markets or the entire economy.
b. the production side of the economy, exclusively.
c. human behavior and choices as they relate to relatively small units --- an
individual, a firm, an industry.
5. The concept that relates how much one variable changes as another variable changes is
a. slope.
b. line.
c. curve.
6. Why do societies need rationing devices?
a. Because people have too many needs and not enough wants.
b. Because price exists.
c. Because scarcity exists.
7. Efficiency is consistent with
a. maximizing net benefits.
b. equating marginal benefits and marginal costs.
c. a and b
8. To an economist, utility means:
a. additional.
b. usefulness.
C. satisfaction.
9. A three-word synonym for the term ceteris paribus is
a. "nothing else changes."
b. "in my opinion."
c. "it is proved."
10. Which of the following is a microeconomics topic?
a. the study of how prices are determined in the computer industry
b. the study of unemployment in the economy
c. the study of how changes in the nation's money supply affect the nation's output
11. Choice implies
a. opportunity cost.
b. Efficiency.
c. inefficiency.
12. Opportunity cost is the value of
a. the best forfeited alternative.
b. the chosen alternative.
C. a free good.
13. Marginal utility is
a. the extra satisfaction derived from consuming an additional unit of a good.
b. the change in total satisfaction as an additional unit of a good is consumed.
c. a and d
14. A person is said to be in consumer equilibrium if she
a. equates marginal utilities per dollar spent.
b. has diminishing marginal utility of money.
c. purchases only normal goods.
15. Consumer equilibrium exists when
a. marginal utility for all goods is the same.
b. total utility is constant.
c. the MU/P ratio for all goods is the same
16. Indifference curves are convex to the origin if
a. a person's marginal rate of substitution declines as he or she consumes more of a good.
b. a person's marginal rate of substitution increases as he or she consumes more of a
good.
c. a and c
17. An indifference curve shows all
a. possible equilibrium positions on an indifference map.
b. equilibrium combinations of two products that are obtainable with a given money
income.
c. combinations of two products that will yield the same utility to a
consumer.
18. The law of diminishing marginal utility says that
a. the marginal utility gained by consuming equal successive units of a good
will decline as the amount consumed increases.
b. the more of a particular good one consumes, the greater is the utility received from the
consumption of that good.
c. the marginal utility gained by consuming equal successive units of a good will increase
as the amount consumed increases.
19. Suppose you are consuming a particular good and you could somehow give back the last unit
you consumed. What would happen to total and marginal utility (assuming that the marginal
utility of the unit given back is positive)?
a. Both total and marginal utility would decrease.
b. Both total and marginal utility would increase.
c. Total utility would decrease but marginal utility would increase.
20. Because there are so few diamonds in the world, the consumption of diamonds
a. takes priority over the consumption of water.
b. takes place at relatively high marginal utility.
c. takes place at relatively low marginal utility.
21. The law of diminishing marginal utility helps to explain
a. why people trade.
b. the law of demand.
c. a and b
22. According to the traditional theory of marginal utility as presented in the textbook, as more
units of a good are acquired, the consumer's marginal utility
a. always continues to rise.
b. diminishes.
c. remains constant.
23. The theory of consumer choice assumes that consumers attempt to maximize
a. the difference between total utility and marginal utility.
b. average utility.
c. total utility.
24. When an economist talks about utility, she is talking about
a. a company that provides electricity, water, gas, etc.
b. the satisfaction, in terms of price, that a producer receives from selling his product.
c. the satisfaction that results from the consumption of a good.
25. A utility is an artificial construct used as a means of measuring the
a. price of a good.
b. satisfaction one receives from the consumption of a good.
C. costs of producing a good.
26. If the marginal utility of a good is negative, then
a. consumers should buy less of it.
b. consumers will consume it only if it is free.
 c. consumers should buy more of it to make its marginal utility positive.
27. To economists, utility means
a. marginal value.
b. relative value.
c. satisfaction.
28. Marginal utility is defined as the
a. change in marginal utility a person derives from the consumption of a good.
B. change in total utility a person derives from the consumption of a good divided by the
price of that good.
c. change in total utility a person derives from the consumption of goods
divided by the change in the quantity of the good consumed.
29. The law of diminishing marginal utility can be stated as follows:
a. As the amount of goods consumed increases, the sum of satisfaction received tends to
decrease.
b. As the amount of goods consumed increases, the additional satisfaction gained from
consuming additional units tends to decrease.
c. b and c
30. Total utility
a. is the total amount of satisfaction derived from consuming a particular quantity of a
good.
b. for quantity Y can be calculated by summing up the marginal utilities of each unit that
comprises quantity Y.
c. all of the above
31. Which of the following is true about the relationship between price and quantity supplied?
a. There is always a direct relationship.
b. There is always an inverse relationship.
c. There is usually a direct relationship.
32. A demand schedule is a numerical tabulation of
a. prices and quantities supplied.
b. costs and quantities demanded.
c. prices and quantities demanded.
33. As the price of good A rises, the demand for good B rises. Therefore, goods A and B are
a. normal goods.
b. inferior goods.
 c. substitutes.
34. The law of supply states that price and quantity supplied are
a. inversely related, ceteris paribus.
b. directly related, ceteris paribus.
c. not related.
35. The law of demand states that price and quantity demanded are
a. directly related, ceteris paribus.
b. inversely related, ceteris paribus.
c. independent.

Questions derived from CH1.

1. Who is the Father of Economics? ADAM SMITH
2. What is the “Bible in Economics”? WEALTH OF THE NATIONS
3. Who developed the basic analysis for political economy? DAVID RICARDO
4. _ _ _ _ _ _ _ _ is a German who is influenced by the conditions brought about by the
industrial revolution upon the working classes. His major work, _ _ _ _ _ _ _, is the
centerpiece from which major socialist thought was to emerge. KARL MARX; DAS
KAPITAL
WHAT IS ECONOMICS?
Economics is a science that deals with management of scarce resources. It is also
described as a scientific study on how individuals and the society generally make choices.

ORIGIN OF THE TERM “ECONOMICS”

The two greek roots of the word economics are oikos; household, and nomus;
system or management. Therefore, oikonomia or oikonomus; management of
household

SCARCITY
● The basic and central economic problem confronting every society.
● It is also “limited resources in demand”
● The heart of the study of economics, and the reason behind its reality.

FACTORS OF PRODUCTION
1. Land ——————————> Rent
2. Labor —————————> Salary/Wages
3. Capital —————————> Interest
4. Entrepreneurship ———> Profit

THE CIRCULAR FLOW MODEL

THE CONCEPT OF OPPORTUNITY COST
Opportunity cost refers to the foregone value of the next best alternative. It is the
value of what is given-up when one makes a choice. The thing thus given-up is called the
opportunity cost of one’s choice.

When one makes choices, there is always an alternative that has to be given up. A
producer, who decides to produce shoes, gives up other goods that he could have produced using
the same resources. A student, who buys a book with his limited allowance, gives up the chance
of eating out or watching a movie.

3 E’S IN ECONOMICS
1. Efficiency refers to productivity and proper allocation of economic resources
2. Equity means justice and fairness
3. Effectiveness means attainment of goals and objectives

POSITIVE AND NORMATIVE ECONOMICS

Positive Economics (FACTS) is an economic analysis that considers economic

conditions “as they are”, or considers economics “as it is”. It uses objective or scientific
explanation in analyzing different transactions in the economy. It simply answers that questions
‘what is’/

Normative Economics (ASSUMPTIONS/ POSSIBLE TRUTHS ) is economic

analysis which judges economic conditions “as it should be”. It is that aspect of economics that
is concerned with human welfare. It deals with ethics, personal value judgements and
obligations analyzing economic phenomena. It answers the question ‘what should be’

CETERIS PARIBUS ASSUMPTION

This assumption is important in studying economics, Ceteris Paribus means “all things
held constant” or “all else held equal”

ECONOMICS HAS TWO MAJOR BRANCHES

MICROECONOMICS
Deals with the individual decisions of the economy—firms and households, and how
their choices determine relative prices of goods and factors of production.

MACROECONOMICS
Studies the relationship among broad economic aggregates like national income,
national output, money supply, bank deposits, total volume of savings, investment, consumption
expenditure, general price level of commodition, government spending, inflation, recession, and
employment.

TYPES OF ECONOMIC SYSTEMS

1. TRADITIONAL ECONOMY
It is basically a subsistence economy. A family produces goods for its own consumption.

2. COMMAND ECONOMY
It is a type of economy wherein the manner of production is dictated by the government.
The government decides on what, how, how much, and for whom to produce.

3. MARKET ECONOMY
Or capitalism’s basic characteristic is that the resources are privately owned, and that the
people themselves make the decisions. It is an economic system wherein most economic
decisions and means of production are made by the private owners.

4. SOCIALISM
It is an economic system wherein key enterprises are owned by the stare. In this system,
private ownership is recognized.

5. MIXED ECONOMY
This economy is a mixture of a market system and a command system. The Philippine
economy is described as a mixed economy since it applies a mixture of three forms of
decision-making.

Law of Demand
 — If Price goes up, Quantity Demanded goes down. Conversely, if Price goes down,
Quantity Demanded goes up ceteris paribus
— Demand is usually affected by the behavior of consumers
— Change in quantity demand: shift to the right
— Inverse Relationship

A demand schedule is a table that shows the relationship between prices and the specific
quantities demanded at each of these prices

A demand curve is a graphical representation showing the relationship between price and
quantities demanded per time period

Change in Quantity Demand

Forces that cause demand curve to change: (T-C-O-P-S-E)

- Taste of Preferences
- Changing Income
- Occasional or Seasonal Products
- Population Change
- Substitute Goods
- Expectation of Future Price
Law of Supply
— If the Price of a Good or Service goes up, the Quantity Supplied for such good or
service will also go up; if the Price goes down, the Quantity Supplied also goes down,
ceteris paribus.
— Supply is usually affected by the conduct of consumers
— Change in Quantity Supplied: shift to the left
— Direct Relationship

A supply schedule is a schedule listing the various prices of a product and the specific
quantities supplied at each of these prices

The supply curve is a graphical representation showing the relationship between the price of
the product or factor of production (e.g. labor) and the quantity supplied per time period

Change in Quantity Supplied

Forces that cause supply curve to change: (F-O-N-T-W-G)

 - Future Expectation
- Optimization in the use of factors of production
- Number of Sellers
- Technological Change
- Weather Conditions
- Government Policy

Market Equilibrium
Equilibrium
- Equilibrium generally pertains to a balance that exists when quantity demanded equals
quantity supplied.

Equilibrium Market Price

- Equilibrium market price is the price agreed by the seller to offer its good or service for
sale and for the buyer to pay for it. Specifically, it is the price at which quantity
demanded of a good is exactly equal to the quantity supplied.

What happens when there is market disequilibrium?

Surplus
- A condition in the market where the quantity supplied is more the quantity demanded.

Shortage
- A condition in the market where the demand is higher than the supply.

Floor Price
- The legal minimum price imposed by the Government.

Price Ceiling
- The legal maximum price imposed by the Government.
Market Equilibrium/ Equilibrium point
- The meeting of supply and demand results to what is referred to as ‘market equilibrium’.

The Concept of Elasticity

In economics, elasticity means responsiveness. In general, it is the ratio of the

percent change in one variable to the percent change in another variable. A tool used by
economists for measuring the reaction of a function to changes in parameters in a relative way.

Elasticity Of Demand
● Demand elasticity, in particular, is a measure of the degree of responsiveness of quantity
demanded to a given change in one of the independent variables which affect demand for
that product.
○ Price elasticity of demand is the responsiveness of consumers’ demand to
change in price of the good sold.
 ○ Income elasticity of demand is the responsiveness of consumers’ demand to
a change in their income.
○ Cross elasticity of demand is the responsiveness of demand for a certain
good, in relation to changes in price of other related goods

● Determinants of price elasticity of demand

○ Availability of close substitutes
■ Goods with close substitutes
● more elastic demand
● Necessities vs. luxuries
○ Necessities – inelastic demand
○ Luxuries – elastic demand

● Demand Elastic
● Demand Inelastic

● Extreme Types of Demand Elasticity

Determinants of Demand elasticity:
A. Ease of substitution
B. Proportion of total expenditures
C. length of time period
D. Durability of product which may include
a. possibility of postponing purchase
b. possibility of repair
c. used product market

Elasticity of Supply
● Reaction or response of the sellers or producers to price changes of goods sold. It is a
measure of the degree of responsiveness of supply to a given change in price

● Variety of demand curves

○ Demand is elastic
■ Price elasticity of demand > 1
○ Demand is inelastic
■ Price elasticity of demand < 1
○ Demand has unit elasticity
■ Price elasticity of demand = 1

● Supply Elastic
● Supply Inelastic

● Extreme Types of Supply Elasticity

 ● Determinants of Supply elasticity:
○ TIME
○ Time horizon involved with which production can be increased

● Variety of supply curves

● Supply is unit elastic
○ Price elasticity of supply = 1
● Supply is elastic
○ Price elasticity of supply > 1
● Supply is inelastic
○ Price elasticity of supply < 1

Who is a Consumer?
- One who demands goods and services
- Without consumption (households), there is no need for production (firm). The
consumer is the king in a capitalist or free-market economy. Producers, for their own
interests, have to satisfy the needs and wants of consumers in order to earn profits.
Influences on Consumer Behavior: (C-S-P-P)
- Cultural
- Social
- Personal
- Psychological

Goods and Services

- Goods refer to anything that provides satisfaction to the needs, wants, and desires of the
consumer (like cars, books, clothes, etc.) that contribute directly (final goods) or
indirectly (intermediate goods) to the satisfaction of human needs and wants.
- Essential Goods (Needs): Satisfies our basic needs, those we can’t live without.
- Luxury Goods (Wants): those which we may do without, but which are to
contribute to our comfort and well being.
- Services are any intangible economic activities (such as hairdressing, catering,
insurance, banking, telecommunications, etc.), that likewise contribute directly or
indirectly to the satisfaction of human wants.

Economic and Free Good

- An economic good is that which is both useful and scarce. Water from a faucet is an
economic good, because we are not utilizing it for free, we have to pay to its distributor.
- The air that we breathe and the sunlight coming from the sun are examples of free
good.

Tastes and Preferences

- Consumers have various tastes and preferences. Preferences are the choices made by us
consumers as to which products or services to consume.
Maslow’s hierarchy of needs identifies the basic priorities of every consumer.

Utility Theory
- Utility, in economics, refers to the satisfaction or pleasure that an individual or
consumer gets from the consumption of a good or service that (s)he purchases.
- Utility is also measured by how much a consumer is willing to pay for a good/service.

- Marginal utility is the additional satisfaction that an individual derives from

consuming an extra unit of a good or service.
- Marginal means ‘additional’ or ‘extra’. In economics, we use marginal analysis in
the examination of the effects of adding one extra unit to, or taking away one unit from,
some economic variable

- Total utility, on the other hand, is the total satisfaction that a consumer derives
from the consumption of a given quantity of a good or service in a particular
time period.
 - Our total utility usually increases as we consume more and more of a good or service, but
generally the increase is at a slower or declining rate.

Law of Diminishing Marginal Utility

- This Law states that as a consumer gets more satisfaction in the long-run, he experiences
a decline in his satisfaction for goods and services. This means that consumption of more
successive units of the same good increases total utility, but at a decreasing rate because
marginal utility diminishes.

Marginal Utility Curve

Consumer surplus is a measure of the welfare we gain from the consumption of goods and
services, or a measure of the benefits that we derive from the exchange of goods.
Marginal rate of substitution (MRS)
- The concept of the marginal rate of substitution is the key to ‘reading’ a preference map.
The marginal rate of substitution is the rate at which a person will give up good y (the
good measured on the y-axis; in our example above it pertains to the pizzas) to get more
of good x (the good measures on the x-axis; in our example above it refers to
hamburgers) and at the same time remain indifferent (remain on the same indifference
curve). The MRS is measured by the magnitude of the slope of an indifference curve

The Indifference Curve is a line that shows combinations of goods among which a consumer
is indifferent

Budget Line or consumption-possibility line shows the various combinations of two

products that can be purchased by the consumer with his income, given the prices of the
products. In other words, a consumer, given his fixed budget, must spend wisely and efficiently
in order to maximize his satisfaction

Income and Substitution Effect—Indifference curves and budget constraints can be helpful
in order for us to understand the income and substitution effects more clearly. Indifference
analysis can be used to analyze how a consumer would change the combination of two
goods for a given a change in their income or the price of the good.

The Engel Curve or Engel’s Law

- Engel curves illustrate the relationship between consumer demand and household
income. He noted that as individual’s income changes, the pattern of the consumption
expenditure on goods also changes.
- According to Engel, as the income of a family increases, the proportion of its income
spent on necessities, such as food, declines, while the income spent on luxury goods
increases.