Are you running out of time to finish your revision for your upcoming Microeconomics examinations?
How do you ensure you will cover the bare minimal to show your basic grasp of Microeconomics ?
What should you present in your answers to present your minimal understanding of this subject ? especially if you running out of time ? Or your mind went blank during the microeconomics exams?
Here’s a 15 minutes overview
And use it as a checklist …
Consumers :
A) Consumer welfare
Think about your own buying experience – what makes you happy ?
We associate that experience as consumer welfare
So like any rational beings , we will like to increase our welfare. Yes make sure you mention this term in the microeconomics examinations
Consumer welfare may increase when
a) Prices are lowered
Don’t you light up a smile when you see the word “SALE”
So when prices fall, with a given amount of income unchanged [ known as money income] , we will know obtain a larger quantity of goods and services , ie our our real income [ie our purchasing power rises].
But wait, we should also make some assumptions to qualify that we are happier with the greater amount of stuff we get>
Yes, CETERIS PARIBUS!
ie Assuming all other factors [e.g quality, income , taste and preference] unchanged. A must do in your microeconomics examinations.
So how will price level falls ?
Think about the demand-supply analysis :
Where you shift one curve at a time with a rise in supply or a fall in demand BUT holding the slope of the other curve unchanged. See, its CETERIS PARIBUS again
So what if we change the slope of the of the other curve? We will obtain a different degree of price change – PRICE ELASTICITY
And what if we shift two curves at the same time : Then we will have to consider which change has a greater magnitude.
So the above coverage means the student demonstrated evaluation skills in the microeconomics exams.
The world is not simply explained by two curves. They are just basic tools. So if you can highlight the possibly invalidity of your answers shows you are aware of the limitations.
b) Quantity rises
Wasn’t it a sheer delight to see “Buy one get one free?”. So if prices stays constant, but we have more income , our real income also rises.
And finally greater choice, more variety, better quality. Oh yes, we relax our assumptions again.
So putting the two aspects together : A lower price, a higher quantity , we are moving down along the demand curve and we capture a larger CONSUMER SURPLUS.
So far, so good. And truly 99% of the students enjoyed this part of microeconomics.
Many will proudly declare they often solve for the correct values , provided a set of well drawn curves. But are they really good enough for a ACE for microeconomics exams?
B) Consumption Optimization
So we often hear different ones say “Money no enough“?
Thus an individual must make the best use of his income
Consumer optimization occurs one will make full use of his income [ budget constraint] and reach the highest satisfaction possible [As given by the utility level]
And this is the part we discuss substitution and income effect.
This has to be analyzed in graphical mode. Check out our past year exam paper discussion or buzz us for a live demo.
Firms :
Firms in general like to generate positive profits ie a positive difference between total revenue less total costs.
The general principal is profit maximizing where marginal revenue equates to the marginal cost. [Have you wondered why we are always concern over marginal concepts?]
This is the must learn concept and to be stated clearly in your microeconomics exams
To increase Profitability
a)Increase total revenue [ price multiply by quantity] : Most of us will jump in to state the firm should lower the price of the good .
But to be precise, the quantity response must be larger
What about increasing prices ?
This is possible [ Think about some brands where prices do not drop] , so in this case if quantity fall is smaller in proportion, the firms can still generate more revenue .
So price changes must relate to the degree of response of quantity demanded. And this is the concept of elasticity of demand.
But do firms really set pricing or output based on profit maximising condition ?
It also depends on the market they operate in.
Market Structure and Firms’ behaviour
In some cases, they are dependent on each other to set output or prices.
And there are strategies that firms can adopt where they observe each other’s behaviour under the discussion of Game theory
What do we observe in most cases ?
Firms tend to increase price together.
Or undertake similar strategies of marketing campaign. Sometimes there is a leader – follower approach
So why are there such behaviour of collusion ?
Why price undercutting is not an optimal strategy – which is an application of prisoner’s dilemma, Grim Trigger strategy.
This is then the interesting bits of microeconomics
Government : This is MUST-have discussion aspect in Microeconomics exams
Most of us begin our Microeconomics journey with our first concept :SCARCITY.
Broadly defined as a case of limited resources not able to satisfy the unlimited needs
So as government, they will need to ensure this problem is resolved , ie to achieve greater efficiency
PARETO OPTIMALITY
I think this might have been the most terrifying word in your study of microeconomics. But again it is a term that must appear in your microeconomics exams whenever you want to discuss the role of government in the economy.
So what exactly is Pareto optimality????
But it simply means no wastage or distortion.
I usually explain it as stretching a rubber band using both hands.
If you can still stretch one side of the rubber band, it means you have not fully stretched it.
But if both hands have fully extend the rubber band, there is no way to do so , isn’t that full usage of the function of the rubberband?
So bring this to consumer- firm perspectives : their valuation of a good must be the same.
The price that the consumer pays [ to reap satisfaction] vs firm’s valuation of the good [ ie how much resources need to produce this good]
In general the principle of price equating to marginal cost.
So that is the next must know equation for microeconomics exams.
Market can be distorted
a) when price is not set correctly.
Think of
- large firms with market power
- government providing subsidy to lower price
- distorted information [ Asymmetrical information, market unravelling]
b) marginal cost inaccurate
Think of
- cost being much lower as the firm’s cost did not account for pollution, third party cost
- cost was too high government taxes, tariffs
c) No price signal
Yes, there are goods or services that cannot have an indicative price . Pure Public goods due to the non rivalry, non excludability nature
General Evaluation Skills
So checking on the assumptions in your microeconomies exam answers is a must.
Another key evaluation in microeconomics exams is to highlight in your answers that the market will never be perfect.
Even with government’s correction of the market, it might lead to other distortions.
A to Z in Microeconomics Exams
But in general you must have an understanding of all three parties in the economy, not any one or any two to get a pass in microeconomics exams .
Most students tend to omit discussion of firms [The tedious understanding of market structure] , or other cases, discussion of pareto optimality and market failure.
The great misperceptions that Microeconomics is just about diagrams and solving for values of price, quantity, profit.
But what if time runs out, your mind went blank.
What if you cant recall a single formula during the microeconomics exams ?
How to check if your computed answers, analyzed diagram make sense ?
Check , they are all discussing the behaviour of the 3 parties.
Don’t leave the exam microeconomics exam answers page empty.
As an exam marker’/grader for a good 10+ years for microeconomics exams , we will very much like to award marks [but not for pure strings of definitions]
Make no case for the Zero
We need to justify a mark or two but we cant do so if its an empty page. So do write something until the very last minute [ And not leave your seat until you know your did write something for each question]
And the step closer to the Ace
And for those with good mastery of diagrams and computations, what might have deter you from the next better grade ? Not just a splatter of definitions or theories , but a good overall coverage of the 3 parties described above.