Formula sheet

a decision involves giving up one option to take another, even when no money changes hands directly, such as choosing how to spend an afternoon.

$MB$

marginal benefit of one more unit

$MC$

marginal cost of one more unit

you are deciding how much of something to do — how many units to produce, how many hours to study, how many workers to hire — rather than a simple yes/no decision.

a statement needs to be classified as a factual claim (positive) or an opinion about policy (normative), a very common first-exam question.

$Q^d$

quantity demanded, held to a strictly negative response to P only once every other influence is held constant

a model isolates the effect of one variable — such as price — by assuming every other relevant variable stays fixed.

you need to identify the relevant market for a good before analysing supply, demand, or market power.

you need to check whether a described market can be treated as perfectly competitive, the benchmark model built up over Weeks 9 to 10 of this course.

$a$

quantity demanded at a price of zero

$b$

how strongly quantity responds to price (the slope's magnitude)

a demand relationship is given as a straight line in price, the most common form in problem sets.

you need to decide whether a described event moves demand along the curve (price changed) or shifts the whole curve (anything else changed).

$c$

quantity supplied at a price of zero (often negative, meaning suppliers need a minimum price before entering)

$d$

how strongly quantity responds to price

a supply relationship is given as a straight line in price.

$P^*$

equilibrium price

$Q^*$

the common quantity demanded and supplied at P^*

you need to find the price and quantity where a market clears — no shortage, no surplus.

$E_d$

price elasticity of demand, typically negative (report the absolute value when classifying)

you need to measure how strongly quantity demanded responds to a price change, in percentage terms, independent of units.

$Y$

consumer income

you need to classify a good as normal or inferior from how demand responds to income.

$Q_X$

quantity of good X demanded

$P_Y$

price of a related good Y

you need to classify the relationship between two goods as substitutes or complements.

you need to justify why preferences can be represented by well-behaved indifference curves, a common short-answer question.

you need to identify a badly drawn indifference curve diagram, or explain why a diagram is wrong, a frequent short-answer prompt.

$MU_X, MU_Y$

marginal utility of X and Y, the extra utility from one more unit of each

you need the slope of an indifference curve at a point, either from the curve itself or from a utility function's partial derivatives.

$MU_X$

the extra utility from one more unit of X, holding Y fixed

you need the individual building block before forming a marginal rate of substitution, or to discuss diminishing marginal utility of a single good.

$a, b$

fixed per-unit utility weights

two goods are essentially interchangeable to the consumer at a fixed rate, such as 500ml and 1L bottles of the same water brand. Indifference curves are straight lines.

$a, b$

the fixed proportion in which the goods must be consumed together

two goods are always used together in a fixed ratio, such as left shoes and right shoes. Indifference curves are L-shaped, with the kink at the fixed ratio, and MRS is undefined at the kink.

$M$

income

$P_X, P_Y$

prices of the two goods

$-P_X/P_Y$

the slope of the budget line

you need the set of affordable bundles, its intercepts (M/P_X on the X-axis, M/P_Y on the Y-axis), or its slope.

$MU_X/P_X$

MU_Y/P_Y = utility per lira spent, equalised across both goods at the optimum

you are solving for a utility-maximising bundle with an interior solution (positive amounts of both goods).

$a, b$

the exponents in U = X^aY^b

you recognise Cobb-Douglas utility and want to skip the tangency derivation. With a=0.4, b=0.6 above: X^* = 0.4(300)/5 = 24, matching the long derivation exactly.

$X^d(P_X)$

the optimal quantity of X at each possible price of X

you need to explain, conceptually, where a downward-sloping demand curve comes from: the price-consumption curve connects the optimal bundles across all values of P_X, and the demand curve simply re-plots X* against P_X.

$substitution effect$

holds purchasing power fixed at the new prices, isolating pure relative-price reasoning

$income effect$

the remainder, from purchasing power changing

a question asks you to decompose the total effect of a price change, or explain why a demand curve could theoretically slope upward (a Giffen good).

you need to classify a good from a description of how its consumption responded to a price change, or to explain why the law of demand can (in rare, extreme cases) fail.

a question asks specifically about how quantity demanded responds to income (not price), or to identify a good as normal or inferior from the slope of its Engel curve.

$P^d(Q)$

inverse demand curve

$P^*$

the market price actually paid

$Q^*$

quantity purchased at P^*

you need the total dollar benefit consumers get from being able to buy at a single market price, rather than at the maximum price they would each have been willing to pay.

$Q$

output

$L$

labour

$K$

capital

you need the general relationship between inputs and maximum feasible output, before specifying a functional form.

$MP_L$

extra output from one more unit of labour, holding capital fixed

$AP_L$

output per worker

you need to measure labour productivity either at the margin (the next worker) or on average (across all current workers).

a question asks why marginal product does not keep rising forever, or asks you to identify where diminishing returns set in on a production function.

$MRTS_{LK}$

the rate at which a firm can substitute labour for capital while holding output constant

you need the slope of an isoquant, or the rate at which a firm could give up capital for labour without changing output.

$t$

the common scaling factor applied to every input

$k$

the returns-to-scale exponent

you double (or scale by any factor) every input at once and need to classify how output responds — a much broader question than diminishing marginal returns, which holds only one input fixed.

$explicit cost$

actual cash payments (wages, rent, materials)

$implicit cost$

opportunity cost of resources the firm already owns

you need to compute true economic cost or economic profit, not just the accounting figure — the same distinction opened this course in Week 2.

$w$

wage rate

$r$

rental rate of capital

$C$

total expenditure on inputs

you need the set of input combinations available at a given cost, or the isocost line's slope, -w/r.

$MP_L/w$

MP_K/r = output per lira spent, equalised across both inputs at the cost-minimising bundle

you are finding the cheapest way to produce a given output level, given input prices.

$FC$

fixed cost, does not vary with Q

$VC(Q)$

variable cost, a function of output

$TC(Q)$

FC + VC(Q)

you are given a total cost function and need any of the per-unit cost measures at a specific output level.

you need to explain, or read off a graph, why the MC curve passes through the minimum points of both the AVC and ATC curves — the same logic applies to ATC with AVC replaced by ATC throughout.

an exam asks you to explain — not just draw — why these particular shapes appear.

you need to connect the shape of the long-run cost curve to the returns-to-scale concept from Lesson 6: increasing returns to scale produce economies of scale (falling LRATC), and so on.

$MR$

marginal revenue

$P$

the market price, taken as given by an individual competitive firm

the firm is one of many small sellers of an identical product — the defining feature that collapses marginal revenue down to just the market price.

you need the profit-maximising output for a competitive firm at a given market price.

the market price is so low that the firm is considering producing nothing at all, in the short run.

you need to state or sketch a competitive firm's short-run supply curve directly from its cost structure.

$PS$

producer surplus, the firm's short-run reward above and beyond variable cost

you need the area between the market price and the MC curve, up to the profit-maximising quantity — the producer-side twin of consumer surplus.

you need to find the long-run equilibrium price in a perfectly competitive industry, or explain why competitive firms earn zero economic profit in the long run.

$CS$

consumer surplus

$PS$

producer surplus

you need the overall measure of a market's economic benefit, to compare the free-market outcome against a policy intervention.

$P_b$

price paid by buyers

$P_s$

price received by sellers

$t$

the per-unit tax

a tax is imposed and you need to find the new equilibrium quantity and the prices on each side of the market.

$Q_{\text{tax}}$

the after-tax equilibrium quantity

you need the government's revenue from the tax, or the efficiency cost, once the after-tax quantity and prices are known.

$a$

the demand curve's price intercept

$b$

the demand curve's slope magnitude

demand is linear and you need marginal revenue directly, without differentiating total revenue from scratch each time.

you need a monopolist's profit-maximising price and quantity. Note the two-step process: MR = MC pins down quantity, and price is then read off the DEMAND curve, not the MR curve, at that quantity.

$Q_c$

the competitive (efficient) quantity

$Q^*$

the monopoly quantity

$P^*$

the monopoly price

you need the efficiency cost of monopoly relative to the competitive benchmark, using the standard deadweight-loss triangle.