EKN 110: Economics 110 (Micro) Exam Notes

Economics 110 (Micro) examines how households, firms, and markets make choices in response to incentives and constraints. This exam notes guide focuses on the core microeconomic tools used in South African universities and related tertiary pathways—demand and supply, elasticity, consumer choice, production and costs, market structures, and policy. It blends definitions with exam-ready methods, worked examples, and “what to do on the day” problem-solving frameworks.

These notes are written to help you: (1) interpret micro graphs quickly, (2) translate wording into models, (3) compute key quantities reliably, and (4) justify answers with appropriate microeconomic reasoning—skills required across South African institution syllabi for introductory microeconomics.

1) Foundations of Microeconomics: Models, Assumptions, and How to Score Points

Microeconomics studies individual decision-making—households and firms—and how those decisions aggregate into market outcomes (prices, quantities, and welfare). Intro micro often uses simplified models to capture cause-and-effect. Your exam answers should show you understand both the model and the real-world logic behind it.

1.1 What “micro” asks: the three classic questions

In most Economics 110 (Micro) exams, you’ll repeatedly meet three core questions:

1. How do prices and incentives determine quantity demanded/supplied?
2. How do buyers and sellers behave under constraints?
3. How do different market structures affect efficiency and welfare?

A good exam response typically names the relevant relationship (e.g., “law of demand”), identifies what the shock is (income change, price change, technology, taxes), and states the predicted change (direction and sometimes magnitude using elasticity).

1.2 Key micro terms you must use accurately

Below are terms frequently tested. Memorise their meaning, but more importantly, know how they connect in problems.

• Demand (Qd): quantity consumers are willing and able to buy at each price.
• Supply (Qs): quantity producers are willing and able to sell at each price.
• Equilibrium: where Qd = Qs.
• Ceteris paribus: “all else equal.” Many exam mistakes come from ignoring this.
• Movement vs shift:
  • Change in price moves you along a curve.
  • Change in non-price determinants shifts the curve.
• Elasticity: responsiveness of one variable to another (often price to quantity demanded).

1.3 Micro modelling: turning words into graphs

A major portion of micro exams rewards correct “model selection.” Consider this step-by-step approach:

1. Underline the independent variable (what changes? e.g., price, income, technology).
2. Identify the dependent variables (quantity demanded, quantity supplied, price, equilibrium).
3. Choose the market (goods market, labour market if included, etc.).
4. Determine whether the shock is price-related or non-price-related:
   • If the prompt says “price of the good changes,” you adjust along demand/supply.
   • If the prompt says “income changes,” “tastes change,” “prices of related goods change,” you shift demand.
   • If prompt says “input costs change,” “technology changes,” “taxes/subsidies,” “number of firms changes,” you shift supply.
5. Predict direction: increase/decrease in equilibrium price and quantity.

Example blueprint (typical exam question)

“Suppose the price of product X increases. Describe the effect on the quantity demanded for X.”

• Independent variable: price of X
• Model: demand for X
• Use law of demand: higher price → lower quantity demanded
• Output: movement along demand curve to the left (or right), not a shift.

You will often be asked to provide both a written explanation and a graph. The graph must match your written directions.

1.4 Assumptions: why they matter in exam reasoning

Intro micro models often assume:

• Perfect information (especially in consumer choice basics).
• Rational behavior (consumers maximise utility; firms maximise profit).
• Markets clear (sometimes assumed for equilibrium).
• “All else equal” (ceteris paribus).

In exam answers, when asked “why,” you should cite assumptions. For instance:

• Demand curve slopes downward because consumers reduce quantity when price rises, holding other factors constant.
• Supply curve slopes upward because higher prices induce producers to sell more, given technology and input prices.

1.5 South African tertiary context: exam style expectations

Across South Africa, introductory micro exams commonly include:

• Short calculations (elasticity, total revenue, cost functions).
• Graph-based interpretation (shifts, movements, welfare rectangles).
• Policy critique (tax incidence, price controls, monopoly effects).
• Applied explanations with micro logic (substitution vs income effect, opportunity cost, profit vs normal profit).

Your grade depends on combining accuracy with clear reasoning. A typical high-mark response:

• states the economic principle,
• identifies the change category (shift/movement),
• describes the new equilibrium outcome,
• and provides a brief welfare or efficiency implication if policy is involved.

2) Demand, Supply, and Elasticity: Graphs, Calculations, and Policy Effects

Demand and supply are the backbone of micro exams. Elasticity then provides the quantitative bridge—how strongly consumers and firms respond. Many policy questions (tax, price ceilings/floors, subsidies) rely on elasticity to predict outcomes.

2.1 Demand and supply: what the curves mean

2.1.1 Demand curve basics

A demand curve shows the relationship between the price of a good and the quantity demanded, holding other factors constant.

Reasons demand slopes downward (keep these in mind for explanations):

• Substitution effect: as price rises, consumers substitute toward relatively cheaper alternatives.
• Income effect: as price rises, real purchasing power falls, reducing quantity demanded for normal goods.

If the good is an inferior good, the income effect may cause unusual behaviour, but introductory micro often assumes typical downward slope unless stated otherwise.

2.1.2 Supply curve basics

A supply curve shows the relationship between the price of a good and quantity supplied, holding other factors constant.

Reasons supply slopes upward:

• Higher prices make production more profitable, encouraging firms to sell more.
• Opportunity cost considerations: higher returns induce more resource allocation.

2.2 Shifts versus movements: common exam pitfalls

A frequent mistake is mixing movement and shift. Use this rule:

• Price changes → movement along curve.
• Non-price determinant changes → shift of curve.

Demand shifters (non-price determinants)

Common demand shifters include:

• Income (especially for normal/inferior goods),
• Tastes/preferences,
• Prices of related goods (substitutes increase demand when price of substitute rises; complements behave opposite),
• Expectations about future prices/income,
• Number of buyers.

Supply shifters

Supply shifts when:

• Input costs (wages, raw materials) change,
• Technology changes,
• Taxes/subsidies change effective costs,
• Expectations about future prices change,
• Number of sellers changes,
• Regulation affects production.

2.3 Equilibrium: solving without getting lost

Equilibrium is where:
[
Q_d = Q_s
]
In numerical problems, you often:

1. Write demand equation and supply equation.
2. Set them equal.
3. Solve for equilibrium price and quantity.
4. Optionally compute producer/consumer responses.

Example (generic algebra form)

If:
[
Q_d = 100 – 2P,\quad Q_s = 20 + 2P
]
Set equal:
[
100 – 2P = 20 + 2P \Rightarrow 80 = 4P \Rightarrow P^* = 20
]
Then:
[
Q^* = 100 – 2(20)=60
]

Exams usually test whether you can do this reliably and then interpret changes in direction.

2.4 Elasticity: price elasticity of demand (PED) as exam core

2.4.1 Definition

Price elasticity of demand:
[
E_d = \frac{%\Delta Q_d}{%\Delta P}
]
If (|E_d|>1), demand is elastic.
If (|E_d|<1), demand is inelastic.
If (|E_d|=1), demand is unit elastic.

In most exams, PED is negative due to the inverse relationship between price and quantity, but many teachers focus on absolute value.

2.4.2 Midpoint formula (frequently required)

When percentage change depends on base values, use the midpoint formula:
[
E_d=\frac{\frac{Q_2-Q_1}{(Q_1+Q_2)/2}}{\frac{P_2-P_1}{(P_1+P_2)/2}}
]
This avoids directional bias from using start or end values.

If your exam uses “simple elasticity”:
[
E_d = \frac{\Delta Q/Q}{\Delta P/P}
]
make sure you follow the formula your lecturer taught.

2.5 Elasticity and total revenue (TR): the exam interpretation link

Total revenue:
[
TR = P \times Q
]

Relationship between elasticity and TR changes when price changes:

• Elastic demand ((|E_d|>1)): price ↑ → TR ↓ (quantity falls proportionally more).
• Inelastic demand ((|E_d|<1)): price ↑ → TR ↑ (quantity falls proportionally less).
• Unit elastic ((|E_d|=1)): price ↑ → TR unchanged.

Example interpretation

If bread demand is relatively inelastic because fewer substitutes exist, a price increase may increase TR even if sales drop slightly. This is often used in policy and tax questions to argue how revenue behaves.

2.6 Determinants of elasticity (write these in a structured way)

For demand elasticity, typical determinants:

1. Availability of substitutes: more substitutes → more elastic.
2. Necessity vs luxury: necessities → more inelastic.
3. Time horizon: long run → more elastic (consumers adjust).
4. Definition breadth: narrowly defined goods → more elastic.

These points often earn marks when prompts ask “why demand is elastic/inelastic.”

2.7 Cross-price elasticity and income elasticity (if included)

• Cross-price elasticity of demand (Edx):
  [
  E_{x}=\frac{%\Delta Q_{d,good\ 1}}{%\Delta P_{good\ 2}}
  ]

  • Substitute: Edx > 0
  • Complement: Edx < 0

• Income elasticity of demand (Eiy):
  [
  E_{iy}=\frac{%\Delta Q}{%\Delta Income}
  ]

  • Normal good: positive
  • Inferior good: negative

Use these if your exam includes related-goods contexts.

2.8 Elasticity of supply (price elasticity of supply, PES)

Supply elasticity determinants:

1. Time period: longer time → more elastic.
2. Flexibility of production: adjustable inputs make supply more elastic.
3. Ability to store inventory: if firms can store, short-run supply may be more elastic.

In tax incidence questions, supply elasticity matters a lot. The side with more inelastic supply or demand bears relatively more of the tax burden.

2.9 Graphical welfare under taxation and price controls (conceptual core)

Although full welfare diagrams may appear later, you must understand the basic logic:

• A tax creates a wedge between what consumers pay and what producers receive.
• Equilibrium quantity falls due to reduced incentives on both sides.
• Deadweight loss arises from mutually beneficial transactions not occurring.

Elasticity affects incidence and welfare:

• More elastic side adjusts quantity more, so it generally bears more of the tax burden in terms of quantity reduction.
• More inelastic side retains higher share of price adjustment.

2.10 Mini case: a plausible South African-style policy scenario (no institution-specific claims)

Consider a government places a per-unit tax on electricity for a region. If electricity demand is relatively inelastic (households have limited short-run substitutes), consumers might continue buying near previous levels, while producers reduce output or change contracts. The tax may raise consumer price but reduce quantity modestly. If industrial users can switch to alternative energy after some time, the elasticity increases in the long run, increasing the deadweight loss and shifting tax burden more toward electricity suppliers adjusting long-run supply.

This is the kind of reasoning examiners want: connect elasticity to the direction/magnitude of quantity changes and to welfare.

3) Consumer Choice, Utility, Production, and Costs: Micro Foundations for Numerical Problems

Beyond demand and supply, micro exams often test how consumers and firms think: consumers maximise utility subject to budget constraints; firms choose inputs to produce output; and then they face costs (explicit and implicit) and profit conditions.

3.1 Consumer choice: budget constraint and opportunity cost

3.1.1 Budget constraint

With two goods, (X) and (Y), and prices (P_X) and (P_Y), income (M):
[
P_X X + P_Y Y = M
]
Graphically:

• Intercept on (X)-axis: (X = M/P_X)
• Intercept on (Y)-axis: (Y = M/P_Y)
• Slope: (-P_X/P_Y)

If the income changes, the budget line shifts. If price changes, the slope changes and intercepts adjust.

3.1.2 Opportunity cost

Opportunity cost of consuming more of (X) is the amount of (Y) forgone:
[
\text{OC of }X = \frac{P_X}{P_Y}
]
When prompts ask “interpretation,” mention: higher relative price of (X) makes it more expensive in terms of forgone (Y).

3.2 Indifference curves and marginal rate of substitution (MRS)

An indifference curve shows combinations of goods that provide the consumer equal utility. Standard exam property:

• indifference curves are downward sloping,
• convex to the origin (diminishing marginal rate of substitution).

3.2.1 MRS

MRS is the rate at which a consumer is willing to trade (Y) for (X) while keeping utility constant:
[
MRS_{X,Y}=\frac{MU_X}{MU_Y}
]
At the optimum:
[
MRS_{X,Y} = \frac{P_X}{P_Y}
]
This is a key condition often tested either verbally or through reasoning.

3.3 Utility maximisation and income–substitution effects (when included)

If the exam extends to choice under price changes, two effects matter when a price changes:

• Substitution effect: move along compensated demand curve (substitute away from relatively more expensive good).
• Income effect: change in real purchasing power alters consumption.

A typical written explanation:

• When price of a normal good rises, substitution effect reduces consumption; income effect also reduces consumption → total effect likely decreases quantity.

If the good is inferior, income effect can offset substitution effect.

3.4 Consumer surplus (C.S.) and welfare intuition

Consumer surplus: difference between what consumers are willing to pay and the market price.

For linear demand, exam often uses triangle areas:

• If intercept price is (P_{max}) and equilibrium price is (P^), consumer surplus is:
  [
  CS = \frac{1}{2}(P_{max}-P^)\times Q^*
  ]
  This appears in tax or price control questions.

3.5 Firms: production, productivity, and the role of input choice

A firm’s production process describes how inputs become output.

3.5.1 Production function

General form:
[
Q = f(L, K)
]
where (L) = labour, (K) = capital.

3.5.2 Total product, marginal product, and average product

With labour in the short run (capital fixed):

• Total Product (TP): total output.
• Marginal Product (MP):
  [
  MP_L = \Delta TP/\Delta L
  ]
• Average Product (AP):
  [
  AP_L = TP/L
  ]

A typical exam graph shows diminishing marginal returns: MP eventually falls as more labour is added to fixed capital.

3.6 Costs: explicit vs implicit, total vs average vs marginal

Costs are central. Exams often require you to compute or interpret cost curves.

3.6.1 Types of cost

• Explicit costs: paid out (wages, rent, materials).
• Implicit costs: opportunity costs of resources owned by the firm (e.g., owner’s time).

3.6.2 Total cost, fixed cost, variable cost

• Fixed costs (FC): do not vary with output in the short run (rent, machinery lease).
• Variable costs (VC): vary with output (labour, raw materials).

[
TC = FC + VC
]

3.6.3 Average and marginal costs

[
AC = TC/Q
]
[
AVC = VC/Q
]
[
MC = \Delta TC/\Delta Q
]

Key exam relationships:

• MC intersects AC and AVC at their minimum points (under standard assumptions).
• If MC < AC, AC decreases; if MC > AC, AC increases.

3.7 Break-even, profit, and normal profit

Profit:
[
\pi = TR – TC
]
Normal profit occurs when total revenue equals total cost including implicit costs. Economic profit is:
[
\pi_{economic} = TR – (explicit + implicit)
]
In introductory exams, you may be asked to determine whether a firm should produce in the short run:

• If price < AVC → firm typically shuts down (short run).
• If price between AVC and ATC → firm produces but may incur economic loss.
• If price ≥ ATC → firm earns at least normal profit (and economic profit if above ATC).

3.8 Worked numerical mini-set (typical exam patterns)

Suppose:

• FC = 50
• VC = 0.5Q^2 (so VC depends on Q)

Then:
[
TC = 50 + 0.5Q^2
]
Compute AC:
[
AC = \frac{50 + 0.5Q^2}{Q} = \frac{50}{Q}+0.5Q
]
MC:
[
MC = \frac{dTC}{dQ} = Q
]
Set MC = AC to find the output where AC is minimal:
[
Q = \frac{50}{Q} + 0.5Q
\Rightarrow Q – 0.5Q = 50/Q
\Rightarrow 0.5Q = 50/Q
\Rightarrow 0.5Q^2 = 50
\Rightarrow Q^2 = 100
\Rightarrow Q = 10
]
Then:
[
AC_{min} = \frac{50}{10}+0.5(10)=5+5=10
]
A high-mark answer shows the algebra and also interprets:

• If market price is above 10, the firm earns profit relative to average costs.

3.9 Common exam-style interpretations (what examiners like)

When asked about cost changes, mention:

• rising input prices shift the cost curves upward.
• improved technology shifts down cost curves.
• economies of scale lower average cost for higher output levels; diseconomies raise it.

When asked about marginal cost behavior:

• diminishing marginal returns raise marginal cost eventually, flatten then steepen MC.

Your written explanations should connect the story (inputs, technology) to the shape of curves.

4) Market Structures and Competitive Outcomes: Perfect Competition, Monopoly, and Imperfect Competition Logic

Micro exams often shift from general market demand/supply to how firms behave in different market structures. You typically compare:

• number of firms,
• barriers to entry,
• pricing power,
• profit outcomes,
• efficiency and welfare implications.

4.1 Perfect competition: price takers and profit maximisation

In perfect competition:

• Many firms,
• identical products,
• free entry and exit,
• no single firm can influence market price.

Thus, each firm faces a horizontal demand curve at the market price (P). The firm is a price taker.

4.1.1 Output decision rule (core)

A competitive firm chooses output where:
[
MR = MC
]
In perfect competition, (MR = P) (since demand is horizontal). So:
[
P = MC
]

This rule appears frequently in exams. The firm produces where its marginal cost equals market price, provided it is not below shutdown conditions.

4.1.2 Long-run equilibrium intuition

In long-run competitive equilibrium:

• economic profit is driven to zero,
• price equals minimum ATC:
  [
  P = ATC_{min}
  ]
  If firms make economic profit, entry occurs, increasing supply, driving price down. If firms incur losses, exit reduces supply, raising price.

4.2 Consumer and producer surplus under perfect competition

Efficiency: competitive markets generally achieve allocative efficiency (where price equals marginal cost) under standard assumptions.

Your welfare reasoning:

• Consumer surplus higher under competitive outcomes compared to monopoly (generally).
• Producer surplus may be lower in monopoly due to restricted output.

If asked to compare, mention trade-offs: monopoly produces less and charges higher price, reducing both consumer surplus and total welfare.

4.3 Monopoly: market power, barriers, and the MR–MC condition

Monopoly:

• one seller,
• high barriers to entry,
• downward-sloping demand (a result: monopoly has some ability to set prices).

4.3.1 Monopoly pricing rule

Monopoly maximises profit where:
[
MR = MC
]
Then it uses demand curve to find the price corresponding to that quantity.

A key exam concept:

• MR lies below demand for a monopolist (for downward-sloping demand).
• Therefore, monopoly quantity is less than the competitive quantity (at the same demand).

4.3.2 Deadweight loss and inefficiency

Monopoly reduces output relative to the efficient level (where (P = MC)). The missing transactions create deadweight loss (DWL).

If asked to draw welfare:

• consumer surplus becomes smaller,
• producer surplus might increase relative to competition depending on cost structure,
• DWL appears between competitive and monopoly quantities.

4.4 Price discrimination (if introduced): degrees of pricing

If your course includes price discrimination:

• First-degree (perfect): captures all consumer surplus.
• Second-degree (by quantity): uses menus or blocks.
• Third-degree (by group): different prices by market segment.

The condition for third-degree discrimination (one common pattern):

• markups differ across groups based on elasticities:
  [
  \frac{P_1 – MC}{P_1} \text{ and } \frac{P_2 – MC}{P_2}
  ]
  Higher elasticity group faces lower price; lower elasticity group faces higher price.

Even if not fully calculated, the exam wants reasoning: charge more where demand is less elastic.

4.5 Monopolistic competition and oligopoly (conceptual comparisons)

4.5.1 Monopolistic competition

• many firms,
• differentiated products,
• some pricing power,
• entry is possible.

Long-run economic profit typically becomes zero due to entry, but firms maintain differentiation, so some inefficiency relative to perfect competition remains.

4.5.2 Oligopoly

• few firms,
• interdependence,
• strategic behavior.

Intro exams may discuss:

• cartel behavior (like monopoly if collusion exists),
• non-collusive outcomes,
• games and reaction curves if later in syllabus.

If games are beyond scope, focus on qualitative reasoning: fewer firms can maintain higher markups and output restrictions.

4.6 Collusion and antitrust policy logic

If firms collude, they behave like a cartel:

• restrict output to raise price,
• create consumer welfare losses and DWL.

Antitrust aims to prevent collusion by enforcement, affecting firm incentives.

Exams may ask: “Why are cartels unstable?” Common reasons:

• disagreement on output shares,
• incentive to cheat on cartel by undercutting price,
• limited ability to enforce contracts.

4.7 Worked concept comparison: monopoly vs competition on a single diagram

A standard exam argument without heavy numbers:

1. Both markets share the same demand and marginal cost curves.
2. Competitive equilibrium: (P = MC), quantity (Q_c).
3. Monopoly: choose (Q_m) where (MR = MC) and set price from demand (P_m).
4. Therefore:
   • (Q_m < Q_c)
   • (P_m > P_c)
5. Welfare:
   • allocative efficiency lost,
   • DWL occurs.

When asked for explanation, mention:

• monopolist sets quantity to balance marginal revenue with marginal cost, not to set price equal to marginal cost.

5) Government Policy in Microeconomics: Taxes, Subsidies, Price Controls, and Market Failures with Exam-Ready Diagrams

This section ties everything together: how markets behave under interventions and where “market failure” motivates policy. Intro micro often emphasises taxes and price controls; later micro may include externalities and public goods.

5.1 Taxes: incidence, welfare, and the role of elasticity

5.1.1 Tax wedge concept

A per-unit tax (t) creates:

• consumers pay (P_c),
• producers receive (P_p),
• wedge: (P_c – P_p = t).

Your job in exam questions is often to:

• find new equilibrium quantity,
• compute how prices change,
• interpret incidence.

5.1.2 Who bears the tax? Not “who sends the money”

Tax incidence depends on elasticities:

• if demand is more inelastic than supply, consumers bear a larger share (consumer price rises more).
• if supply is more inelastic than demand, producers bear more.

This is a common exam trap: students claim “the taxed party pays all.” In reality, both sides adjust through price changes and quantity changes.

5.1.3 Welfare effects of taxation

• Government collects revenue: tax × quantity traded.
• Deadweight loss arises from reduced quantity below efficient level.

Even if students can draw a graph, marks may require describing:

• the reason quantity falls: incentives change,
• the efficiency concept: mutually beneficial trades that would occur without tax do not occur with tax.

5.2 Subsidies: opposite direction and fiscal cost

A per-unit subsidy:

• reduces effective cost to producers,
• increases quantity in the market,
• can also generate deadweight loss if the subsidy distorts choices.

Incidence logic again depends on elasticities:

• who benefits more (consumers via lower price; producers via higher received price).

In policy evaluation questions, mention:

• subsidies can be warranted for positive externalities,
• but require fiscal funding and can lead to inefficiency if no externality exists.

5.3 Price controls: price ceilings and price floors

5.3.1 Price ceiling

A price ceiling is an upper limit on price. If:

• ceiling is below equilibrium price → shortage occurs.
• ceiling is at/above equilibrium price → no effect.

Shortage arises because quantity demanded exceeds quantity supplied. Exam answers should discuss likely rationing mechanisms:

• queues,
• informal payments,
• reduced quality,
• black markets.

5.3.2 Price floor

A price floor is a minimum price. If:

• floor is above equilibrium price → surplus occurs.

Surplus:

• quantity supplied exceeds quantity demanded,
• requires government intervention to dispose of excess (buying up stock) if policy demands.

When evaluating, link to welfare:

• consumer surplus changes,
• producer surplus changes,
• DWL arises from reduced trade.

5.4 Minimum wages (often in micro syllabi)

Minimum wage is a price floor on labour. Intro micro often expects:

• if set above equilibrium wage → unemployment (quantity of labour demanded falls below labour supplied).
• but real-world nuance: sometimes unemployment effects are smaller depending on labour market frictions and monopsony.

If your course is strictly introductory, keep it conceptual:

• compare quantity demanded and quantity supplied,
• state that employment may fall.

If asked for counterargument, mention:

• minimum wage can improve worker welfare and may reduce turnover or raise productivity, potentially offsetting job losses (but this is beyond the basic competitive model).

5.5 Externalities and market failure: why intervention might be justified

Externalities occur when the actions of a person or firm affect others without compensation.

5.5.1 Negative externality (e.g., pollution)

A firm producing with pollution imposes costs on society. The social marginal cost (SMC) exceeds private marginal cost (PMC). Market outcome:

• too much output,
• price too low relative to socially efficient level,
• deadweight loss.

Policy solutions:

• Pigouvian tax equal to marginal external cost,
• regulation/standards,
• cap-and-trade (if covered).

Write the logic clearly:

1. identify external cost,
2. show the wedge between private and social costs,
3. describe how policy shifts equilibrium.

5.5.2 Positive externality (e.g., education)

Benefits spill over. Social marginal benefit (SMB) exceeds private marginal benefit (PMB). Market outcome:

• too little output.
  Policy solutions:
• subsidy to education/training,
• vouchers,
• public provision.

5.6 Public goods: non-excludable and non-rival

If your syllabus includes public goods:

• because people can’t be excluded easily and one person’s consumption doesn’t reduce others’ benefits, markets may underprovide.

Classic exam explanation:

• free-rider problem: individuals benefit without paying.

Policy solutions:

• government funding,
• collective decision-making mechanisms.

You might be asked to contrast public goods with externalities; keep definitions crisp.

5.7 Information failure (if included): moral hazard and adverse selection

Some introductory micro courses touch information asymmetry:

• Adverse selection: before transaction; low-quality sellers more likely enter if insurance exists (e.g., insurance markets).
• Moral hazard: after transaction; insured party changes behaviour.

If included, policy responses:

• screening,
• incentives,
• contracts.

However, some Economics 110 (Micro) syllabi focus more on real sectors and may not require deep information economics. Use only what your course covered.

5.8 Consolidated exam workflow: how to answer policy questions

When faced with a policy prompt, use a consistent decision tree:

1. Identify the policy instrument: tax, subsidy, price ceiling/floor, regulation, cap.
2. Identify the market and curve affected:
   • tax shifts supply up by the tax (in per-unit terms),
   • subsidy shifts supply down.
3. State impact on equilibrium:
   • direction of price and quantity changes.
4. Discuss elasticity if asked about incidence:
   • more inelastic side bears more.
5. Add welfare analysis:
   • government revenue and DWL rectangles/triangles.
6. Give a brief evaluation/counterargument:
   • administrative costs, unintended consequences, enforcement difficulty, potential long-run adjustments.

This approach makes your answer structured and easy for markers to award points.

5.9 Numerical policy mini-examples (practice style)

Example A: per-unit tax on a linear market (calculation-driven)

Suppose demand and supply:
[
Q_d = 120 – 2P,\quad Q_s = 20 + 2P
]
Equilibrium without tax:
[
120 – 2P = 20 + 2P \Rightarrow 100 = 4P \Rightarrow P^* = 25
]
[
Q^* = 20 + 2(25)=70
]

Now impose a per-unit tax (t=10). In many standard textbook treatments:

• supply based on producer price (P_p),
• consumer price (P_c = P_p + t).

Rewrite supply in terms of consumer price:
[
Q_s = 20 + 2P_p = 20 + 2(P_c – 10)=20 + 2P_c – 20 = 2P_c
]
Demand:
[
Q_d = 120 – 2P_c
]
New equilibrium:
[
120 – 2P_c = 2P_c \Rightarrow 120 = 4P_c \Rightarrow P_c = 30
]
Then (P_p = P_c – 10 = 20). Quantity:
[
Q = 2P_c = 60
]
So tax reduces quantity from 70 to 60, consumer price rises from 25 to 30, producer price falls from 25 to 20. This is exactly the kind of calculation expected if your exam includes numeric taxation.

Welfare interpretation:

• revenue for government = (t \times Q = 10 \times 60 = 600).
• DWL would be computed from triangles using differences in quantities (if asked).

Example B: price ceiling below equilibrium

Using the earlier equilibrium (P^*=25), set ceiling at (P_{max}=20). Then:
Demand at (P=20):
[
Q_d = 120 – 2(20)=80
]
Supply at (P=20):
[
Q_s = 20 + 2(20)=60
]
So shortage:
[
Q_d – Q_s = 80-60 = 20
]
Exam answers should include:

• “shortage of 20 units,”
• and mention rationing mechanisms (queues, informal markets).

5.10 Market failure evaluation: when policy helps vs when it may harm

A top exam answer doesn’t only state direction of effects; it evaluates whether intervention is justified.

Consider typical evaluation criteria:

• Is there indeed a market failure (externality, public good, monopoly power)?
• Are there measurement problems (hard to estimate external costs)?
• Are enforcement/administration feasible?
• Are long-run adjustments captured (tax incidence changes with time horizon)?

For example:

• Tax might reduce pollution but if firms can’t measure emissions properly, the tax could be less effective.
• Price controls can help consumers in the short run but often create shortages and quality deterioration.

This balanced reasoning improves marks in essay-style questions.

Summary of Core Topics to Rehearse Before the Exam

To prepare efficiently, rehearse these micro skills repeatedly:

1. Translate prompts into shifts/movements (demand/supply).
2. Compute equilibrium using set-equal methods.
3. Calculate elasticity using correct formula (often midpoint).
4. Use elasticity logic to interpret total revenue and tax incidence.
5. Understand consumer optimisation: budget constraint, MRS condition.
6. Apply firm rules: MR = MC for profit max; shutdown vs produce conditions.
7. Compare market structures: competitive efficiency vs monopoly DWL.
8. Analyse policy: tax/subsidy incidence, welfare, price controls shortages/surpluses, externalities with social vs private costs/benefits.

If you want, I can also generate a separate “EKN 110: Micro Exam Practice Pack” with 30+ South Africa-style questions (including full worked solutions) covering elasticity, equilibrium with taxes, consumer choice conditions, cost curve computations, and monopoly vs competition welfare comparisons.