SECO101: Economics 1A (Micro) Exam Notes

SECO101: Economics 1A (Micro) is typically the first formal microeconomics module in many South African universities and TVET articulation pathways. It builds your understanding of how households and firms make decisions, how markets coordinate through prices, and how welfare is affected by market outcomes. These notes are designed as exam-focused support: they explain core theory, show worked examples, and provide “exam-style” checklists for common question types—especially the kind you’ll see in South African assessment papers.

Section 1: Foundations of Microeconomics—Demand, Supply, and Market Equilibrium (with South African Context)

Microeconomics studies decision-making by individuals and firms and how their choices determine outcomes in specific markets. A key emphasis in SECO101 is mastering the logic connecting preferences and constraints (for consumers) to production and costs (for firms), and then connecting these to market demand and market supply.

Microeconomic Thinking: Scarcity, Choice, and Trade-offs

Most exam questions begin by testing whether you can apply fundamental ideas rather than simply recite definitions.

1. Scarcity means resources are limited.
2. Choice means you must use limited resources in one way rather than another.
3. Trade-offs means choosing one option implies giving up another.

In microeconomics, trade-offs show up as:

• Consumer trade-offs between consumption of different goods.
• Firm trade-offs between inputs (e.g., labour vs capital).
• Government trade-offs between efficiency and equity when designing policy.

A common exam framing: “Explain how scarcity affects economic agents and why market prices matter.”
A strong answer:

• Scarcity forces rationing through prices (when markets are competitive).
• Prices convey information about relative scarcity and relative willingness to pay.

Demand: Law of Demand, Determinants, and Demand Curves

The Law of Demand

The law of demand states: as price rises, quantity demanded falls, ceteris paribus.

• Ceteris paribus is essential in exams. If income or tastes change, the demand curve itself can shift.
• A movement along the demand curve happens when price changes.
• A shift in demand happens when non-price determinants change.

Determinants of Demand (Things that Shift Demand)

You should be able to list them quickly and explain mechanisms:

• Income (normal vs inferior goods)
  • Normal good: higher income → higher demand.
  • Inferior good: higher income → lower demand.
• Tastes and preferences
  • Trends, advertising, culture.
• Prices of related goods
  • Substitutes: if substitute price rises → demand increases.
  • Complements: if complement price rises → demand decreases.
• Expectations
  • If consumers expect prices to rise in the future → demand increases now.
• Number of buyers
  • More buyers → higher total demand at each price.

Demand vs Quantity Demanded

Exams often penalize confusion between:

• Demand = the entire relationship between price and quantity.
• Quantity demanded = the specific amount demanded at a given price.

Supply: Law of Supply, Determinants, and Supply Curves

The Law of Supply

The law of supply states: as price rises, quantity supplied rises, ceteris paribus.

Movement along supply occurs when price changes; shifts occur due to factors like costs and technology.

Determinants of Supply

Common exam list:

• Input prices (e.g., wages, raw materials)
• Technology
• Taxes and subsidies
• Number of sellers
• Expectations about future prices
• Regulation and compliance costs

A useful example for South African markets: if imported fertiliser prices increase due to exchange rate changes, small farms face higher costs, shifting supply left (less produced at every price).

Market Equilibrium: How Prices Coordinate Buyers and Sellers

Equilibrium Definition

Market equilibrium is where:

• Quantity demanded = quantity supplied
• The market price adjusts so that excess demand or excess supply disappears.

Graphically:

• Demand curve intersects supply curve at equilibrium price (P^) and equilibrium quantity (Q^).

Disequilibrium: Surplus and Shortage

• If price is above equilibrium, supply exceeds demand → surplus.
• If price is below equilibrium, demand exceeds supply → shortage.

A good exam explanation goes beyond the graph:

• Surplus pushes prices down through unsold inventory.
• Shortage pushes prices up through bidding for limited supply.

Shifts vs Movements: Common Exam Traps

You should be trained to answer: “What changed?” before sketching.

Quick Decision Rule

• If the question says “price changes” → movement along the curve.
• If it says “income changes”, “technology changes”, “input costs change” → shift.

Example: South African Petrol and Transport Effects

Suppose petrol prices rise due to fuel tax changes.

• Petrol is a good; its price increase might cause movement along supply/demand depending on whether petrol itself is the market analysed.
• But the larger macro implication is that transport costs rise for many businesses, shifting supply for goods transported (e.g., bread, vegetables).
  In exams, you must specify which market’s demand/supply is being analysed.

Elasticity in Early Micro: Sensitivity of Quantity to Price

Elasticity measures responsiveness. Even if your course later formalises elasticity in detail, SECO101 often tests foundational intuition.

Price Elasticity of Demand (PED)

[
PED = \frac{%\Delta Q_d}{%\Delta P}
]

• If (|PED| > 1), demand is elastic.
• If (|PED| < 1), demand is inelastic.
• If (|PED| = 1), unit elastic.

What Affects PED?

• Availability of substitutes
• Necessities vs luxuries
• Share of income
• Time horizon (elasticity tends to increase over time)

Worked Elasticity Example (Exam Style)

If price rises from R10 to R12 and quantity demanded falls from 100 units to 80 units:

• Percentage change in price:
  [
  %\Delta P = \frac{12-10}{10} \times 100% = 20%
  ]
• Percentage change in quantity:
  [
  %\Delta Q = \frac{80-100}{100} \times 100% = -20%
  ]
• Elasticity:
  [
  PED = \frac{-20%}{20%} = -1
  ]
  So demand is unit elastic.

Case-Style Practice: Interpreting Policy Impacts on Markets

In South African policy discourse, microeconomics appears constantly—price controls, taxes, subsidies, and minimum wage debates.

Consider a subsidy for a good:

• Subsidy reduces effective cost for producers, shifting supply right.
• Price paid by consumers falls; quantity increases.

In exams, always include:

1. Direction of shift (demand/supply).
2. Change in price and quantity.
3. Welfare implications (consumer surplus, producer surplus, government cost, deadweight loss if relevant).

Section 2: Consumer Theory—Preferences, Utility, Budget Constraints, and Choice

Consumer theory explains how individuals choose bundles of goods given preferences and constraints. SECO101: Economics 1A (Micro) usually focuses on basic utility and budget analysis, then links this to demand.

Preferences and Utility: What “Utility” Means

Preferences as Rankings

Preferences describe how consumers rank bundles. Utility is a numerical representation of that ranking.

• If bundle A is preferred to bundle B, then utility(A) > utility(B).
• If preferences are consistent, they allow for ranking and choice.

Assumptions Often Used in Exam Questions

• Completeness: consumers can compare any two bundles.
• Transitivity: if A > B and B > C, then A > C.
• More is better (monotonic preferences): under typical assumptions, adding to one’s bundle increases utility.

Indifference Curves: Visualising Preference Trade-offs

An indifference curve shows combinations of two goods yielding the same utility.

Key Properties

• Indifference curves are usually downward sloping (more of one good requires less of the other to keep utility constant).
• They do not cross.
• They are convex to the origin for typical “risk-averse in consumption terms” preferences (diminishing marginal rate of substitution).

Marginal Rate of Substitution (MRS)

MRS measures the rate at which a consumer is willing to substitute one good for another while staying on the same indifference curve.

• Diminishing MRS corresponds to convex indifference curves.
• In exams, mention: as you consume more of good X and less of good Y, you’re less willing to give up X for extra Y.

Budget Constraint: The Financial Limits

A consumer has income and prices for goods. A two-good budget constraint is:
[
p_x x + p_y y \le m
]
where:

• (p_x, p_y) are prices
• (x, y) are quantities of goods
• (m) is income

The consumer chooses a bundle affordable within this set.

Interpretation

• If income increases: budget line shifts outward.
• If price of one good increases: budget line rotates inward for that good.
• If both prices increase proportionally: budget line rotates but may leave the intercepts scaled.

Optimal Choice: Tangency and Corner Solutions

Interior Solution (Tangency)

A typical exam statement: optimal consumption occurs where the highest attainable indifference curve touches the budget line.

Mathematically, tangency implies:

• (MRS = \frac{p_x}{p_y}) (in absolute value, depending on curve orientation)

This condition ensures:

• The trade-off the consumer is willing to make matches the market trade-off determined by prices.

Corner Solutions

If preferences are extreme (e.g., perfect complements or goods the consumer only wants one of), the optimum can occur at the axes.

Common complementarity cases:

• Perfect substitutes: linear indifference curves; consumer buys the cheaper good.
• Perfect complements: L-shaped indifference curves; consumer buys goods in fixed proportions (e.g., left shoe/right shoe).

Worked Example: Budget Line and Equilibrium Bundle

Suppose:

• Income (m = 200)
• Price of good X (p_x = 10)
• Price of good Y (p_y = 20)

Then intercepts:

• If (y=0): (10x = 200 \Rightarrow x=20)
• If (x=0): (20y = 200 \Rightarrow y=10)

So budget line goes between (20,0) and (0,10).

If an indifference curve is tangent at some bundle (not given numerically), you’d identify the tangency by matching MRS with price ratio:
[
\frac{p_x}{p_y} = \frac{10}{20} = 0.5
]
So at optimum, (MRS) equals 0.5 (depending on how MRS is defined; ensure consistent direction).

From Choice to Demand: Linking Consumer Theory to Market Outcomes

SECO101 often wants you to connect consumer demand to market demand:

• If a consumer’s optimal bundle changes with income and prices, the chosen quantity of a good becomes the individual demand schedule.
• Market demand is the horizontal sum of individual demands.

So when income rises and the good is normal, chosen quantity increases → demand increases.

Income and Substitution Effects (Foundational Level)

When price changes, total demand response can be decomposed into:

• Substitution effect: consumers switch toward the relatively cheaper good.
• income effect: real purchasing power changes; affects demand depending on whether the good is normal or inferior.

Exams sometimes ask conceptual questions like:

• “Why might demand for a good increase even if its price rises?”
  Possible answer:
• Income effect dominates substitution effect (rare in introductory micro but shows up in discussions such as Giffen goods).

South African Example: Household Choices Under Budget Constraints

A household with fixed income (e.g., wages paid monthly) may allocate spending across:

• staple foods,
• transport,
• electricity/data,
• school-related expenses.

If electricity tariffs increase:

• “electricity” might become effectively more expensive,
• households may reduce consumption and adjust substitutes (e.g., switching to paraffin or gas depending on availability).
  This is budget constraint logic applied to daily life.

In an exam answer, don’t claim specifics unless data is given—focus on mechanism:

• Price increase → lower real purchasing power.
• Choice shifts to cheaper alternatives or reduces quantity.

Exam Checklist for Consumer Questions

When you see a consumer theory problem, structure your answer:

1. Identify the budget constraint and what changes (income or prices).
2. Sketch/describe budget line movement (outward shift, inward rotation).
3. Identify preference type if mentioned (substitutes, complements).
4. Determine optimal consumption (tangency or corner).
5. Translate to demand change (e.g., quantity of X rises or falls).

Section 3: Production, Costs, and Firm Behaviour—From Short-Run Decisions to Cost Curves

Microeconomics becomes concrete when you analyse production and the cost structures firms face. SECO101: Economics 1A (Micro) typically emphasises translating production conditions into cost curves, then connecting costs to supply incentives.

Production Functions and Inputs

A production function links inputs to output. In basic form:
[
Q = f(L, K)
]
where:

• (L) = labour input
• (K) = capital input (machines, infrastructure)

The Key Concept: Diminishing Marginal Returns

In the short run, at least one input is fixed (often capital (K)). With labour varying:

• Initially, adding labour increases output significantly.
• Eventually, the additional labour contributes less because fixed capital becomes crowded.
  This is reflected by diminishing marginal product.

From Production to Total, Average, and Marginal Product

If you compute outputs as labour changes:

• Total Product (TP) increases with labour.
• Marginal Product (MP) measures the extra output from one more unit of labour.
• Average Product (AP) is output per unit of labour.

In exams, show:

• MP rises at first, then falls due to diminishing returns.
• AP follows a similar but not identical pattern; MP intersects AP at AP’s maximum.

Cost Curves: Fixed vs Variable Costs

A firm’s total cost can be split:

• Fixed cost (FC): costs independent of output in the short run (rent, salaried staff).
• Variable cost (VC): costs change with output (wages for labour hired, raw materials).

Total cost:
[
TC = FC + VC
]

Average and Marginal Costs

• Average Fixed Cost:
  [
  AFC = \frac{FC}{Q}
  ]
• Average Variable Cost:
  [
  AVC = \frac{VC}{Q}
  ]
• Average Total Cost:
  [
  ATC = \frac{TC}{Q} = AFC + AVC
  ]
• Marginal Cost:
  [
  MC = \frac{\Delta TC}{\Delta Q}
  ]

Exam insight:

• MC cuts ATC and AVC at their minima (under standard assumptions).
  This relationship is a frequent marker point.

The Shape of Cost Curves in the Short Run

SECO101 students often struggle with why curves are U-shaped. The core reason is:

• Fixed cost makes AFC fall as output rises.
• Variable cost initially falls in efficiency terms (economies of scale internally) then rises (diminishing marginal returns), generating U-shaped AVC and ATC.

A coherent verbal explanation:

1. At low output, workers and machines are underutilised → adding more labour reduces average costs (specialisation improves, learning occurs).
2. At higher output, fixed inputs become binding → each extra unit of labour yields smaller extra output → marginal cost rises → average cost rises.

Economies and Diseconomies of Scale (Link to Long Run)

Short run: at least one input fixed; cost curves are shaped by diminishing returns.

Long run: all inputs can vary. Firms can experience:

• Economies of scale: as output increases, average cost falls due to efficiencies, spreading fixed costs, better technology.
• Diseconomies of scale: as output increases further, coordination problems, bureaucracy, and managerial constraints increase average cost.

In exam answers, differentiate:

• Short run curve behaviour: influenced by diminishing marginal returns.
• Long run curve: the minimum cost for each output level when the firm adjusts all inputs.

Firm Behaviour: Profit Maximisation Framework

In micro, a standard assumption is that firms aim to maximise profit:
[
\pi = TR – TC
]
where:

• (TR = P \times Q) for price-taking firms.
• (P) is market price.
• (Q) is output.

Under perfect competition (intro micro context):

• A firm is a price taker, so (P) is given.
  Profit maximisation becomes choice of (Q).

Decision Rule: Shut Down vs Produce

In the short run, firms compare:

• price (P) to average variable cost (AVC)
• price (P) to average total cost (ATC)

Key logic:

• If (P \ge ATC): firm earns non-negative economic profit (may be zero economic profit).
• If (AVC \le P < ATC): firm earns negative economic profit but can cover variable costs; it should continue producing in the short run (economic loss).
• If (P < AVC): firm cannot cover variable costs; it should shut down (in the short run).

In exam diagrams:

• The supply curve for a competitive firm is typically the portion of MC above AVC.

Worked Cost Example (Concrete Numbers)

Let’s use a simplified scenario for clarity.

Assume a firm has:

• Fixed cost (FC = 100)
• Variable costs depend on output. Suppose:
  • At (Q=5): (VC=150) → (TC=250)
  • At (Q=6): (VC=168) → (TC=268)
    So for (Q=6), average total cost:
    [
    ATC = \frac{268}{6} \approx 44.67
    ]
    At (Q=5):
    [
    ATC = \frac{250}{5} = 50
    ]
    Marginal cost from 5 to 6:
    [
    MC = \Delta TC / \Delta Q = (268-250)/(6-5)=18
    ]
    If market price (P=45):
• Compare to ATC: (P<ATC) at both points maybe implies loss.
• Compare to AVC:
  • AVC at (Q=5): (VC/Q = 150/5=30)
  • (P=45\ge 30) implies production continues in short run.

Even if profit is negative, shutdown occurs only if price falls below AVC.

South African Industry Illustration: How Costs Shape Supply

Consider a typical South African baker (small or medium):

• Fixed costs: rent for premises, salaried management, insurance.
• Variable costs: flour, yeast, electricity use that scales with production, packaging.
  If wheat prices rise (input prices), variable costs rise:
• supply shifts left in the short run (less output at each price).
  If energy subsidies are reduced or tariffs rise sharply:
• AVC rises → threshold price for production increases.

In exam answers, link policy to costs:

• Taxes on inputs shift AVC and MC upward.
• Subsidies lower cost, shifting supply.

Exam Checklist for Production/Cost Questions

1. Identify short run vs long run.
2. Compute or interpret FC, VC, TC.
3. Use relationships between MC, ATC, AVC (minima intersections).
4. Apply price-ATC/AVC rule for profit/shutdown.
5. Convert cost analysis into supply implications.

Section 4: Market Structures and Competition—Perfect Competition and an Intro to Monopoly Logic

SECO101: Economics 1A (Micro) often moves from firm behaviour under perfect competition to broader market structure intuition. Even if monopoly details are not fully developed, you must know the core differences in incentives and outcomes: market power, entry, and how pricing decisions differ from perfect competition.

Perfect Competition: Assumptions and Implications

A competitive market assumes:

• Many firms
• Identical or homogeneous products
• Firms are price takers
• Free entry and exit (no long-run barriers)
• Perfect information (intro level assumption)

Because firms are price takers:

• Each firm’s demand curve is perfectly elastic: horizontal at market price (P).
• The firm cannot influence price by changing output.

Perfect Competition and Profit Maximisation

The firm chooses output where:

• (MC = MR)

For a price-taking firm:

• (MR = P)

So the condition becomes:
[
MC = P
]
subject to shutdown rule.

Long-Run Equilibrium in Competitive Markets

A frequent exam question: Why does economic profit become zero in the long run under perfect competition?

Mechanism:

• If firms earn positive economic profit, entry attracts new firms → supply increases → market price falls.
• As price falls, profit opportunities shrink.
• Entry stops when economic profit returns to zero.

In long run:

• (P = ATC_{min})
• Economic profit = 0
• Firms still earn normal profit (covering opportunity cost of capital).

A well-structured answer includes:

1. Sign of profit.
2. Entry/exit response.
3. How that changes market supply.
4. New equilibrium price.
5. Long-run profit condition.

Worked Example: Competitive Firm Output Choice

Suppose market price is (P=30). A firm’s cost schedule implies:

• At (Q=4), (MC=28)
• At (Q=5), (MC=30)
• At (Q=6), (MC=35)

Then optimal output is (Q=5) because:

• (MC) closest to (P), and if MC crosses P.

If the question asks for profit:

1. Compute (TR = P \times Q = 30 \times 5 = 150).
2. Compute (TC) at (Q=5) (from schedule).
3. Profit (=) TR − TC.

Short Run vs Long Run Graph Logic

You may be asked to interpret diagrams:

• Short run: price fixed, firms may have profit or loss.
• Long run: entry or exit changes price until firms earn zero economic profit.

In your written answer, describe the economic logic rather than only describing movement on axes.

Monopoly: Core Differences (Intro-Level)

Monopoly exists when:

• One firm sells the product (barriers to entry prevent others).
• The firm has market power.
• Demand faced by the monopolist is downward sloping.

Key difference:

• Under monopoly, the firm can influence price by choosing output.
• Thus the marginal revenue (MR) is below price (for typical downward sloping demand).

The typical optimality condition remains:
[
MC = MR
]
not (MC = P).

Then compare resulting price to ATC to determine profit.

Why Monopoly Produces Different Output and Prices

Because (MR < P), monopoly chooses output where:

• (MC = MR) yields a lower quantity than competitive equilibrium (holding demand and costs constant).
• Price is higher than the competitive price.

In welfare terms (intro intuition):

• Monopoly may create deadweight loss due to reduced output relative to efficient benchmark.
• Redistribution occurs from consumers to the monopolist depending on elasticity and cost structure.

In exam responses, keep the argument consistent:

• Perfect competition: many firms → no pricing power → efficient output.
• Monopoly: pricing power → restricted output → less consumer surplus and higher price.

Practical Example: Utilities and Exclusive Licences (Conceptual)

Some South African markets (e.g., certain localised service providers, historical exclusive licences) can be analysed conceptually as monopoly or monopoly-like:

• Barriers to entry (regulation, infrastructure ownership) prevent full competition.
  In an exam, you can use this as an illustrative story:
• A firm with local market power sets output and price with demand and marginal revenue logic.
• Welfare depends on costs and demand elasticity.

Be careful: exams often test whether you can identify the logical pattern, not whether you know specific market participants.

Competition vs Market Power: Elasticity’s Role

Elasticity matters for monopoly too:

• If demand is very elastic, monopoly is constrained; MR approaches P and the monopoly price may be closer to competitive.
• If demand is inelastic, monopoly can charge much higher markups.

In exam wording:

• The pricing power depends on elasticity of demand. More elastic demand → lower markup.

Exam Checklist for Market Structure Questions

1. State the key assumptions (price taker vs price maker).
2. Write the profit maximisation condition:
   • Perfect competition: (MC = P)
   • Monopoly: (MC = MR)
3. Use demand and cost relationships to infer output and price direction.
4. If asked: compute profit or interpret (economic profit vs loss).
5. Mention welfare/efficiency intuition if relevant.

Section 5: Welfare, Market Failures, and Policy—Taxes, Subsidies, Price Controls, and Externalities

The final step in SECO101 micro often asks: if markets don’t produce socially optimal outcomes, what can policy do? This section focuses on consumer/producer welfare concepts and classic market failure channels: externalities, taxes/subsidies, and (sometimes) price controls and their consequences.

Consumer and Producer Surplus: Measuring Gains from Trade

Definitions

• Consumer surplus (CS): difference between willingness to pay and market price.
• Producer surplus (PS): difference between market price and willingness to accept (marginal cost structure).

In competitive markets:

• Efficient allocation maximises total surplus.

In exam diagrams:

• CS is area under demand above price.
• PS is area above supply below price.

Why Surplus Matters

Surplus lets you analyse:

• distributional effects of policy (who gains/loses),
• efficiency losses (deadweight loss).

Taxes: Incidence and Welfare Effects

A common advanced intro question is tax incidence: who actually bears the burden, buyers or sellers?

Key Insight: Incidence Depends on Elasticities

• More inelastic side bears more of the tax burden.
• More elastic side responds more to price changes, shifting more burden to the other side.

Even without complex math, you can reason:

• If consumers cannot easily substitute away when taxed, then effective price paid increases more for consumers.
• If producers can easily adjust supply, they absorb less.

Example Structure for Exam Answers

Suppose a per-unit tax (t) is placed on sellers or buyers.
You must typically say:

1. Supply shifts left (if sellers bear tax) or demand shifts left (if buyers bear tax).
2. Equilibrium price for buyers and sellers diverge:
   • (P_{buyers} > P_{sellers}).
3. Tax revenue collected = (t \times Q_{taxed}).
4. Welfare consequences:
   • Consumer surplus falls.
   • Producer surplus falls.
   • Deadweight loss occurs because output falls below the efficient quantity.

Worked Numerical Illustration (Tax Revenue and Surplus Intuition)

Imagine:

• Original equilibrium price (P^* = 50) and quantity (Q^* = 100).
  A tax reduces quantity to (Q_t = 80) and creates a wedge such that consumers pay (P_c=56) and producers receive (P_p=46). The tax per unit equals the wedge:
  [
  t = P_c – P_p = 56-46 = 10
  ]
  Tax revenue:
  [
  TR_{tax} = t \times Q_t = 10 \times 80 = 800
  ]
  Even if you do not compute CS and PS areas precisely, you can state:
• The sum of CS and PS decreases.
• Revenue is part of the transfer; the rest is deadweight loss due to reduced trade from 100 to 80 units.

Subsidies: Incentives and Fiscal Cost

A subsidy shifts supply right (or demand right depending on viewpoint) leading to:

• lower price for consumers,
• higher quantity produced/consumed.

But the government pays:

• Subsidy cost = subsidy per unit × quantity.

Potential downsides:

• Efficiency loss if subsidy encourages overconsumption relative to socially optimal level.
• Fiscal burden on government budgets.

In exam answers, be sure to distinguish between:

• distribution (transfers) and
• efficiency (deadweight loss).

Price Controls: Ceiling Prices and Floor Prices

Price Ceiling

A price ceiling is a maximum legal price.

• If set below equilibrium, it creates a shortage.
• If set above equilibrium, it has no binding effect.

In shortage, allocation often shifts to non-price mechanisms:

• queues,
• rationing,
• informal payments (depending on context).

Exams often want you to mention:

• shortage magnitude depends on how far ceiling is from equilibrium and on elasticities.

Price Floor

A minimum legal price (common in labour and agricultural product contexts).

• If set above equilibrium, it creates surplus (excess supply).
• If below equilibrium, it does nothing.

In surplus, firms may be forced to reduce production or face wasted output.

Externalities: When Market Prices Fail to Reflect Social Costs/Benefits

Externalities occur when:

• actions impose costs or benefits on third parties not reflected in market prices.

Two types:

• Negative externality: e.g., pollution from factories.
• Positive externality: e.g., vaccination benefits society.

Negative Externality (Conceptual Diagram Logic)

If a factory pollutes:

• private marginal cost (PMC) < social marginal cost (SMC).
  The market equilibrium where supply/demand intersect uses PMC and results in:
• overproduction relative to the socially efficient level.

A policy to correct:

• tax equal to marginal external damage (Pigouvian tax),
• regulation/standards,
• cap-and-trade (policy details may vary by syllabus depth).

Positive Externality

If education has spillovers:

• private marginal benefit (PMB) < social marginal benefit (SMB).
  The market results in:
• underconsumption relative to efficient output.

Policy:

• subsidy equal to marginal external benefit,
• grants or public provision.

Public Goods and Common Resources (Intro)

Even if full detail isn’t required, exams may ask conceptual comparisons:

• Public goods are non-excludable and non-rival.
• Common resources are rival but non-excludable.

Market outcomes:

• public goods: underprovided due to free-riding.
• common resources: overused due to tragedy-of-the-commons logic.

A strong exam answer:

• Explain the incentive problem, not just the definitions.

Policy Instruments and Efficiency-Equity Trade-offs

A policy can improve efficiency but may affect distribution.

A structured policy evaluation in exams:

1. Efficiency: Does it move quantity toward the social optimum?
2. Equity: Who wins and who loses? (CS, PS, income distribution)
3. Administrative feasibility: Is it practical to measure or enforce?
4. Incentives: Does it encourage desired behaviour?

Example: externality tax vs direct regulation

• Tax uses price mechanism and encourages firms to reduce emissions if it’s cheaper to abate.
• Regulation can set direct standards but might be less flexible.

South African Application Themes: Taxes, Utilities, and Externalities

Micro theory is often applied to real South African policy debates:

• Excise taxes (e.g., on alcohol or fuel): affect prices and consumption; incidence depends on elasticity.
• Electricity pricing and subsidies: influence production and household consumption; can generate efficiency and distribution effects.
• Environmental regulation: addresses negative externalities such as air pollution or water contamination.
• Housing, rent controls, and affordability: can be analysed as price ceiling/floor problems with supply responses.

In exams, it is acceptable to use “typical” examples if the question does not demand a named case study. Keep the theoretical mechanism front and centre.

Exam Checklist for Welfare and Policy Questions

When answering welfare/policy problems:

1. Identify the market failure or policy type (tax, subsidy, price control, externality).
2. Determine direction of supply/demand shift.
3. Determine changes in price for consumers and producers and quantity traded.
4. Mention welfare effects:
   • changes in CS and PS,
   • tax revenue transfer,
   • deadweight loss (if efficiency loss is implied).
5. If externalities: specify whether the market is over- or under-producing relative to social optimum and propose correction.

High-Yield Exam Practice: How to Structure Answers Rapidly in SECO101

Even without specific past paper questions, exam technique often determines marks. This section provides practical patterns you can use for common micro topics.

Pattern 1: “Explain and Graph” Questions

A typical instruction: “Explain the effect of a rise in income on demand for a normal good.”

A strong answer structure:

1. State what happens to demand curve (shift right if normal good).
2. Explain why (income effect increases quantity at each price).
3. Clarify movement vs shift.
4. Conclude with market-level predictions: higher equilibrium price and higher equilibrium quantity.

Pattern 2: “Compute” Questions with Clear Steps

Example structure for elasticity or cost/profit:

1. Write formula.
2. Substitute numbers.
3. Calculate with units or signs.
4. Interpret (elastic/inelastic; profit positive/negative; shutdown decision).

Pattern 3: Policy Impact Evaluation

For taxes/subsidies:

1. Identify who pays the tax (incidence).
2. Decide which curve shifts.
3. Determine new equilibrium and tax revenue.
4. Discuss welfare:
   • redistribution + efficiency loss.

Pattern 4: Micro Diagrams Interpretation

When faced with a diagram:

• Always name the axes (P vs Q).
• Identify the initial equilibrium.
• Describe which curve moves and why.
• Mention direction of changes.

Final Consolidation: Core SECO101 Micro Concepts to Memorise (Quick Reference)

Use this as a last-minute checklist immediately before exams.

Market and Elasticity

• Law of demand: price ↑ → quantity demanded ↓ (ceteris paribus)
• Demand shifters: income, tastes, related prices, expectations, number of buyers
• Law of supply: price ↑ → quantity supplied ↑ (ceteris paribus)
• Supply shifters: input costs, technology, taxes/subsidies, expectations, number of sellers
• Equilibrium: where Qd = Qs
• Elasticity:
  • (|PED|>1) elastic, (|PED|<1) inelastic
  • Substitutes, necessity, time horizon matter

Consumer Choice

• Budget constraint: (p_x x + p_y y \le m)
• Optimal choice:
  • interior tangency: (MRS = p_x/p_y)
  • corner solutions when preferences force extremes
• Normal vs inferior goods:
  • income rises → quantity rises/falls accordingly

Production and Costs

• (TC = FC + VC)
• (AFC = FC/Q) falls as Q rises
• (ATC = TC/Q), (AVC = VC/Q)
• (MC = \Delta TC/\Delta Q)
• MC intersects ATC and AVC at their minima (typical under standard assumptions)
• Shutdown rule:
  • produce if (P \ge AVC)
  • shut down if (P < AVC)

Market Structure and Behaviour

• Perfect competition:
  • price taker, (MR=P)
  • profit max: (MC = MR = P)
  • long run: economic profit → 0, (P=ATC_{min})
• Monopoly:
  • chooses output where (MC = MR)
  • (MR < P) for downward sloping demand
  • generally higher price and lower output vs competition

Welfare and Policy

• CS and PS measure gains from trade
• Taxes create wedge and deadweight loss; incidence depends on elasticities
• Subsidies increase quantity but cost government budget; may cause overconsumption
• Price ceilings and floors cause shortages/surpluses if binding
• Externalities:
  • negative: market overproduces (too much output)
  • positive: market underproduces (too little output)
  • Pigouvian tax/subsidy can correct incentives

These notes are aligned to the kinds of conceptual and computational competencies expected from an Economics 1A (Micro) course. Practise converting every verbal statement into the correct graph direction (shift vs movement), the correct algebra (elasticity, cost relations, profit rules), and the correct policy/welfare interpretation (incidence, surplus, and deadweight loss).