ECO1010F: Microeconomics I Exam Notes

Microeconomics I (ECO1010F) typically introduces the core toolkit of economic thinking: how individuals and firms make decisions under scarcity, how markets coordinate those decisions, and how equilibrium changes when conditions shift. These exam notes emphasise clear definitions, exam-ready diagrams/logic, and practical applications relevant to South African university syllabi. You’ll find worked examples, common question patterns, and “how to score” guidance for multiple-choice, short-answer, and problem-based questions.

ECO1010F Microeconomics I: Foundations, Economic Thinking, and Core Graph Skills

What Microeconomics Is (and Is Not)

Microeconomics studies the behaviour of individual economic units—households, firms, industries, and specific markets—and how their decisions interact. In an ECO1010F context, the emphasis is usually on:

Choices under scarcity (opportunity cost)
Demand and supply (how prices and quantities are determined)
Consumer choice (preferences, budget constraint, utility ideas)
Producer behaviour (costs, production decisions)
Market structures (often a first pass at perfect competition vs. market power)
Welfare (efficiency, surplus concepts)

Microeconomics is not primarily about the whole economy’s output and unemployment—that’s more typical of macroeconomics.

Opportunity Cost and Decision-Making

A recurring exam theme is opportunity cost: the cost of a choice is the value of the next best alternative forgone. Opportunity cost is not always the amount of money paid; it’s the value of what you give up.

Example (consistent with SA contexts):
A student uses a weekend to do part-time work at a net income of R600. Alternatively, they could attend a workshop worth R200 and gain skills they value at R250. The opportunity cost of attending is:

Value of forgone earnings = R600
(Value of workshop + skills) = R200 + R250 = R450, but that does not add to cost; it’s part of the benefit of the alternative.

So if the workshop is chosen, the opportunity cost is essentially the R600 they could have earned. Exams often ask which concept is correct: “cost equals cash outlay” vs “cost equals opportunity cost”.

Positive vs Normative Statements

Positive economics describes “what is”: e.g., “When the price increases, quantity demanded decreases.”
Normative economics prescribes “what should be”: e.g., “The government should impose a price ceiling.”

Many exam questions try to see if you can label statements correctly.

Classification practice:

“A tax increases the final price paid by consumers in a competitive market.” → Positive
“The government should subsidise public transport to reduce inequality.” → Normative
“If supply shifts right, equilibrium price falls.” → Positive

Market Equilibrium and Disequilibrium

The standard model assumes:

Demand curve: downward sloping (price vs quantity demanded)
Supply curve: upward sloping (price vs quantity supplied)
Equilibrium occurs where quantity demanded = quantity supplied

If the market price is set above equilibrium, typically there is excess supply. If below equilibrium, there is excess demand.

Exam wording to watch:

“movement along the curve” vs “shift of the curve”
“increase/decrease in quantity demanded/supplied” vs “increase/decrease in demand/supply”

Demand: Distinctions and Determinants

Demand refers to the relationship between price and quantity demanded, holding other factors constant. Demand itself is distinct from quantity demanded.

Law of Demand

The law of demand states that, ceteris paribus, as price increases, quantity demanded decreases.

Reasons often discussed include:

Income and substitution effects (consumer theory)
Diminishing marginal willingness to pay
Substitutes become relatively more attractive when price rises

Demand Determinants (Shifts)

Common determinants that shift the demand curve:

Consumer income (if normal good)
Preferences and tastes
Prices of related goods:
- Substitutes: raise demand if substitute becomes more expensive
- Complements: raise demand if complement becomes more expensive decreases
Expectations about future prices/income
Number of buyers in the market

Important exam skill: Use sign logic. For example:

If a good is a normal good, an increase in income shifts demand right.
If a good is inferior, income increase shifts demand left.

Supply: Distinctions and Determinants

Similarly:

Supply (curve relationship) vs quantity supplied (point on curve)

Supply Determinants (Shifts)

Typical supply shifters include:

Input prices (e.g., wages, raw materials)
Technology improvements
Taxes/subsidies on production
Number of sellers/firms
Expectations (future prices)
Weather and other shocks (especially in agriculture)

Graph Mastery: The Core Skill

Most ECO1010F questions reward students who can interpret graphs quickly and accurately.

Movement vs Shift

Movement along the curve occurs due to a change in price (for demand or supply).
Shift of the curve occurs due to a change in a non-price determinant.

Example (typical exam pitfall):
A drought increases production costs for maize. That shifts supply left (or up). Students sometimes incorrectly say “demand decreases” if quantity falls—quantity falls because supply changed.

Equilibrium Effects from Shifts

A common approach:

Identify which curve shifts (demand or supply).
Determine direction of shift (right/left).
Determine how equilibrium price and equilibrium quantity move.

Standard cases:

Demand ↑ (right) and Supply constant → price ↑, quantity ↑
Supply ↑ (right) and Demand constant → price ↓, quantity ↑
Demand ↓ (left) and Supply constant → price ↓, quantity ↓
Supply ↓ (left) and Demand constant → price ↑, quantity ↓

Introduce a Scenario (South Africa relevant)

Imagine a policy increases VAT on imported electronics. For domestic sellers, this raises input costs depending on supply chain; supply may shift left, pushing prices up. Consumers may also reduce spending: demand could shift left. In equilibrium analysis, if both happen, price unambiguously rises, but quantity depends on relative magnitudes.

Exams often ask qualitative outcomes; you must say clearly what you can and cannot conclude without magnitudes.

Worked Example: Equilibrium Change

Problem:
Initial equilibrium: at price R10, quantity demanded equals quantity supplied at 100 units. A subsidy to producers reduces their cost, shifting supply right. After the change, equilibrium price is R8 and equilibrium quantity is 120 units.

Questions you might see:

What happened to supply? → Supply increased/right shift
Compare changes: price fell from R10 to R8 (−R2), quantity rose from 100 to 120 (+20)
Explain in words: lower production costs increase supply; market clears at a lower price and higher quantity.

Elasticity Preview: The Bridge to Later Topics

Even if elasticity appears later in ECO1010F, it builds on graph intuition.

Price elasticity of demand measures responsiveness of quantity demanded to price.
Income elasticity measures responsiveness of quantity to income.
Cross-price elasticity measures responsiveness of demand for one good to price of another good.

A key exam logic: elasticity affects incidence of taxes and effectiveness of policies.

ECO1010F Consumer Theory: Preferences, Utility Ideas, Budget Constraints, and Demand Logic

Preferences and Utility: How Economists Model Choice

Consumer theory often starts with preferences, which are assumed to be complete and transitive in standard models.

Complete: a consumer can compare any two bundles and say which is preferred or indifferent.
Transitive: if A is preferred to B and B is preferred to C, then A is preferred to C.

To translate preferences into something usable, economists often use utility—a numerical representation of satisfaction.

Exam note: Utility numbers don’t matter in absolute terms; only comparisons and marginal trade-offs matter. A monotonic transformation yields the same choices.

Indifference Curves

An indifference curve represents combinations of goods between which the consumer is indifferent.

Key properties:

Downward sloping (more of one good means less of another to keep utility constant)
Convex to the origin (diminishing marginal rate of substitution)
Higher utility curves represent more preferred bundles

Diminishing Marginal Rate of Substitution (MRS)

If indifference curves are convex, then as the consumer has more of good X, they are willing to give up less of good Y to get an additional unit of X. That’s diminishing MRS.

Budget Constraint

A consumer faces a budget constraint:

With income I
Prices of goods Px and Py
Quantities x and y
Budget: Px x + Py y = I

In exam questions, you may be asked to calculate:

Intercepts: max x when y=0, and max y when x=0
Whether a bundle is affordable
The effect of price changes or income changes on the constraint line

Worked Budget Constraint Example

Suppose:

Income I = R1,200
Price of good X: Px = R10
Price of good Y: Py = R20

Budget equation:

10x + 20y = 1200

Intercepts:

If y=0 → 10x=1200 → x=120
If x=0 → 20y=1200 → y=60

If the bundle is (x=50, y=40):

Cost = 10(50) + 20(40) = 500 + 800 = R1,300
Not affordable (exceeds R1,200)

Optimal Choice: Tangency Condition

Under standard assumptions, the consumer chooses the bundle where the highest possible indifference curve touches the budget line—often called tangency.

At tangency:

MRS = Px/Py

Intuition: the consumer’s willingness to trade one good for another equals the market’s exchange rate.

Special Cases: Perfect Substitutes and Perfect Complements

Exams like to test non-standard preferences because tangency may not apply normally.

Perfect Substitutes

Indifference curves are linear; MRS is constant. Consumer buys whichever good yields greater utility per rand.

Example utility: U = aX + bY with constant rates. Optimal choice: invest all budget into the higher “per price” alternative.

Perfect Complements

Indifference curves are L-shaped: goods must be consumed together in fixed proportions (e.g., left shoes and right shoes).

Optimal choice occurs at the corner where you satisfy the fixed ratio.

From Utility Maximisation to Demand

A central step: derive how demand changes when price changes. While full derivation can be calculus-heavy, exam questions usually ask for qualitative conclusions:

Demand decreases when price rises (for normal goods)
Substitution effect and income effect may be discussed at a high level

Normal vs Inferior Goods; Substitution and Income Effects (Qualitative)

When price of a good increases:

Substitution effect: consumer substitutes away from the more expensive good → demand falls
Income effect: depends on whether good is normal or inferior
- Normal good: income effect reinforces substitution → demand falls further
- Inferior good: income effect offsets substitution → demand could fall less or even rise in extreme cases

Important exam phrasing:
For inferior goods, income effect is positive for demand when income decreases. Since a price increase effectively reduces real income, it can increase demand.

Worked Example: Effect of Income Change

Assume good X is a normal good. If income increases from R1,200 to R1,500, budget expands and demand shifts right. You may be asked:

What happens to budget constraint intercepts?
How does the feasible set change?
Does quantity demanded increase?

Calculations for Intercepts

Keep prices constant:

Px = R10, Py = R20

At I=R1,200:

Max x = 120
Max y = 60

At I=R1,500:

Max x = 150
Max y = 75

The budget line moves outward, giving higher attainable bundles. If X is normal, demand for X increases.

Demand Curves and Marshallian vs Hicksian (If Covered)

Some syllabi touch on the distinction:

Marshallian (uncompensated) demand: actual choice given income
Hicksian (compensated) demand: choice that holds utility constant while adjusting income to offset price change

If this is included, exams usually focus on interpretation rather than heavy math.

Marshallian demand reflects substitution + income effects.
Hicksian demand reflects substitution effect only.

Income Elasticity and Classification of Goods

Define:

Income elasticity of demand = (% change in quantity demanded) / (% change in income)

Interpretation:

0: normal good
< 0: inferior good
= 0: necessity-like (rarely exact, but conceptually)
Large absolute values: luxury-like / highly responsive

Example:
If income increases by 10% and quantity demanded increases by 25%:

Income elasticity = 0.25 / 0.10 = 2.5
Highly income elastic: luxury-like.

Price Elasticity of Demand: Building toward Market Impact

While full elasticity calculations may appear in later sections, you can prepare with the basic formula:

Point elasticity:

Ed = (dQ/dP) * (P/Q)

Arc elasticity (common in exams):

Ed = [(Q2−Q1)/((Q2+Q1)/2)] / [(P2−P1)/((P2+P1)/2)]

Signs: elasticity is often reported as absolute value.

Exam pattern:
You may see:

“Is demand elastic or inelastic?”
“Which has bigger revenue effect?”
“What happens to total revenue when price rises?”

Total Revenue and Elasticity Logic

Total revenue (TR) = P × Q. When price changes:

If demand is elastic, price ↑ → quantity falls proportionally more → TR falls
If demand is inelastic, price ↑ → quantity falls proportionally less → TR rises

This is a frequent exam short-answer.

Example:
Suppose price rises by 5% and quantity falls by 8%. Since |−8%| > 5%, demand is elastic → TR decreases.

ECO1010F Production, Costs, and Firm Behaviour: From Short Run to Long Run

Why Firms Exist in Microeconomics

Firms exist to transform inputs into outputs. In Microeconomics I, the firm is modelled as choosing production and pricing decisions based on costs and demand conditions.

Two central ideas:

Production: turning inputs (labour, capital, materials) into output
Costs: evaluating opportunity costs, accounting vs economic costs, and decision-relevant cost curves

Production Functions and Marginal Products

A production function describes maximum output given input quantities:

Q = f(L, K)

In many beginner models, they consider one variable input with others fixed (short run). Then:

Marginal Product of Labour (MPL): additional output from one more unit of labour
Diminishing marginal returns: as more labour is added (with fixed capital), MPL eventually falls

Worked Intuition Example

Suppose fixed capital is 1 machine. Labour increases:

Labour (L)	Output (Q)	MPL (ΔQ/ΔL)
0	0	—
1	10	10
2	18	8
3	24	6
4	28	4

MPL decreases as L increases → suggests diminishing returns.

Costs: Accounting vs Economic Costs

A frequent exam point:
Economic cost includes explicit costs and implicit opportunity costs.

Accounting profit: revenue − explicit costs
Economic profit: revenue − (explicit + implicit costs)

Example:
A business uses owner’s time valued at R3,000/month (implicit cost).
If accounting profit is R1,000/month, economic profit is R1,000 − 3,000 = −R2,000, meaning the owner is not earning enough to justify opportunity cost.

Total, Average, and Marginal Costs

Let:

Total cost = TC
Variable cost = VC
Fixed cost = FC (so TC = FC + VC)

Then:

Average cost: AC = TC/Q
Average variable cost: AVC = VC/Q
Marginal cost: MC = ΔTC/ΔQ

Relationship Between Curves (Classic Exam Logic)

MC intersects AC at AC’s minimum.
MC intersects AVC at AVC’s minimum (if VC has typical shape).
When MC < AC, AC is falling; when MC > AC, AC is rising.

Students often lose marks by not stating these relationships clearly.

Short Run vs Long Run

Short run: at least one input fixed (e.g., capital fixed)
Long run: all inputs variable

In the short run, fixed costs affect the shape of total cost curves but not marginal cost in the same direct way; since fixed costs don’t change with output, they disappear in marginal calculations.

In the long run:

You can choose the cost-minimising scale.
Long-run average cost (LRAC) reflects the envelope of short-run average cost curves if covered.

Worked Costs Example

Assume:

FC = R500 per period
VC depends on output: VC(Q) = 20Q + 2Q²

Then:

TC(Q) = 500 + 20Q + 2Q²

Compute at Q=5:

VC = 20(5) + 2(25) = 100 + 50 = 150
TC = 500 + 150 = R650
AC = 650/5 = R130

Compute at Q=6:

VC = 20(6) + 2(36) = 120 + 72 = 192
TC = 500 + 192 = R692
AC = 692/6 ≈ R115.33

Marginal cost roughly:

MC ≈ ΔTC/ΔQ = (692−650)/(6−5)=42/1=R42

Now interpret: if MC is below AC at Q=5? Compare:

MC at around 5 is 42, AC is 130 → MC < AC suggests AC is falling, consistent with AC from 130 to 115.33.

This is the style of numeric consistency examiners like: you connect calculations to curve logic.

Economies and Diseconomies of Scale

Economies of scale: as output increases, average cost falls due to spreading fixed costs or operational efficiencies (specialisation, bulk purchasing, learning-by-doing).
Diseconomies of scale: average cost rises due to coordination problems, management inefficiencies, congestion.

In diagrams:

LRAC may slope downward initially then flatten then rise.

Firm Decisions Under Different Market Structures (Preview)

Microeconomics I sometimes begins market structures:

Perfect competition (price taker)
Monopoly and monopolistic competition (price setters)

But even before full details, cost concepts inform supply decisions:

A competitive firm chooses output where marginal cost equals price (in the short run) if producing.

In monopoly, revenue and marginal revenue matter, but costs still determine profitability.

ECO1010F Market Equilibrium, Elasticity Applications, and Government Policy (Taxes, Subsidies, Price Controls)

The Role of Elasticity in Policy

Elasticity is not just a definition; it determines who bears the burden of taxes and how large the effect on quantities is.

More elastic demand: consumers respond strongly → quantity falls a lot
More inelastic demand: consumers respond weakly → quantity falls less
Similar logic for supply

Tax Incidence: Who Pays?

In competitive markets, the statutory tax rate doesn’t determine who bears the burden. Instead, elasticities of supply and demand do.

General rule:

The side more inelastic bears a larger share of the tax burden.

Intuition: The more “stubborn” side changes quantity less when prices change; therefore it accepts a larger effective price change.

Numeric Illustration (Arc-like reasoning)

Suppose equilibrium with:

Price consumers pay: Pc
Price producers receive: Pp
Tax per unit: t = Pc − Pp

If demand is very inelastic and supply is elastic:

Consumers’ quantity demanded doesn’t fall much, so consumers accept a bigger increase in consumer price.
Producers may only see a small decrease in price received.

Subsidies

Subsidies work in the opposite direction:

A subsidy encourages production or consumption depending on mechanism, shifting incentives.
In competitive markets, the burden is split according to elasticities again.

A subsidy reduces effective price faced by one side, but equilibrium adjusts, so both prices move.

Price Ceilings and Price Floors

Price Ceiling (often below equilibrium)

Causes excess demand (shortages) if set below equilibrium
Quality deterioration and rationing can occur
In many exam questions, you’re asked to predict direction of shortage and quantity supplied/demanded.

Price Floor (often above equilibrium)

Causes excess supply (surplus)
Creates potential for government purchases or waste (depending on policy)

Exam precision:
State:

Qd at the ceiling price
Qs at the ceiling price
Compare to equilibrium quantity

Even without numbers, you can still state:

Qd increases relative to equilibrium
Qs decreases relative to equilibrium

Taxes and Deadweight Loss (Efficiency Loss)

When a tax creates a wedge between price paid and price received, transactions that would have occurred in equilibrium may not. The difference between pre-tax and post-tax traded quantities creates:

Deadweight loss (DWL): efficiency loss due to mutually beneficial trades that don’t happen.

In terms of surplus:

Consumer surplus and producer surplus each shrink
Government revenue is gained, but not enough to offset the lost surplus
DWL is the “gap”

Worked Example: Policy with Numeric Supply and Demand (Template)

Consider linear demand and supply:

Demand: Qd = 100 − 2P
Supply: Qs = 20 + 2P
Here P is price, Q quantity.

Pre-tax equilibrium

Set Qd=Qs:
100 − 2P = 20 + 2P
80 = 4P
P* = 20
Q* = 100 − 2(20) = 60

So equilibrium: Pc=20, Pp=20, Q=60.

Imposing a tax t = 5 per unit

With a per-unit tax, producers receive Pp = Pc − 5. Using consumer price Pc:

Qd = 100 − 2Pc
Producers supply based on received price Pp:
Qs = 20 + 2Pp = 20 + 2(Pc − 5) = 20 + 2Pc − 10 = 10 + 2Pc

Set Qd=Qs:
100 − 2Pc = 10 + 2Pc
90 = 4Pc
Pc = 22.5

Then Pp = 22.5 − 5 = 17.5
Quantity:
Q = 100 − 2(22.5) = 100 − 45 = 55

So:

Consumer price rises from 20 to 22.5 (+2.5)
Producer price falls from 20 to 17.5 (−2.5)
Quantity falls from 60 to 55 (−5)

Government revenue:

Tax revenue = t × Q = 5 × 55 = R275 (if currency is rand per unit)

DWL:

Compare pre-tax surplus triangle areas.
In linear cases:
DWL is roughly 0.5 × t × (Q_pre − Q_post) = 0.5 × 5 × 5 = 12.5 in “quantity-price units”.
If using actual numeric currency, you interpret accordingly on diagrams (but exams often accept the triangle area logic).

Elasticity and Revenue: The Laffer-curve intuition (Basic)

In simple tax discussions:

If demand is inelastic, quantity doesn’t fall much → tax revenue may rise with higher tax rate.
If demand is elastic, quantity falls significantly → revenue may fall after a point.

Some courses mention:

Tax revenue peaks at intermediate rates.
Not a strict “Laffer curve” derivation in ECO1010F, but qualitative understanding may appear.

Comparing Policies: Who Gains and Who Loses?

A common exam question requires identifying:

Consumers: lose via higher prices (or lower prices depending on policy)
Producers: gain or lose via price received changes
Government: gains via tax revenue, loses via subsidy payouts
Society: efficiency losses via DWL or gains via corrected externalities (if covered)

Externalities (If Included): Taxes vs Tradable permits

Microeconomics I sometimes briefly introduces externalities. If so:

Negative externality: impose a Pigouvian tax equal to marginal external cost
Positive externality: subsidise marginal benefit

Even if the exam focuses mainly on markets and elasticity, being able to interpret a tax as internalising an external cost can be useful.

ECO1010F Exam Skills: Problem-Solving Framework, Common Question Types, and Practice Scenarios (South Africa Context)

A High-Scoring Exam Workflow (Apply to Almost Any Question)

Use a consistent method:

Identify the topic: demand/supply, elasticities, tax incidence, production costs, or choice theory.
State the ceteris paribus clause: “other things equal” so you don’t mix shifts with movements.
Draw or describe the correct diagram (even briefly).
State the equilibrium direction changes: price up/down, quantity up/down.
If numbers are given, compute:
- equilibrium price/quantity
- elasticities (point or arc)
- tax revenue and/or surplus changes
Explain in words: 1–3 lines of intuition that matches your calculations.

This prevents the classic error of getting the sign wrong (e.g., saying price falls when demand rises).

Most Common Exam Question Types

1) Distinguish movement vs shift

Typical prompt: “The price of maize increases. Illustrate the effect on demand.”
If the price changes, you move along demand; demand shifts only if non-price determinants change.

2) Elasticity classification and revenue implications

Typical prompt: “Price increases from R50 to R60. Quantity demanded falls from 200 to 170. Is demand elastic? What happens to total revenue?”
You compute arc elasticity and then TR changes.

3) Tax incidence

Typical prompt: “A per-unit tax is imposed. Who bears the burden and why?”
Answer with “elasticity of supply/demand”.

4) Cost curves and firm logic

Typical prompt: “If MC is below AC, what happens to AC?”
State: AC is falling.

5) Budget constraint and affordability

Typical prompt: “Is bundle (x,y) affordable given income and prices?”
Compute total expenditure and compare to income.

Detailed Worked Exam-Style Practice: Elasticity and Total Revenue

Problem:
Price increases from R40 to R50. Quantity demanded decreases from 200 to 170 units.
Calculate arc elasticity and determine if demand is elastic/inelastic. Then state the effect on total revenue.

Step 1: Arc elasticity formula

Arc elasticity:

Ed = ( (Q2 − Q1) / ((Q2 + Q1)/2) ) / ( (P2 − P1) / ((P2 + P1)/2) )

Given:

Q1=200, Q2=170
P1=40, P2=50

Compute percentage changes relative to averages:

Quantity change numerator: Q2 − Q1 = 170 − 200 = −30
Quantity average: (170 + 200)/2 = 370/2 = 185
So quantity term: −30/185 ≈ −0.16216

Price change numerator: P2 − P1 = 50 − 40 = 10
Price average: (50 + 40)/2 = 90/2 = 45
So price term: 10/45 ≈ 0.22222

Elasticity:

Ed ≈ (−0.16216) / (0.22222) ≈ −0.7297
Absolute value ≈ 0.73 → inelastic (since |Ed| < 1)

Step 2: Total revenue effect

Initial TR = P1 × Q1 = 40 × 200 = R8,000
New TR = P2 × Q2 = 50 × 170 = R8,500

Total revenue rises because demand is inelastic.

Exam-quality conclusion:
Demand is inelastic; price increase increases total revenue.

Detailed Worked Practice: Tax Incidence with Elasticities (Qualitative + Partial Quant)

Even if your exam gives graphs rather than equations, elasticity reasoning remains.

Scenario:
A competitive market imposes a tax. Demand is relatively steep (more inelastic) and supply is relatively flat (more elastic).

Answer framework:

Tax wedge shifts prices paid/received.
Quantity reduces.
Incidence: more inelastic side bears more burden.
Therefore:
- If demand is more inelastic, consumers bear more of tax.
- Producers bear less (receive a smaller reduction).

You can support this by noting that a steep demand curve means consumers change quantity less when consumer prices rise—so prices adjust more on that side.

Case Study Style Practice: South African Goods and Market Interpretation (No Numbers Needed)

South African markets often appear in examples through goods like:

maize (agricultural supply shocks)
petrol/energy (taxes, regulation, global price pass-through)
public transport (demand depends on income and substitutes)
mobile data/telecom services (subscription models; competition affects elasticity)

A strong exam answer doesn’t require detailed SA institutional facts; it requires using the micro model correctly.

Example prompt:
“Global oil prices rise. Explain the effect on the market for petrol in South Africa.”
A microeconomic answer:

Higher oil prices increase input costs for refined petrol → supply shifts left.
Equilibrium price rises, quantity falls.
Demand may also fall depending on elasticity (if people can substitute to public transport/other fuels).
Government taxes/regulations may affect how much final prices change.

Firm Costs: How to Interpret Questions with Missing Graphs

Sometimes exams provide descriptions instead of graphs. You need to connect:

FC is constant (in SR)
VC rises with output
MC reflects incremental cost
AC depends on both FC and VC

If asked: “Output increases. What happens to MC/AC?”
Your response should depend on whether MC is rising/falling and whether MC is above/below AC.

A safe general structure:

Determine whether marginal returns are diminishing in the short run.
If diminishing returns, VC increases at increasing rate → MC rises after some point.
AC may initially fall due to FC spreading, then rise when VC dominates.

Common Errors and How to Avoid Them (Exam-Focused)

Saying demand shifts when only price changed.
Fix: price change → movement along demand; non-price factor → shift.
Confusing elasticity with slope alone.
A curve’s steepness doesn’t necessarily mean more elastic; elasticity depends on price and quantity magnitudes and formula context.
Mixing up supply and demand roles in tax incidence.
Always write: “Burden depends on relative elasticity: more inelastic side bears more.”
Using economic and accounting profit interchangeably.
Fix: economic profit subtracts implicit costs too.
Forgetting the intersection rules: MC crosses AC at AC minimum.
This can be a direct scoring point if asked.

How to Present Diagrams in Exams (Even When You Can’t Draw Perfectly)

Examiners often reward clarity. Your diagram conventions:

Label axes: Price (P) and Quantity (Q)
Draw curves with correct slopes:
- Demand downward
- Supply upward
Clearly indicate shift direction with arrows
Mark equilibrium point(s) with dots and labels (e.g., E0 and E1)

If the exam is multiple choice, a verbal description can still score if you are precise.

Consistent Quantitative Logic: The “Numbers Discipline” Rule

When you calculate, keep a running list:

Equilibrium before policy
After policy:
- new price(s)
- new quantity
- tax revenue/subsidy spending
- welfare or surplus changes (if asked)

If you compute tax revenue as t×Q, ensure:

t is per unit
Q is the post-tax quantity traded

This prevents inconsistencies like using pre-tax quantity in revenue calculations.

Institution Cluster (South Africa) Focus Note Embedded in Practice Scenarios

Microeconomics exam preparation in South Africa often benefits from adapting examples to institutional contexts: you may encounter syllabi where lecturers frame applications using local market settings, but the underlying micro models remain the same. Your answers should therefore keep the model logic consistent (demand/supply, elasticity, cost curves), while the “story” can be tailored to typical South African goods and policy debates.

Final Consolidation: What to Memorise vs What to Derive

High-Frequency Definitions (Memorise)

Demand vs quantity demanded
Supply vs quantity supplied
Equilibrium where Qd = Qs
Opportunity cost
Economic cost vs accounting cost
FC, VC, TC
AC, AVC, MC
Elasticity (price, income, cross-price)
Tax incidence depends on relative elasticities
MC intersects AC at AC minimum
Inelastic demand: price ↑ increases TR

High-Frequency Derivations (Practise)

Solve equilibrium with linear equations
Apply per-unit tax wedge:
- consumer price = producer price + tax
Compute arc elasticity
Determine TR changes using elastic/inelastic logic
Translate budget constraint to feasible bundles (cost = Px x + Py y)

High-Frequency Explanations (Write Clearly)

Why curves shift vs why you move along curves
Why burden falls on more inelastic side
Why diminishing marginal returns raise MC
Why surplus falls and deadweight loss occurs when a wedge is introduced

If you want, I can also generate: (1) a one-page formula sheet, (2) a set of 10 fully worked ECO1010F practice questions with memos, or (3) a South Africa–tailored scenario bank (maize, petrol, airtime/data pricing, housing rental markets, and transport subsidies) using the same micro tools.