EKN 214 Microeconomics 214 Detailed Exam Notes

Microeconomics is the study of how individual households and firms make decisions under constraints, how prices are formed in specific markets, and how incentives shape outcomes. In EKN 214 Microeconomics (often titled Microeconomics 214) at the University of Pretoria (UP) BCom Economics level, exams typically assess your ability to (1) apply core theory to new scenarios, (2) use diagrams and mathematical intuition correctly, and (3) interpret results in plain language. These detailed notes focus on the typical UP-style microeconomics syllabus emphases—consumer and producer choice, demand and supply, market equilibrium, elasticity, welfare, and the foundational logic behind market power and policy.

Section 1: Core Tools—Preferences, Utility, Constraints, and Choice (Consumer Theory)

1.1 The consumer’s problem: the conceptual framework

At the heart of microeconomics is a simple idea: consumers choose bundles of goods that best satisfy their preferences subject to a budget constraint. In exam questions, you’re often asked to derive demand, interpret changes, or determine optimality conditions.

A standard setup:

Let there be two goods: X and Y
Consumer chooses quantities (x, y)
Prices are pₓ and pᵧ
Income is m
Budget constraint:
[
p_x x + p_y y = m
]
With non-negativity constraints: (x \ge 0, y \ge 0).

Utility is represented by a utility function u(x, y), but exam questions may also specify preferences via diagrams (indifference curves) or properties (e.g., “more is preferred”, “diminishing marginal rate of substitution”).

Key tasks in exams usually include:

Identify the budget line (slope and intercepts)
Use indifference curves to locate the best feasible bundle
Explain what happens when prices or income change
Translate qualitative answers into diagrams or quantitative expressions

Budget line interpretation

Rewrite the budget constraint:
[
y = \frac{m}{p_y} – \frac{p_x}{p_y}x
]

Y-intercept: ( \frac{m}{p_y} )
X-intercept: ( \frac{m}{p_x} )
Slope: ( -\frac{p_x}{p_y} )

So if pₓ increases, the budget line becomes steeper downward in (x)-space (less x for the same y).

1.2 Preferences and indifference curves

Indifference curves show combinations of goods that give the consumer the same utility.

Common preference assumptions:

Complete and transitive preferences (so a “best” can be chosen)
More is preferred (monotonicity): if you can afford more of a good and everything else equal, utility weakly increases
Diminishing marginal rate of substitution (DMRS): indifference curves are typically convex to the origin

Marginal Rate of Substitution (MRS)

MRS is the amount of Y the consumer is willing to give up for an additional unit of X while staying on the same utility level.

At an interior optimum:
[
MRS_{xy} = \frac{MU_x}{MU_y} = \frac{p_x}{p_y}
]

Where (MU_x) and (MU_y) are marginal utilities.

Exam-style verbal-to-diagram translation

If MRS increases as you move right along an indifference curve, it means the consumer values X more relative to Y when they have more X—consistent with convexity.

1.3 Optimization: interior vs corner solutions

A crucial distinction for exams is whether the optimum is:

Interior (consumer buys positive quantities of both goods)
Corner (consumer buys only one good)

Interior solution logic

An interior optimum occurs where:

The budget line is tangent to an indifference curve:
[
\text{Slope of indifference curve} = \text{Slope of budget line}
]
Equivalent condition:
[
\frac{MU_x}{MU_y} = \frac{p_x}{p_y}
]

Corner solution

Occurs when tangency is impossible due to extreme preferences or constraints. In exam questions, you may be told utility is:

Perfect substitutes (e.g., (u(x,y) = x + y))
Perfect complements (e.g., (u(x,y) = \min{x, y}))

For perfect substitutes:

Consumer chooses the good with the higher “value per rand” depending on relative prices, and may buy only one good unless prices are equal.

For perfect complements:

Consumer buys fixed proportions, so demand is kinked and tangency doesn’t apply in the same smooth way.

1.4 Hicksian and Marshallian demand: what you need to recognize

Exams often focus on Marshallian (uncompensated) demand, but may ask about substitution and income effects, requiring a conceptual understanding of compensated demand.

Marshallian demand maximizes utility subject to the income constraint.
Hicksian (compensated) demand minimizes expenditure to achieve a target utility level (or equivalently holds utility constant and changes prices).

You may not need full derivations, but you must be able to interpret:

Substitution effect: due to relative price change at constant utility
Income effect: due to real purchasing power change

1.5 Substitution and income effects: normal, inferior, and Giffen goods

A price increase generally has two effects:

Substitution effect: consumer substitutes away from the relatively more expensive good → demand typically falls
Income effect:
- If the good is normal, income effect reinforces substitution → demand falls more
- If the good is inferior, income effect offsets substitution → demand might fall less or even rise
- If the good is Giffen, the income effect dominates substitution → demand rises when price rises (rare, but conceptually important)

How to write the “direction” answer in exams

When asked: “Is demand likely to increase or decrease when price rises?”

Always determine substitution direction first (for most goods, substitution effect reduces quantity demanded)
Then determine income effect based on whether the good is normal/inferior
Conclude based on dominance

1.6 Worked micro example (exam-ready): MRS tangency and solving for demand

Assume preferences:
[
u(x,y)=x^{1/2}y^{1/2}
]
Let income be (m), prices (p_x, p_y).

Marginal utilities:
[
MU_x = \frac{1}{2}x^{-1/2}y^{1/2}, \quad MU_y=\frac{1}{2}x^{1/2}y^{-1/2}
]
MRS:
[
\frac{MU_x}{MU_y}=\frac{y}{x}
]
At optimum:
[
\frac{y}{x}=\frac{p_x}{p_y}
\Rightarrow y = x\frac{p_x}{p_y}
]
Budget:
[
p_x x + p_y y = m
]
Substitute:
[
p_x x + p_y \left(x\frac{p_x}{p_y}\right)= m
\Rightarrow p_x x + p_x x = m
\Rightarrow 2p_x x=m
\Rightarrow x=\frac{m}{2p_x}
]
Then:
[
y=x\frac{p_x}{p_y} = \frac{m}{2p_x}\frac{p_x}{p_y}=\frac{m}{2p_y}
]

So demands are:
[
x^(p_x,p_y,m)=\frac{m}{2p_x},\quad y^(p_x,p_y,m)=\frac{m}{2p_y}
]

This kind of structure appears in exams because it checks whether you can:

compute MUs,
form MRS,
use tangency,
substitute into budget,
solve.

1.7 Income and substitution effects in practice: “how to show it” with diagrams

When the price of X changes:

The budget line rotates around the point where it intersects the initial indifference curve’s tangency (depending on the method used)
For the substitution effect, the consumer is compensated so utility stays the same
The final choice reflects both effects

In an exam diagram, you typically:

Draw initial budget line and indifference curve.
Identify initial optimum.
Draw new budget line after (p_x) changes.
Identify new optimum.
If doing decomposition, draw the compensated budget line (or “hypothetical” tangency) that holds utility constant.

Even if you cannot compute Hicksian demand, exam graders often reward correct diagram logic and correct sign reasoning.

Section 2: Demand, Elasticity, Revenue, and Market Equilibrium (Market Theory and Applied Reasoning)

2.1 Demand curves and the meaning of “ceteris paribus” correctly

A demand curve shows the relationship between price and quantity demanded, holding other factors constant (income, preferences, prices of other goods, expectations). In exam questions, failing to state what’s held constant can cost marks.

If the only change is in the price of X, then:

quantity demanded changes along the demand curve.

If something else changes:

the demand curve shifts (not just movement along it).

Shifters commonly used in exams:

income changes
tastes/preferences
prices of substitute or complementary goods
expectations about future prices
number of buyers (population or demographics)

2.2 Price elasticity of demand: calculations and interpretations

Price elasticity of demand:
[
\varepsilon_{d}=\frac{%\Delta Q}{%\Delta P}=\frac{dQ}{dP}\cdot\frac{P}{Q}
]

For linear demand curves, there’s a standard pattern:

Elasticity varies along the curve
At higher prices and lower quantities, demand is often less elastic in absolute value, etc. (depends on slope and intercept)

Point elasticity vs arc elasticity

Exams sometimes provide two points and ask for arc elasticity:
[
\varepsilon_{arc}=\frac{(Q_2-Q_1)/\left(\frac{Q_1+Q_2}{2}\right)}{(P_2-P_1)/\left(\frac{P_1+P_2}{2}\right)}
]
This prevents the “which direction” issue that arises with point elasticity.

Common elasticity directions and magnitudes

(|\varepsilon|>1): elastic demand (percentage change in quantity is larger)
(|\varepsilon|<1): inelastic demand
(|\varepsilon|=1): unit elastic
(\varepsilon=0): perfectly inelastic
(|\varepsilon|\rightarrow\infty): perfectly elastic

2.3 Elasticity and total revenue: the exam classic

Total revenue (TR) is:
[
TR=P\cdot Q
]

When price changes slightly:

If demand is elastic, higher price reduces TR (because quantity falls proportionally more)
If demand is inelastic, higher price increases TR (quantity falls less than proportionally)
If demand is unit elastic, TR stays unchanged

How to answer quickly in exam wording

When asked: “What happens to total revenue if price increases?”

Check whether demand is elastic or inelastic in that region
State direction of TR and justify using elasticity logic

2.4 Cross-price elasticity and substitutes/complements

Cross-price elasticity:
[
\varepsilon_{xy}=\frac{%\Delta Q_x}{%\Delta P_y}
]

If substitute: (\varepsilon_{xy}>0)
If complement: (\varepsilon_{xy}<0)
If unrelated: approximately 0

This is used in policy and industry analysis:

An increase in the price of public transport affects demand for taxis (substitute) and bicycles (maybe substitute), etc.
In complementary industries (e.g., printers and cartridges), changes in the price of one affect the other.

2.5 Income elasticity: necessity vs luxury and market segmentation

Income elasticity:
[
\varepsilon_{m}=\frac{%\Delta Q}{%\Delta m}
]

(\varepsilon_m>0): normal good
(0<\varepsilon_m<1): normal necessity (proportionally smaller increase than income)
(\varepsilon_m>1): normal luxury (proportionally larger)
(\varepsilon_m<0): inferior good

In applied exam questions, income elasticity can be used to infer likely changes in demand given economic growth or contraction.

2.6 Supply and equilibrium: representing production decisions

In micro theory, supply often comes from firms’ marginal cost and profit motives, but in basic equilibrium questions supply may be given as a function or curve.

Supply curve meaning:

higher price → higher quantity supplied (typical)
shifts driven by input costs, technology, taxes/subsidies, number of sellers, expectations

Market equilibrium

Equilibrium occurs when:
[
Q_d(P)=Q_s(P)
]

At equilibrium:

buyers want to buy exactly what sellers want to sell
no persistent shortage or surplus
in comparative statics, the equilibrium price and quantity adjust when demand/supply shift

2.7 Comparative statics: shift effects and direction logic

A frequent exam format:

“Suppose demand increases while supply remains constant. What happens to price and quantity?”
Answer logic:
shifting demand right raises equilibrium price and quantity
supply and demand slope determine magnitude

However, direction is not enough; some questions ask “who bears tax burden” or “welfare changes,” requiring careful diagram reasoning.

2.8 Welfare and consumer/producer surplus in equilibrium

Consumer surplus (CS):

difference between what consumers are willing to pay and what they actually pay
in diagram terms: area under demand curve above price line

Producer surplus (PS):

difference between what producers receive and their willingness to supply
area above supply curve below price line

Total surplus (TS) = CS + PS = measure of economic welfare under certain assumptions.

When policy changes (tax, subsidy, price controls), equilibrium shifts lead to changes in CS and PS and produce deadweight loss.

2.9 Worked equilibrium example: shifting demand and calculating outcomes

Consider:
[
Q_d = 100 – 2P,\quad Q_s = 20 + 2P
]

Equilibrium:
[
100 – 2P = 20 + 2P
\Rightarrow 80 = 4P
\Rightarrow P^* = 20
]
Then:
[
Q^*=20+2(20)=60
]

Now suppose demand increases due to preference change:
[
Q_d' = 110 – 2P
]
Equilibrium with unchanged supply:
[
110 – 2P = 20 + 2P
\Rightarrow 90 = 4P
\Rightarrow P' = 22.5
]
Quantity:
[
Q' = 20 + 2(22.5)=65
]

Exam points you can explicitly mention:

Demand shift right → price rises and quantity rises
Magnitude depends on slopes (here symmetric slopes 2 and 2 but intercept changes)

2.10 Tax incidence logic (foundation for later sections)

Even if tax is paid by buyers or sellers, incidence depends on elasticities of demand and supply:

more elastic side bears less burden (shifts more of the burden through quantity reduction)
less elastic side bears more burden

You may be asked conceptually:

If demand is very inelastic, a per-unit tax causes a large price increase to consumers and small decrease to producers → consumers bear most burden.

To solve numerically, you may use:

equilibrium with a wedge (tax)
compute new equilibrium quantities and prices received/paid

This connects directly to welfare calculations (deadweight loss).

Section 3: Producer Theory, Cost Curves, Supply Decisions, and Market Structure Foundations

3.1 Firm objectives and constraints: profit maximization

In introductory microeconomics, the firm typically maximizes profit:
[
\pi = TR – TC
]
with:

total revenue (TR = P\cdot Q)
total cost (TC = FC + VC(Q))

Profit maximization in many exam problems occurs where:
[
MR = MC
]
In perfect competition, price-taking implies:
[
P = MR
\Rightarrow P = MC \quad \text{(at the optimal output)}
]

At the shutdown decision:

compare price with average variable cost (AVC) in the short run.

3.2 Production functions and marginal products

Production functions relate inputs to output:
[
q = f(K, L)
]
where (K) is capital, (L) labor.

Marginal product of labor:
[
MPL = \frac{\partial f(K,L)}{\partial L}
]
Diminishing marginal returns:

as (L) increases holding (K) constant, (MPL) eventually declines

Exams may present a production table and ask:

compute total product (TP), marginal product (MP), average product (AP)
identify the ranges of increasing/decreasing returns

How to compute from a table (template)

If output is given for successive labor inputs, compute:

(TP(L))
(MP(L) = TP(L)-TP(L-1))
(AP(L) = TP(L)/L)

Then interpret:

If (MP>AP), average rises
If (MP<AP), average falls

3.3 Cost curves: translating production into costs

Given input prices:

wage (w) for labor
rental rate (r) for capital

In short-run analysis, capital is fixed and labor varies.

From production, derive:

Total cost (TC(Q))
Average cost (AC(Q)=TC(Q)/Q)
Average variable cost (AVC(Q)=VC(Q)/Q)
Marginal cost (MC(Q)=\Delta TC/\Delta Q)

Core relationships (important for diagrams and exam reasoning):

(MC) intersects (AC) at the minimum of (AC)
(MC) intersects (AVC) at the minimum of (AVC)

3.4 Diminishing returns to inputs → cost curve shapes

The usual short-run cost pattern:

when marginal product declines, marginal cost rises
leading to U-shaped cost curves

Exam questions often link:

“increasing marginal costs” to diminishing marginal returns
“how costs change when output increases”

3.5 Profit maximization with numerical examples

Suppose:

market price (P=10)
firm’s marginal cost schedule indicates optimal output where (MC=10)

Example using a marginal cost table:

Output Q	MC
0	—
1	6
2	9
3	10
4	12

If (P=10), the firm chooses (Q=3) where (MC=10) (or the smallest Q such that MC≥P, depending on discretization rules in the question).

To find shutdown:

compute AVC at Q=3; if (P<AVC), firm shuts down and produces 0 in the short run.

3.6 Long-run vs short-run: key differences you must state

Short run:

at least one input fixed (commonly capital)
firm can have rising costs due to diminishing marginal returns

Long run:

all inputs can vary
no fixed factors
firms choose optimal scale where economies/diseconomies may exist

Cost implications:

long-run average cost curve (LRAC) represents the minimum AC for each output level
if there are economies of scale, LRAC falls over some range; if diseconomies, it rises.

3.7 Market structure overview: perfect competition, monopoly, and beyond

Microeconomics often transitions from competitive markets to imperfect competition.

Perfect competition

many buyers and sellers
homogeneous product
price takers
free entry/exit

Implications for equilibrium profits:

in long-run competitive equilibrium, economic profit tends to zero due to entry and exit.

Monopoly

single seller
barriers to entry
downward sloping demand for the firm (also market demand)
MR < P for monopoly (because to sell more, the monopolist reduces price)

Implications:

monopoly output where (MR=MC)
monopoly price from demand at that quantity
monopoly generates deadweight loss due to reduced output relative to efficient benchmark.

You may be tested on:

comparing monopoly vs competitive equilibrium
welfare effects (CS transfer to PS, DWL)

3.8 Worked monopoly example (MR- MC logic)

Assume demand:
[
Q = 100 – 2P
]
Rearrange:
[
P = 50 – \frac{Q}{2}
]
Total revenue:
[
TR = P\cdot Q = \left(50 – \frac{Q}{2}\right)Q = 50Q – \frac{Q^2}{2}
]
Marginal revenue:
[
MR = \frac{dTR}{dQ}=50-Q
]

Suppose marginal cost is constant:
[
MC = 20
]
Profit-maximizing:
[
MR = MC \Rightarrow 50-Q=20 \Rightarrow Q_m=30
]
Monopoly price:
[
P_m = 50 – \frac{30}{2} = 50 – 15=35
]

If a competitive price were equal to MC (price-taking), competitive outcome would be:

in competitive equilibrium, (P=MC=20)
From demand (Q=100-2P):
[
Q_c = 100-2(20)=60
]
So monopoly restricts output from 60 to 30.

This sets up welfare comparisons:

CS smaller under monopoly
PS larger (compared to competition)
deadweight loss appears between 20 and 35 pricing and quantities between 30 and 60.

3.9 Elasticity and market power: Lerner index intuition

A standard relationship:
[
\frac{P-MC}{P}=\frac{1}{|\varepsilon_d|}
]
where (\varepsilon_d) is demand elasticity faced by the firm.

Implications:

if demand is more elastic (customers have more substitutes), monopoly/market power is weaker, and (P) is closer to (MC).
if demand is inelastic, firm can charge larger markup.

Exams sometimes ask qualitative “what happens if demand becomes more elastic?” Answer:

markup ((P-MC)) decreases.
output increases (relative to monopoly baseline).

3.10 Real-world application framing for SA contexts (conceptual, not factual)

Although exam questions are typically theoretical, UP economics-style prompts often encourage applied reasoning. In South Africa, exam scenarios may include:

energy and fuel markets
telecommunications and data pricing
essential consumer goods (food, transport)
public policy (taxes, subsidies, price controls)

You should be able to reason generically using micro tools:

if a good is essential (inelastic demand), taxes may raise costs to consumers with smaller quantity reduction
if demand is elastic (many substitutes), policies will reduce quantity more

The key is to keep the microeconomics logic consistent with the elasticity and equilibrium framework.

Section 4: Welfare Analysis, Market Failures, Externalities, Taxes/Subsidies, and Policy Design

4.1 Social welfare: from private decisions to societal outcomes

Welfare analysis typically compares:

the allocation produced by markets under certain assumptions
the allocation that would maximize total surplus under a social planner perspective

In competitive markets without distortions:

marginal social benefit equals marginal social cost at efficient allocation
total surplus is maximized

In the presence of market failures (externalities, public goods, asymmetric information, market power), the competitive outcome can differ from the efficient one.

For exams, you’ll be asked to identify:

the efficient condition
how taxes/subsidies shift outcomes toward efficiency
whether the policy improves total welfare and by how it changes CS/PS and deadweight loss.

4.2 Externalities: positive and negative

An externality occurs when one agent’s action affects others not reflected in market prices.

Negative externality example logic

If consumption or production imposes costs on others:

private marginal cost (PMC) < social marginal cost (SMC)
market overproduces relative to the efficient level

Efficient output satisfies:
[
SMC = SMB
]
Where:

(SMC = PMC + MEC) (marginal external cost)
(SMB) is marginal social benefit

A Pigouvian tax corrects by increasing private costs:

tax per unit equals marginal external cost.

Positive externality example logic

If it creates benefits to others:

private marginal benefit (PMB) < social marginal benefit (SMB)
market underproduces relative to efficient outcome

A Pigouvian subsidy equals marginal external benefit.

4.3 Taxes and subsidies: incidence, deadweight loss, and transfers

Consider a per-unit tax (t). The tax creates a wedge between what consumers pay and what producers receive:

price paid by consumers increases
price received by producers decreases

Welfare components:

CS decreases
PS decreases (relative to pre-tax)
government revenue is a transfer from CS and PS
Deadweight loss measures efficiency loss: the triangle between demand and supply in the reduced quantity outcome.

Exam tasks may include:

Determine new equilibrium quantity
Determine who bears tax burden (consumers vs producers) using elasticity
Compute welfare changes (sometimes via areas)

Tax incidence rule of thumb

more inelastic side bears more burden.
with perfectly elastic supply, consumers bear all; with perfectly elastic demand, producers bear all.

You may not always calculate numerically, but you must be able to justify qualitatively.

4.4 Price controls: ceilings and floors

Price ceilings (e.g., (P \le P_{max})) cause:

if ceiling below equilibrium: shortage (excess demand)
quantity supplied less than quantity demanded

Price floors (e.g., (P \ge P_{min})) cause:

if floor above equilibrium: surplus (excess supply)

Exam reasoning often asks:

What happens to quantity? Who gains/loses?
What is the effect on welfare?
Under what elasticities is the welfare loss larger?

In supply-and-demand diagrams, you can compute CS/PS changes using areas.

4.5 Consumer and producer surplus under distortionary policies

A policy that creates a wedge between price and marginal cost/benefit causes:

a loss of surplus for one or both sides
deadweight loss due to reduced trades that would have been mutually beneficial

To score well, always link:

CS/PS changes to shift in equilibrium price and quantity
DWL to the area representing trades not carried out

4.6 Worked welfare analysis: negative externality corrected by tax

Let private marginal cost intersect private marginal benefit at (Q_m), but social marginal cost suggests efficient output (Q^* < Q_m).

In a diagram:

demand reflects marginal private benefit (MPB) and also marginal social benefit (MSB) if benefits are internal
supply reflects PMC
SMC lies above PMC

A tax equal to marginal external cost at each output moves private cost to align with social cost.

Exam answer structure:

State market outcome: overproduction where PMC=MPB
State efficient outcome: where SMC=MSB
Explain Pigouvian tax: tax raises PMC to SMC
Conclude: tax reduces output toward efficiency, reduces DWL

Even without numeric areas, the logic is graded.

4.7 Deadweight loss and triangles: how to compute and interpret

If numeric demand and supply functions are provided, you can compute DWL:

DWL from tax equals:
- lost consumer and producer surplus in the reduced quantity region
Graphically:
- DWL often is a triangle if the change is small and supply/demand linear.

To calculate, you need:

the tax-induced wedge
the change in equilibrium quantity
the relevant intercept differences

In more complex cases (non-linear), the concept still remains: DWL is the area between social marginal benefit and social marginal cost over the range of lost output.

4.8 Efficiency vs equity: separating the two in policy evaluation

Micro policy questions often include welfare but also fairness or distribution.

Efficiency: maximize total surplus, reduce deadweight loss.
Equity: who bears the cost, who benefits. Tax incidence matters here.

An exam response should:

First evaluate efficiency using welfare analysis
Then discuss incidence and distribution using elasticity, exemptions, and potential compensation mechanisms

For example, a carbon tax may reduce emissions (efficiency) but raise costs for households; policy design could include rebates or targeted assistance to improve equity while maintaining efficiency.

Section 5: Advanced Micro Topics Common in EKN 214—Game-like Reasoning, Market Power, Price Discrimination, and Exam Strategy

5.1 Market power and price discrimination basics

Once you understand monopoly pricing, a natural extension is price discrimination: the firm charges different prices to different consumers (or groups) for the same good.

Conditions typically include:

the seller has market power
buyers can be segmented
arbitrage is limited or prevented (buyers cannot resell cheaply)

Three price discrimination degrees (often taught)

First-degree (perfect): charge each consumer their maximum willingness to pay → captures almost all consumer surplus.
Second-degree (self-selection): consumers choose among different versions (e.g., quantity discounts, bulk pricing).
Third-degree (group-based): different prices for different customer types (e.g., students vs non-students).

Exams often ask:

how discrimination affects output and total welfare compared to monopoly
when discrimination increases consumer surplus
constraints that prevent full capture of surplus

5.2 Third-degree discrimination: the elasticity rule

For third-degree discrimination, the profit-maximizing condition uses elasticities in each segment:
[
\frac{P_i – MC}{P_i} = \frac{1}{|\varepsilon_i|}
]
So:
[
P_i = \frac{MC}{1-\frac{1}{|\varepsilon_i|}} \quad \text{(in algebraic forms)}
]

Key implication:

set a higher markup where demand is more inelastic.
charge higher price to the group with fewer substitutes.

5.3 Worked third-degree discrimination example (with consistent numbers)

Assume:

Marginal cost is constant: (MC=10)
There are two market segments with demands:
- Segment 1 (inelastic): (Q_1 = 100 – 4P_1)
- Segment 2 (more elastic): (Q_2 = 120 – 8P_2)

We do not need point elasticity if demand is linear and we can compute MR or use the elasticity markup rule. However, to keep it exam-relevant, we’ll use a common linear-discrimination approach based on marginal revenue derived from each segment.

Derive segment MR

Segment 1: (Q_1 = 100 – 4P_1 \Rightarrow P_1 = 25 – \frac{Q_1}{4})
Then:
[
TR_1 = P_1 Q_1 = \left(25 – \frac{Q_1}{4}\right)Q_1 = 25Q_1 – \frac{Q_1^2}{4}
]
[
MR_1 = \frac{dTR_1}{dQ_1} = 25 – \frac{Q_1}{2}
]

Set (MR_1=MC=10):
[
25 – \frac{Q_1}{2} = 10
\Rightarrow \frac{Q_1}{2}=15
\Rightarrow Q_1=30
]
Then:
[
P_1 = 25 – \frac{30}{4} = 25 – 7.5 = 17.5
]

Segment 2: (Q_2 = 120 – 8P_2 \Rightarrow P_2 = 15 – \frac{Q_2}{8})
[
TR_2 = \left(15 – \frac{Q_2}{8}\right)Q_2 = 15Q_2 – \frac{Q_2^2}{8}
]
[
MR_2 = 15 – \frac{Q_2}{4}
]
Set (MR_2=10):
[
15 – \frac{Q_2}{4} = 10
\Rightarrow \frac{Q_2}{4}=5
\Rightarrow Q_2=20
]
Then:
[
P_2 = 15 – \frac{20}{8} = 15 – 2.5 = 12.5
]

So the firm charges:

Segment 1 price (P_1=17.5), quantity (Q_1=30)
Segment 2 price (P_2=12.5), quantity (Q_2=20)

Interpretation:

segment 1 demand is less elastic (tends to get higher price)
segment 2 demand more elastic (lower price, more competitive pressure)

Exam question typically follows:

compare total output and welfare with single-price monopoly
discuss whether discrimination improves efficiency (often it can increase output by capturing more trades)

5.4 Comparing monopoly single-price vs discrimination: what to say in exams

While full computation depends on aggregate demand, an exam-style reasoning is:

Under discrimination, the firm can tailor prices to demand intensities.
Often discrimination increases total quantity relative to single price monopoly because some consumers previously priced out may be served at a lower price.
Consumer surplus can either rise or fall depending on discrimination degree and feasibility; with third-degree discrimination, some CS is transferred to consumers, but the firm still captures substantial surplus.

To score well, avoid blanket statements like “discrimination always increases welfare.” Instead:

mention it can improve efficiency by reducing deadweight loss
mention it can also reduce consumer surplus if the firm extracts more surplus overall.

5.5 Game theory intuition in micro exams (without deep proofs)

Some EKN-style exams include strategic reasoning (not full game theory). Examples:

entry deterrence
pricing strategies
credible commitment and preemption

Key strategic vocabulary:

dominant strategy: best regardless of others’ actions
Nash equilibrium: mutual best responses
credible threat: a threat that is optimal if carried out

Even if the course is “microeconomics,” strategic reasoning often appears in:

oligopoly analysis (Cournot and Bertrand logic)
mechanisms and commitment problems

You can prepare by knowing the typical Cournot and Bertrand result directions.

Cournot (quantity competition) quick logic

each firm chooses quantity
with differentiated goods or identical firms, equilibrium quantities depend on demand and cost
competition reduces price relative to monopoly, and increases total quantity

Bertrand (price competition) quick logic

each firm chooses price
if products are identical and costs constant, Bertrand predicts price equal to marginal cost in equilibrium (zero profit) because firms undercut each other

These are often used qualitatively or with simple numerical examples.

5.6 How to approach EKN 214 exam questions: a reliable workflow

A consistent exam workflow can be the difference between partial and full marks.

Step-by-step method for most problems

Identify the market/agent: consumer, firm, competitive market, monopoly, tax policy, externality.
Write down the governing condition:
- consumer: tangency (MU_x/MU_y=p_x/p_y)
- competitive firm: (P=MC) (and shutdown check with AVC)
- monopoly: (MR=MC) plus price from demand
- tax/externality: use wedge and compare social vs private marginal conditions
Draw the diagram (if allowed/required):
- label axes and curves correctly
- mark equilibrium points and wedges
Solve algebraically if numbers provided:
- compute equilibrium quantities and prices
- compute elasticities or welfare areas if asked
Interpret results in words:
- state who gains/loses and direction of changes
- ensure statements match signs in your math

Common mistake checklist (for UP-style grading)

Mixing up movement along vs shifts
Incorrect sign in elasticity-based reasoning
Using (P=MC) for monopoly (wrong—monopoly uses (MR=MC))
Forgetting to check shutdown condition for short-run firm problems
Confusing private vs social marginal cost/benefit in externalities
Diagram labels inconsistent with computed outcomes

5.7 Diagram discipline: what markers look for

In many economics exams, marks are awarded for correct reasoning via graphs. A “minimal but correct” diagram includes:

properly labeled axes (P on vertical, Q on horizontal)
clearly drawn demand and supply curves
equilibrium point labeled with computed values if given
when doing taxes: wedge shown and relevant points labeled
welfare: CS, PS, and DWL areas labeled

If you have computed a tax wedge numerically, make sure the diagram’s qualitative wedge matches the computed direction.

5.8 Worked mini-set: quick problems you may encounter

Problem A: Normal vs inferior good from sign of income effect

Given:

substitution effect predicts quantity falls when price rises
observed quantity rises
Inference:
income effect is positive enough to dominate substitution
the good behaves as inferior (or more strongly Giffen if it rises with price in a standard demand system with positive net income effect outweighing substitution)

Write:

“If the price of X rises and quantity demanded increases, the income effect must be sufficiently strong and positive; X is likely inferior, and if substitution effect is negative then income effect dominates.”

Problem B: Total revenue test

Given: Demand elasticity at current price is (|\varepsilon_d|=1.4) (elastic).
Price increases by 5%. Quantity falls by approximately:

( %\Delta Q \approx \varepsilon \cdot %\Delta P \Rightarrow -1.4 \cdot 5% = -7% )
Total revenue:
TR changes by roughly (+5% – 7% = -2%) → decreases.
Exam answer:
“Total revenue decreases when demand is elastic and price increases.”

Problem C: Tax burden and elasticities

If demand is inelastic and supply is elastic:

consumers can’t reduce quantity much, so they bear more of the tax.
Write:
“Inelastic demand means the quantity response is small, so consumers face a larger share of the tax burden.”

5.9 Connecting everything: how micro topics reinforce each other

A strong exam performance comes from integrated understanding:

Consumer theory → demand curves and elasticity
Producer theory → supply decisions and marginal cost
Market equilibrium → welfare and policy impacts
Externalities and taxes → link price distortions to efficiency conditions
Monopoly/price discrimination → show why MR and elasticity matter for welfare outcomes
Market power → incidence of policy and responsiveness of quantities

For instance:

When you compute elasticity, you use it later for tax incidence.
When you draw welfare triangles, they relate to deadweight loss caused by externalities or market power.
When you compute monopoly prices, you can infer the effect on consumer surplus and compare to competition.

5.10 Final checklist: a concise “pre-submission” routine

Before submitting an exam paper response:

Do all computed values match across the answer? (quantity and price used consistently)
Do all sign statements match your diagram?
Are the correct conditions used? (e.g., (MR=MC) for monopoly)
Have you defined symbols briefly if the question expects definitions?
Is your interpretation consistent with your calculations (e.g., TR direction, CS/PS changes)?

Institution-focused note for UP BCom Economics study approach (South African university context)

Because this study material is situated within the broader University of Pretoria (UP) BCom Economics study environment, it’s useful to practice exam answers in a style consistent with South African university marking schemes:

clear definitions early in each solution
explicit conditions (e.g., tangency, MR=MC, equilibrium)
diagram reasoning that matches algebra
verbal interpretation tied to economic meaning (not just math results)

When practicing, focus on timed sets and ensure that every solution includes:

at least one diagram (where applicable)
a brief explanation of direction (increase/decrease) and why
correct use of terms: inelastic, normal, inferior, deadweight loss, incidence, marginal vs average

Summary: What to master for EKN 214 Microeconomics 214 exams

To excel in EKN 214 Microeconomics 214, you must master:

Consumer choice: budget lines, indifference curves, MRS, optimality, substitution vs income effects.
Elasticity and market demand: how to compute and interpret elasticity; connect elasticity to total revenue and policy responses.
Producer theory: production and marginal products, cost curves, profit maximization, shutdown logic.
Market equilibrium and welfare: equilibrium shifts, CS/PS/DWL, and policy effects of taxes and price controls.
Market power and discrimination: monopoly pricing via (MR=MC), the welfare implications, and third-degree discrimination using marginal revenue or elasticity logic.
Exam method: diagram discipline, correct conditions, consistent algebra, and clear economic interpretation.

If you can consistently apply these building blocks—especially the conditions and welfare logic—you will be able to handle most UP-style microeconomics exam questions with confidence, speed, and accuracy.