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Essential Microeconomics Formulas and Concepts

Mar 28, 2025

Microeconomics Key Formulas and Concepts

Introduction

  • Critical formulas and conditions for microeconomics exams.
  • Useful for understanding multiple-choice questions and concepts.

Cost Equations

Total Costs

  • Total Cost (TC):
    • Formula: TC = Total Fixed Cost (TFC) + Total Variable Cost (TVC)
    • Rearranging:
      • TFC = TC - TVC
      • TVC = TC - TFC
    • Alternative: TC = Average Cost (AC) × Quantity (Q)
    • Total Fixed Cost (TFC): TFC = Average Fixed Cost (AFC) × Q
    • Total Variable Cost (TVC): TVC = Average Variable Cost (AVC) × Q

Average Costs

  • Average Cost (AC): AC = TC / Q
  • Average Fixed Cost (AFC): AFC = TFC / Q
  • Average Variable Cost (AVC): AVC = TVC / Q
  • Relationships:
    • AC = AFC + AVC
    • AFC = AC - AVC
    • AVC = AC - AFC

Marginal Cost

  • Marginal Cost (MC): Change in TC / Change in Q
  • Trick: Marginal equations are derivatives of average equations.

Revenue Equations

Total Revenue

  • Total Revenue (TR): Price (P) × Q

Average Revenue

  • Average Revenue (AR): TR / Q = P

Marginal Revenue

  • Marginal Revenue (MR): Change in TR / Change in Q

Product Equations

Total Product

  • Total Product (TP): Average Product (AP) × Quantity of Labor

Average Product

  • Average Product (AP): TP / Quantity of Labor

Marginal Product

  • Marginal Product (MP): Change in TP / Change in Quantity of Labor

Returns to Scale

  • Increasing Returns to Scale: Output change > Input change; Long-run cost curve slopes downward.
  • Constant Returns to Scale: Output change = Input change; Curve is flat.
  • Decreasing Returns to Scale: Output change < Input change.

Profit Equations

  • Profit: TR - TC or AR - AC (profit per unit)
  • Supernormal Profit: TR > TC or AR > AC
  • Subnormal Profit (Loss): TR < TC or AR < AC
  • Normal Profit (Break-even): TR = TC or AR = AC
    • Also equals sales maximization and limit price.

Profit Maximization

  • Profit Max: MR = MC
  • Revenue Max: MR = 0
  • Sales Max: AR = AC (at break-even)
  • Profit Satisficing: Between profit maximization and sales maximization.

Efficiency Conditions

Allocative Efficiency

  • Occurs where demand equals supply; Marginal Benefit = Marginal Cost.
    • On diagrams: Price = MC (Price is AR = demand curve; MC is supply curve).

Productive Efficiency

  • Operating at the lowest point on the AC curve.

X-Efficiency

  • Operating on the AC curve at any quantity.

Dynamic Efficiency

  • Requires long-run supernormal profit reinvested in the company.

Minimum Efficient Scale

  • Minimum output level where all economies of scale are fully exploited.

Shutdown Condition

  • Shutdown Price: AR = AVC
    • Operate if AR > AVC in the short run.

Concentration Ratio

  • Formula: n-number of firms and their total market share.

Utility Equations

  • Total Utility: Average Utility × Q
  • Average Utility: Total Utility / Q
  • Marginal Utility: Change in Total Utility / Change in Q
    • Utility is maximized when Marginal Utility = 0.

Elasticity Equations

  • Price Elasticity of Demand (PED): % change in Qd / % change in P
  • Price Elasticity of Supply (PES): % change in Qs / % change in P
  • Cross Elasticity of Demand (XED): % change in Qd of Good A / % change in P of Good B
  • Income Elasticity of Demand (YED): % change in Qd / % change in Income

Index Numbers

  • Formula: (Raw Number / Base Year Raw Number) × 100

Labor Market

  • Profit Max Employer: Employ workers until Marginal Revenue Product (MRP) = Marginal Cost of Labor

Gini Coefficient

  • Area between Lorenz Curve and line of perfect equality / total area beneath the line.

Ensure to review these key concepts and equations thoroughly for your micro exams. Watch related macroeconomic videos for a comprehensive understanding.

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