Microeconomics Exam 1 Key Terms & Concepts Guide
(2026/2027)
Foundations of Microeconomics | Key Domains: Scarcity, Choice, & Opportunity Cost, Supply &
Demand Model, Market Equilibrium & Efficiency, Elasticity & Its Applications, Consumer Choice
Theory (Utility), and Government Interventions (Price Floors/Ceilings, Taxes) | Expert-Aligned
Structure | Term & Concept Guide Format
Introduction
This structured Microeconomics Exam 1 Guide for 2026/2027 provides a focused review of
essential terminology and foundational concepts. It emphasizes mastery of the core models and
principles used to analyze individual and firm decision-making in markets, including graphical
analysis of supply and demand and the effects of policy.
Guide Structure:
● Key Terms & Definitions: (CORE MICROECONOMIC VOCABULARY)
● Concept Application & Graph Questions: (60 IDENTIFICATION & ANALYSIS ITEMS)
Answer Format
All correct terms and conceptual answers must appear in bold and cyan blue, accompanied by
concise rationales explaining the definition of the microeconomic term (e.g., "Ceteris Paribus,"
"Consumer Surplus," "Price Elasticity of Demand"), its role in a model (e.g., how a shift in demand
affects equilibrium), the correct interpretation of a graph, and why alternative definitions or
interpretations are economically incorrect.
1. The cost of the next best alternative that is forgone when a choice is made is known as:
● A. Sunk cost
● B. Marginal cost
● C. Opportunity cost
● D. Fixed cost
C. Opportunity cost
Opportunity cost represents the value of the best alternative sacrificed when a decision is made. It is a
fundamental concept in economics because resources are scarce, and every choice involves trade-offs.
Sunk costs are past and unrecoverable; marginal cost is the cost of one additional unit.
2. The phrase "ceteris paribus" means:
, ● A. Let the buyer beware
● B. All else equal
● C. In the long run
● D. On the margin
B. All else equal
"Ceteris paribus" is a Latin phrase used in economic models to isolate the relationship between two
variables by assuming all other relevant factors remain constant. For example, the law of demand
states that, ceteris paribus, quantity demanded falls as price rises.
3. A point inside the production possibilities frontier (PPF) indicates:
● A. Efficient use of resources
● B. Inefficient use of resources
● C. Economic growth
● D. Unattainable production
B. Inefficient use of resources
The PPF shows the maximum combinations of two goods an economy can produce with its available
resources and technology. Points on the curve are efficient; points inside indicate underutilization (e.g.,
unemployment); points outside are unattainable.
4. According to the law of demand, when the price of a good increases, ceteris paribus, the:
● A. Demand for the good increases
● B. Quantity demanded of the good decreases
● C. Supply of the good decreases
● D. Equilibrium price falls
B. Quantity demanded of the good decreases
The law of demand describes an inverse relationship between price and quantity demanded, holding
other factors constant. A change in price causes a movement along the demand curve, not a shift of the
entire curve.
5. If the price of a substitute good increases, the demand curve for the original good will:
● A. Shift to the left
● B. Shift to the right
● C. Become steeper
● D. Remain unchanged
B. Shift to the right
, When the price of a substitute (e.g., tea) rises, consumers switch to the original good (e.g., coffee),
increasing demand at every price. This is a rightward shift of the entire demand curve, not just a
movement along it.
6. Market equilibrium occurs where:
● A. Supply equals demand
● B. Quantity supplied equals quantity demanded
● C. Price is at its highest
● D. There is a surplus
B. Quantity supplied equals quantity demanded
Equilibrium is the price and quantity where the amount producers are willing to sell equals the
amount consumers are willing to buy. At this point, there is no tendency for price to change, and the
market clears.
7. A binding price ceiling results in a:
● A. Surplus
● B. Shortage
● C. Higher equilibrium price
● D. No change in quantity traded
B. Shortage
A binding price ceiling is set below the equilibrium price. At this lower price, quantity demanded
exceeds quantity supplied, creating a shortage. Examples include rent control and price caps on
essential goods.
8. Consumer surplus is defined as the:
● A. Difference between what consumers pay and what they are willing to pay
● B. Total amount consumers spend on a good
● C. Difference between market price and production cost
● D. Area above the supply curve and below the price
A. Difference between what consumers pay and what they are willing to pay
Consumer surplus measures the net benefit to buyers. Graphically, it is the area below the demand
curve and above the market price, up to the quantity sold. It represents the extra value consumers
receive beyond what they pay.
9. If the price elasticity of demand is -0.3, demand is:
● A. Elastic
(2026/2027)
Foundations of Microeconomics | Key Domains: Scarcity, Choice, & Opportunity Cost, Supply &
Demand Model, Market Equilibrium & Efficiency, Elasticity & Its Applications, Consumer Choice
Theory (Utility), and Government Interventions (Price Floors/Ceilings, Taxes) | Expert-Aligned
Structure | Term & Concept Guide Format
Introduction
This structured Microeconomics Exam 1 Guide for 2026/2027 provides a focused review of
essential terminology and foundational concepts. It emphasizes mastery of the core models and
principles used to analyze individual and firm decision-making in markets, including graphical
analysis of supply and demand and the effects of policy.
Guide Structure:
● Key Terms & Definitions: (CORE MICROECONOMIC VOCABULARY)
● Concept Application & Graph Questions: (60 IDENTIFICATION & ANALYSIS ITEMS)
Answer Format
All correct terms and conceptual answers must appear in bold and cyan blue, accompanied by
concise rationales explaining the definition of the microeconomic term (e.g., "Ceteris Paribus,"
"Consumer Surplus," "Price Elasticity of Demand"), its role in a model (e.g., how a shift in demand
affects equilibrium), the correct interpretation of a graph, and why alternative definitions or
interpretations are economically incorrect.
1. The cost of the next best alternative that is forgone when a choice is made is known as:
● A. Sunk cost
● B. Marginal cost
● C. Opportunity cost
● D. Fixed cost
C. Opportunity cost
Opportunity cost represents the value of the best alternative sacrificed when a decision is made. It is a
fundamental concept in economics because resources are scarce, and every choice involves trade-offs.
Sunk costs are past and unrecoverable; marginal cost is the cost of one additional unit.
2. The phrase "ceteris paribus" means:
, ● A. Let the buyer beware
● B. All else equal
● C. In the long run
● D. On the margin
B. All else equal
"Ceteris paribus" is a Latin phrase used in economic models to isolate the relationship between two
variables by assuming all other relevant factors remain constant. For example, the law of demand
states that, ceteris paribus, quantity demanded falls as price rises.
3. A point inside the production possibilities frontier (PPF) indicates:
● A. Efficient use of resources
● B. Inefficient use of resources
● C. Economic growth
● D. Unattainable production
B. Inefficient use of resources
The PPF shows the maximum combinations of two goods an economy can produce with its available
resources and technology. Points on the curve are efficient; points inside indicate underutilization (e.g.,
unemployment); points outside are unattainable.
4. According to the law of demand, when the price of a good increases, ceteris paribus, the:
● A. Demand for the good increases
● B. Quantity demanded of the good decreases
● C. Supply of the good decreases
● D. Equilibrium price falls
B. Quantity demanded of the good decreases
The law of demand describes an inverse relationship between price and quantity demanded, holding
other factors constant. A change in price causes a movement along the demand curve, not a shift of the
entire curve.
5. If the price of a substitute good increases, the demand curve for the original good will:
● A. Shift to the left
● B. Shift to the right
● C. Become steeper
● D. Remain unchanged
B. Shift to the right
, When the price of a substitute (e.g., tea) rises, consumers switch to the original good (e.g., coffee),
increasing demand at every price. This is a rightward shift of the entire demand curve, not just a
movement along it.
6. Market equilibrium occurs where:
● A. Supply equals demand
● B. Quantity supplied equals quantity demanded
● C. Price is at its highest
● D. There is a surplus
B. Quantity supplied equals quantity demanded
Equilibrium is the price and quantity where the amount producers are willing to sell equals the
amount consumers are willing to buy. At this point, there is no tendency for price to change, and the
market clears.
7. A binding price ceiling results in a:
● A. Surplus
● B. Shortage
● C. Higher equilibrium price
● D. No change in quantity traded
B. Shortage
A binding price ceiling is set below the equilibrium price. At this lower price, quantity demanded
exceeds quantity supplied, creating a shortage. Examples include rent control and price caps on
essential goods.
8. Consumer surplus is defined as the:
● A. Difference between what consumers pay and what they are willing to pay
● B. Total amount consumers spend on a good
● C. Difference between market price and production cost
● D. Area above the supply curve and below the price
A. Difference between what consumers pay and what they are willing to pay
Consumer surplus measures the net benefit to buyers. Graphically, it is the area below the demand
curve and above the market price, up to the quantity sold. It represents the extra value consumers
receive beyond what they pay.
9. If the price elasticity of demand is -0.3, demand is:
● A. Elastic
