Microeconomics Exam #1 Study Guide: Key Terms &
Concepts (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 | Comprehensive Study Guide Format
Introduction
This structured Microeconomics Exam #1 Study Guide for 2026/2027 provides a comprehensive
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:
● Detailed Term & Concept Review: (CORE MICROECONOMIC VOCABULARY)
● Integrated Application Questions: (70 IDENTIFICATION, GRAPH, & SCENARIO ITEMS)
Answer Format
All correct terms and conceptual answers must appear in bold and cyan blue, accompanied by
concise rationales explaining the precise definition of the microeconomic term (e.g., "Marginal
Utility," "Deadweight Loss," "Comparative Advantage"), its role in a model (e.g., how a tax creates
deadweight loss on a graph), the correct interpretation of a supply/demand shift, and why
alternative definitions or interpretations are inconsistent with fundamental microeconomic
principles.
1. The value 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 is the cornerstone of economic decision-making. It represents the benefit sacrificed
from the best unchosen alternative. For example, if you choose to study instead of working a $15/hour
job, your opportunity cost is $15 per hour. Sunk costs are past and unrecoverable; marginal cost is the
cost of one additional unit.
,2. The assumption that all other variables remain constant while analyzing the relationship
between two variables is called:
● A. Rational self-interest
● B. Ceteris paribus
● C. Diminishing returns
● D. Comparative advantage
B. Ceteris paribus
"Ceteris paribus" (Latin for "all else equal") is essential for isolating cause-and-effect in economic
models. For instance, the law of demand states that, ceteris paribus, quantity demanded decreases as
price increases—holding income, tastes, and prices of related goods constant.
3. A point inside the production possibilities frontier (PPF) indicates that an economy is:
● A. Operating efficiently
● B. Experiencing economic growth
● C. Using resources inefficiently
● D. Facing unattainable production
C. Using resources inefficiently
The PPF illustrates the maximum output combinations of two goods given scarce resources and
technology. Points on the curve represent efficient production; points inside indicate underutilization
(e.g., unemployment or idle capital); points outside are unattainable without growth.
4. According to the law of demand, when the price of a good rises, ceteris paribus, the:
● A. Demand curve shifts left
● B. Quantity demanded decreases
● C. Supply curve shifts right
● D. Equilibrium quantity increases
B. Quantity demanded decreases
The law of demand describes a movement along the demand curve: as price increases, consumers buy
less of the good, assuming no change in income, preferences, or prices of substitutes/complements. A
shift in the entire demand curve would require a change in one of those other factors.
5. If the price of gasoline increases, the demand for electric vehicles will:
● A. Decrease
● B. Increase
● C. Remain unchanged
● D. Become perfectly inelastic
, B. Increase
Gasoline and electric vehicles are substitutes. When the price of a substitute rises, demand for the
alternative increases at every price, shifting the demand curve for EVs to the right. This reflects
consumer substitution toward relatively cheaper options.
6. Market equilibrium is defined as the price and quantity where:
● A. Supply equals demand
● B. Quantity supplied equals quantity demanded
● C. Producer surplus is maximized
● D. There is no government intervention
B. Quantity supplied equals quantity demanded
Equilibrium occurs where the supply and demand curves intersect. At this point, the amount producers
are willing to sell matches the amount consumers are willing to buy, so there is no surplus or shortage,
and the market clears.
7. A binding price ceiling, such as rent control, results in a:
● A. Surplus of housing
● B. Shortage of housing
● C. Higher quality apartments
● D. Increased construction
B. Shortage of housing
A binding price ceiling is set below the equilibrium price. At this lower price, quantity demanded
exceeds quantity supplied, creating a shortage. Landlords may also reduce maintenance due to lower
profits, leading to declining quality.
8. Consumer surplus is the difference between:
● A. What consumers pay and what they are willing to pay
● B. Total revenue and total cost
● C. Market price and marginal cost
● D. Income and expenditure
A. 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 equilibrium quantity. It represents the extra value
consumers receive beyond what they actually pay.
9. If the price elasticity of demand is -0.4, demand is:
Concepts (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 | Comprehensive Study Guide Format
Introduction
This structured Microeconomics Exam #1 Study Guide for 2026/2027 provides a comprehensive
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:
● Detailed Term & Concept Review: (CORE MICROECONOMIC VOCABULARY)
● Integrated Application Questions: (70 IDENTIFICATION, GRAPH, & SCENARIO ITEMS)
Answer Format
All correct terms and conceptual answers must appear in bold and cyan blue, accompanied by
concise rationales explaining the precise definition of the microeconomic term (e.g., "Marginal
Utility," "Deadweight Loss," "Comparative Advantage"), its role in a model (e.g., how a tax creates
deadweight loss on a graph), the correct interpretation of a supply/demand shift, and why
alternative definitions or interpretations are inconsistent with fundamental microeconomic
principles.
1. The value 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 is the cornerstone of economic decision-making. It represents the benefit sacrificed
from the best unchosen alternative. For example, if you choose to study instead of working a $15/hour
job, your opportunity cost is $15 per hour. Sunk costs are past and unrecoverable; marginal cost is the
cost of one additional unit.
,2. The assumption that all other variables remain constant while analyzing the relationship
between two variables is called:
● A. Rational self-interest
● B. Ceteris paribus
● C. Diminishing returns
● D. Comparative advantage
B. Ceteris paribus
"Ceteris paribus" (Latin for "all else equal") is essential for isolating cause-and-effect in economic
models. For instance, the law of demand states that, ceteris paribus, quantity demanded decreases as
price increases—holding income, tastes, and prices of related goods constant.
3. A point inside the production possibilities frontier (PPF) indicates that an economy is:
● A. Operating efficiently
● B. Experiencing economic growth
● C. Using resources inefficiently
● D. Facing unattainable production
C. Using resources inefficiently
The PPF illustrates the maximum output combinations of two goods given scarce resources and
technology. Points on the curve represent efficient production; points inside indicate underutilization
(e.g., unemployment or idle capital); points outside are unattainable without growth.
4. According to the law of demand, when the price of a good rises, ceteris paribus, the:
● A. Demand curve shifts left
● B. Quantity demanded decreases
● C. Supply curve shifts right
● D. Equilibrium quantity increases
B. Quantity demanded decreases
The law of demand describes a movement along the demand curve: as price increases, consumers buy
less of the good, assuming no change in income, preferences, or prices of substitutes/complements. A
shift in the entire demand curve would require a change in one of those other factors.
5. If the price of gasoline increases, the demand for electric vehicles will:
● A. Decrease
● B. Increase
● C. Remain unchanged
● D. Become perfectly inelastic
, B. Increase
Gasoline and electric vehicles are substitutes. When the price of a substitute rises, demand for the
alternative increases at every price, shifting the demand curve for EVs to the right. This reflects
consumer substitution toward relatively cheaper options.
6. Market equilibrium is defined as the price and quantity where:
● A. Supply equals demand
● B. Quantity supplied equals quantity demanded
● C. Producer surplus is maximized
● D. There is no government intervention
B. Quantity supplied equals quantity demanded
Equilibrium occurs where the supply and demand curves intersect. At this point, the amount producers
are willing to sell matches the amount consumers are willing to buy, so there is no surplus or shortage,
and the market clears.
7. A binding price ceiling, such as rent control, results in a:
● A. Surplus of housing
● B. Shortage of housing
● C. Higher quality apartments
● D. Increased construction
B. Shortage of housing
A binding price ceiling is set below the equilibrium price. At this lower price, quantity demanded
exceeds quantity supplied, creating a shortage. Landlords may also reduce maintenance due to lower
profits, leading to declining quality.
8. Consumer surplus is the difference between:
● A. What consumers pay and what they are willing to pay
● B. Total revenue and total cost
● C. Market price and marginal cost
● D. Income and expenditure
A. 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 equilibrium quantity. It represents the extra value
consumers receive beyond what they actually pay.
9. If the price elasticity of demand is -0.4, demand is:
