MASTER EXAM PREPARATION
MICROECONOMICS — COMPLETE STUDY GUIDE
Includes the core topics:
• Technology & Incentives
• Labour Supply (Doing the Best You Can)
• Strategic Interactions & Game Theory
• Institutions, Power & Inequality
• The Firm and Its Employees
• The Firm and Its Customers
PART 1
TECHNOLOGY, INCENTIVES & ECONOMIC GROWTH
Big Idea
The central question:
Why did living standards increase rapidly after the Industrial Revolution?
Before 1800 — Malthusian Economy
Economic growth did not increase living standards.
Process:
More output → population grows → wages fall → income per person stays low
Result:
Long-run income per person ≈ constant
After 1800 — Industrial Revolution
Technological innovation increased productivity faster than population growth.
Effects:
• Technological progress
• Higher productivity
• Higher wages
• Rising living standards
Core Logic of Economic Growth
Incentives → Decisions → Innovation → Productivity → Economic Growth
Meaning:
1. People respond to incentives
2. Incentives influence decisions
3. Decisions drive innovation
4. Innovation increases productivity
5. Productivity increases living standards
, PART 2
DECISION MAKING & OPPORTUNITY COST
Core Assumption of Economics
People choose the option with the highest net benefit.
Formula:
Net Benefit = Benefit − Cost
Decisions are always made relative to alternatives.
Opportunity Cost
Definition:
Opportunity Cost = Value of the next best alternative forgone
Opportunity cost can include:
• Money
• Time
• Effort
• Risk
• Experience
Example:
Concert value = 100
Ticket cost = 40
Babysitting wage = 50
Opportunity cost of concert:
OC = 50
Economic Cost
Economic Cost = Direct Cost + Opportunity Cost
Example:
40 + 50 = 90
Net Benefit
Net Benefit = Benefit − Economic Cost
Example:
100 − 90 = 10
Economic Rent
Definition:
Economic Rent = Net Benefit (chosen option) − Net Benefit (next best option)
Meaning:
Extra benefit above the minimum required to choose an option.
MICROECONOMICS — COMPLETE STUDY GUIDE
Includes the core topics:
• Technology & Incentives
• Labour Supply (Doing the Best You Can)
• Strategic Interactions & Game Theory
• Institutions, Power & Inequality
• The Firm and Its Employees
• The Firm and Its Customers
PART 1
TECHNOLOGY, INCENTIVES & ECONOMIC GROWTH
Big Idea
The central question:
Why did living standards increase rapidly after the Industrial Revolution?
Before 1800 — Malthusian Economy
Economic growth did not increase living standards.
Process:
More output → population grows → wages fall → income per person stays low
Result:
Long-run income per person ≈ constant
After 1800 — Industrial Revolution
Technological innovation increased productivity faster than population growth.
Effects:
• Technological progress
• Higher productivity
• Higher wages
• Rising living standards
Core Logic of Economic Growth
Incentives → Decisions → Innovation → Productivity → Economic Growth
Meaning:
1. People respond to incentives
2. Incentives influence decisions
3. Decisions drive innovation
4. Innovation increases productivity
5. Productivity increases living standards
, PART 2
DECISION MAKING & OPPORTUNITY COST
Core Assumption of Economics
People choose the option with the highest net benefit.
Formula:
Net Benefit = Benefit − Cost
Decisions are always made relative to alternatives.
Opportunity Cost
Definition:
Opportunity Cost = Value of the next best alternative forgone
Opportunity cost can include:
• Money
• Time
• Effort
• Risk
• Experience
Example:
Concert value = 100
Ticket cost = 40
Babysitting wage = 50
Opportunity cost of concert:
OC = 50
Economic Cost
Economic Cost = Direct Cost + Opportunity Cost
Example:
40 + 50 = 90
Net Benefit
Net Benefit = Benefit − Economic Cost
Example:
100 − 90 = 10
Economic Rent
Definition:
Economic Rent = Net Benefit (chosen option) − Net Benefit (next best option)
Meaning:
Extra benefit above the minimum required to choose an option.
