Microeconomics Concepts Cheat Sheet

This cheat sheet covers key concepts in microeconomics, including game theory, market structures, elasticity, and pricing strategies, as presented in a practice exam.

Core Principles

Nash Equilibrium: A state where no player can improve their outcome by unilaterally changing their strategy.
Pure Strategy Nash Equilibrium: A Nash Equilibrium where players choose a single strategy with certainty.
Mixed Strategy Nash Equilibrium: A Nash Equilibrium where players randomize their strategy choices.
Price Elasticity of Demand: Measures the responsiveness of quantity demanded to a change in price.
Income Elasticity of Demand: Measures the responsiveness of quantity demanded to a change in income.
Cross-Price Elasticity of Demand: Measures the responsiveness of quantity demanded of one good to a change in the price of another good.
Monopoly: A market structure with a single seller and significant barriers to entry.
Oligopoly: A market structure with a few strategically interdependent firms.
Monopolistic Competition: A market structure with many firms selling differentiated products.
Consumer Surplus: The difference between what consumers are willing to pay and what they actually pay.
Producer Surplus: The difference between the price producers receive and their minimum willingness to sell.
Deadweight Loss: A loss of economic efficiency that occurs when the equilibrium outcome is not achievable.

Action Steps

Identify players and their possible strategies in a game.
Determine best responses for each player given the other's strategies.
Find strategy profiles where each player's strategy is a best response to the others (Nash Equilibrium).
Calculate price elasticity of demand to determine if demand is elastic, inelastic, or unit elastic.
Analyze market structures (monopoly, oligopoly, monopolistic competition) based on number of firms, product differentiation, and barriers to entry.
Use demand and cost curves to determine optimal output and price for firms.
Calculate consumer and producer surplus from given demand and supply/cost curves.
Identify sources of monopoly power (e.g., economies of scale, patents).

Formulas

Price Elasticity of Demand (Ed) = (% Change in Quantity Demanded) / (% Change in Price)
Income Elasticity of Demand (Ei) = (% Change in Quantity Demanded) / (% Change in Income)
Cross-Price Elasticity of Demand (Exy) = (% Change in Quantity Demanded of Good X) / (% Change in Price of Good Y)

Key Terms

Nash Equilibrium: A state in a game where no player can benefit by unilaterally changing their strategy.
Pure Strategy: A strategy where a player chooses a specific action with certainty.
Mixed Strategy: A strategy where a player randomizes between two or more pure strategies.
Price Elasticity of Demand: Measures the sensitivity of quantity demanded to a change in price.
Inferior Good: A good for which demand decreases as income rises.
Normal Good: A good for which demand increases as income rises.
Elastic Demand: Quantity demanded changes significantly with a price change (Ed > 1).
Inelastic Demand: Quantity demanded changes little with a price change (Ed < 1).
Monopoly: A market structure characterized by a single seller.
Oligopoly: A market structure with a small number of firms.
Monopolistic Competition: A market structure with many firms selling differentiated products.
Consumer Surplus: The difference between the maximum price a consumer is willing to pay and the actual price paid.
Producer Surplus: The difference between the price a producer receives and the minimum price they are willing to accept.
Deadweight Loss: Loss of economic efficiency when the equilibrium is not achieved.
Price Discrimination: Charging different prices to different customers for the same good or service.
Natural Monopoly: A monopoly that arises due to economies of scale.

Real World Examples

Airline pricing for flights with and without Saturday stay-overs.: Third-degree price discrimination, segmenting travelers based on willingness to pay.
A hotdog stand offering introductory prices.: Understanding price elasticity to adjust pricing for revenue maximization.
Two students deciding how many chicken wings to request.: Illustrates game theory concepts like Nash Equilibrium in a resource allocation problem.

Timeline

Apr 28, 2026 9:37 PM: Practice Exam 3 started.
Apr 28, 2026 9:00 AM: Practice Exam 3 released.
Apr 29, 2026 10:40 PM: Practice Exam 3 submitted.