Academic year: 2021/2022

UNIVERSITY OF MALTA
DEPARTMENT OF ECONOMICS

INTRODUCTORY MICROECONOMICS THEMES

Suggested main text books:

Economics, John Sloman (latest edition)
Economics Principles and Policies. W. Baumol and A. Blinder (latest edition)

These topics will be covered during Semester 1 (about 14 weeks).

I. Introduction
(a) Important concepts in economics
1. What is the difference between microeconomics and macroeconomics?
2. Why are scarcity and choice important concepts in the study of economics?
3. What do you understand by “opportunity cost”?
(b) Using Graphs. Students are to be informed that the following information about graphs is useful in
Microeconomic analysis.
4. What do you understand by the vertical axis and the horizontal axis of a graph? (Hint: Explain that
normally variable Y is drawn on the vertical axis and variable X on the horizontal axis, indicating the Y
depends on X)
5. What do you understand by a positive relationship and a negative relationship between two variables? Give
graphical examples. (Hint: positive relationship: X = money earned Y = demand for a normal product.
Negative relationship: X = increase in price Y = demand for a product. Students can be asked to plot Y=
140 – 20X and Y = 20 + 30 X.)
6. What do you understand by a movement along the curve which shows a positive (or negative) relationship
between two variables (Y and X)? Give a graphical example.
7. Show graphically what you understand by a shift of the curve which shows a positive (or negative)
relationship between two variables (Y and X)? (Hint: If a third variable, Z, also affects variable Y, then the
effect of a change in Z on Y could be shown by a shift of the curve).
8. What do you understand by a U-shaped relationship between two variables, Y and X? (Hint. The students
can be asked to plot this equation, Y=60 – 20X + 2X2 finding the value of Y as X changes from 1 to 10).
9. What do you understand by an inverted U-shaped relationship between two variables, Y and X? (Hint. The
students can be asked to plot this equation, Y= 10 + 20X - 2X2 finding the value of Y as X changes from 1
to 10).
10. What do you understand by an S-shaped relationship between two variables, Y and X? (Hint. The students
can be asked to plot this equation, Y= 16X - 3X2 + 0.2X3 finding the value of Y as X changes from 1 to
10).

II. Demand and Supply and Market Equilibrium

11. What do you understand by the law of demand? Show how demand for a product and its price are related.
Give a graphical example. (Hint: a change in price leads to a movement along the demand curve).
12. What factors other than own-price influence demand for a product? Give a graphical example as to how
these non-own-price variables affect demand. (Hint: the effect of change of a non-own-price variable on
demand for a product is depicted by a shift of the curve, which could be an inward shift or an outward
shift. Non-own-price variables that affect demand include income, price of a substitute, price of a
complement, and tastes . Students are to be informed that the demand curve is draw on the assumption that
there are no supply constraints.)
13. Show how supply of a product and its price are related. Give a graphical example. (Hint: a change in price
leads to a movement along the supply curve).
14. What factors other than own-price influence supply of a product? Give a graphical example as to how
these non-own-price variables affect supply. (Hint: the effect of change of a non-own-price variable on
supply of a product is depicted by a shift of the curve, which could be an inward shift or an outward shift.
Non-own-price variables that affect supply include technological progress, cost of production, weather
conditions and tax. Students are to be informed that the supply curve is draw on the assumption that there
are no demand constraints.)
15. What do you understand by market equilibrium and how do shifts in the demand and supply curve affect
the equilibrium price and quantity? (Hint: useful to use words such as market clearing and price
adjustment)

1
16. What are the effects of a maximum price imposed by the government in a given market for a product?
What are the effects of a minimum price imposed by the government in a given market for a product?
17. Why may government intervention be justified in the provision of merit goods? (Hint: a merit good is one
with high social positive externalities, such as education, health and pensions. In this case, the market still
works but market intervention by the government can be justified on social grounds).
18. Why may government intervention be justified in the case of a public good? (Hint: in this case the market
does not work, as in the case of a lighthouse. In this case intervention by the government to supply the
good in question can be justified. This matter will be discussed further in Section VIII)).
19. What do you understand by price elasticity of demand and how is it measured? (Hint: Emphasise the fact
that elasticity measures relative and not absolute changes).
20. What do you understand by income elasticity of demand and how is it measured?
21. What do you understand by cross elasticity of demand and how is it measured?? (Hint: This is often used
to assess the extent to which two goods can be substitutes for each other).
22. What do you understand by consumer surplus?

III. Consumer Indifference Curves

23. What do you understand by the law of diminishing marginal utility? In which way is this law associated
with demand for a product?
24. What are the characteristics of an indifference curve? What is an indifference map?
25. In what way does an indifference curve reflect the law of diminishing marginal utility? (Hint: the slope of
the curve is the ratio of marginal utilities of the two goods, indicating that as quantity of product A
increases and the quantity of product B decreases, the marginal utility derived from product A decreases,
while that derived from product B increases).
26. What do you understand by marginal rate of substitution between two goods?
27. What do you understand by the budget line? What factors affect the slope and the location of the budget
line?
28. How can consumer preferences be analysed in terms of the superimposition of indifference curves and
budget lines?
29. How does a change in price of a good affect consumption choices? (Hint: the budget line will pivot).
30. How does a change in household income affect consumption choices? (Hint: the budget line will shift).
31. What are the income and substitution effects of a change in price? (this is to be answered without a
diagram - that is only in words).
32. What do you understand by a Giffen good? (this is to be answered without a diagram - that is only in
words).
33. What is the difference between a normal good and an inferior good?

IV. Cost of Production

34. What is the difference between a firm’s (a) sales, (b) gross output and (c) value added (Hint: Sales include
inputs purchased from other firms? Sales also include goods produced in the current period as well as good
produced in previous period and sold in the current period, and excludes goods produced during the current
period, that remain unsold. Gross output includes inputs purchased from other firms. Value added is the
actual output of the firm, as this excludes purchases of inputs from other firms)?
35. What do you understand by the law of diminishing marginal product?
36. Define the terms total product (TP), average product (AP) and marginal product (MP) and the relationships
between them. Draw related diagrams.( Hint: emphasise that TP is S-shaped and AP and MP are both
inverted-U-shaped. The three curves are based on the assumption that up to a point labour becomes
increasingly productive and after a point labour becomes decreasingly productive).
37. Distinguish between disbursed costs of the firm and opportunity costs of the firm (Hint: disbursed costs are
those that are actually paid by the owner/s of the firm to external suppliers and to the employees;
opportunity costs reflect the market cost of inputs, including labour, financial capital and property, some of
which may not be disbursed when the service is contributed by the owner/s of the firm or his family).
38. What do you understand by the following shot-run curves: (a) total costs (TC)? (b) total variable cost
(TVC)? (c) total fixed cost (TFC)? Draw curves representing these different costs.
39. What do you understand by the following: (a) average total cost (AC); (b) average fixed cost (AFC); and
(c) average variable cost (AVC)? Draw curves representing these different costs. (Hint: emphasise that the
AVC is drawn S-shaped, based on the assumption that up to a point the variable input (labour) becomes
increasingly productive and after a point the variable input (labour) becomes decreasingly productive).
40. What do you understand by marginal cost (MC)? What is the relationship between the average total cost
curve (AC) and marginal cost curve (MC)? (Hint: Both are U-shaped. The MC curve passes through the
lowest point of the AC curve as the MC curve rises).
41. Explain how the marginal product curve (MP) is associated with marginal cost curve (MC) in the short run
(Hint: The two curves are mirror images of each other. MC is U-shaped, and MP is inverted U-shaped.

2
 initially output grows at an increasing rate and therefore costs increase at a decreasing rate – i.e. as MP
rises, MC falls - but after a point, output increases at a diminishing rate and therefore costs increase at an
increasing rate – i.e. as MP falls, MC rises).
42. What is the relation between the marginal cost of firms and the industry’s short run supply curve?
43. What is the most important difference between the short run and the long run with regard to costs of
production?
44. Discuss the factors that, in the long run, lead to (a) increasing returns or decreasing cost per unit and (b)
decreasing returns or increasing cost per unit. (Hint: here introduce the concepts of economies and
diseconomies of scale, and the factors that give rise to economies and diseconomies of scale).

V. Theory of Production (Hint: students are to be informed that this theory is very similar to the theory of
utility maximisation)
45. What do you understand by an isoquant?
46. What is an isoquant map?
47. Using an isoquant, explain what you understand by the marginal rate of technical substitution between
labour and capital?
48. What is an isocost line and what factors affect its slope and its position? (Hint: the cost of labour is the
wage rate (W) and the cost of capital is its rental value (R), that is the market cost of hiring machinery and
other capital inputs.)
49. Using an isoquant map and a given isocost line, explain how a firm maximizes output.
50. Using a series of isocost lines and a given isoquant, explain how a firm minimizes cost.
51. Explain the effect on labour utilisation in the long run when the wage rate increases (Hint: the isocost line
pivots inwards on the L axis)
52. Explain the effect on labour utilisation in the long run when the firm increases its cost outlay but the prices
of inputs, namely wage for labour and rental value of capital, remain constant. (Hint: isocost shifts
outward).

VI. Market Structures

General
53. What do you understand by total revenue (TR), average revenue (AR) and marginal revenue (MR) of the
firm?
54. Distinguish between normal profit and supernormal profit. (Note: Supernormal profit is a mark-up earned
by the firm over and above normal profit. It is important to note that normal profit is not really a profit but
a cost of production, which may not be disbursed, corresponding mainly to the inputs contributed by the
owner/s of the firm. This means that normal profit is included in the cost curves. These costs include
labour costs provided by the owner/s, the opportunity cost of which corresponds to the market wage rate;
financial capital provided by the owner’s, the opportunity cost of which corresponds to the market interest
rate; and property of the owners used for the business, the opportunity cost of which corresponds to market
rent).
55. Why is normal profit often associated with opportunity costs? (Hint: the reason is that opportunity costs are
the returns due to the inputs contributed by the owner/s which need not be disbursed).
56. Why should marginal cost be equal to marginal revenue for the firm to maximize its supernormal profit
(SNP)? (Hint: if MC is lower than MR it pays the firm to produce more as this will increase SNP. If MC is
higher than MR producing more reduces SNP. So in order to maximize SNP the firm will stop producing
at a point where MC=MR.)
57. What do you understand by a market? (Hint: in this context a market means demand and supply for a
particular product. Under perfect competition the market is well defined as the products are assumed to be
homogenous. Under monopolistic competition, the products are differentiated, and what constitutes the
relevant market may be difficult to determine. Generally speaking, two products which are differentiated
but are close substitutes, are considered as being in the same market).

Perfect Competition
58. What conditions characterise a perfectly competitive market? (Hint: there must be (a) many small firms
competing, (b) homogenous products leading to perfect substitution between products sold by different
firms, (c) freedom of entry and exit of firms into and out of the market in the long run (d) complete
information about the product by the consumers.
59. Draw the average revenue curve and a marginal revenue curve, assuming a perfectly competitive market
(Note: explain that the term “average revenue” and “price” mean the same thing and the AR curve
therefore shows the demand curve facing the firm. In this case the AR and the MR curves are both shown
by the same horizontal straight line indicating that the firm cannot change the price unitarily without losing
all its clients, given the assumptions underpinning this market model).

3
60. Draw a diagram to show that a perfectly competitive firm can earn supernormal profits in the short run.
61. Why do supernormal profits of a perfectly competitive firm disappear in the long run? (Hint: this occurs
because new firms will enter the market thereby pushing down market prices. The process will continue
until the SNP of all firms will disappear. In this case firms will cover normal profit only and therefore
would still remain in the market).
62. What are the major welfare implications of perfect competition in the long run? (Hint: two major
advantages for the consumer (i) firms do not charge SNP and (ii) firms produce at the most efficient level
of production.
63. To what extent do the implications associated with a perfectly competitive market model apply in reality?
(Hint: Although a perfectly competitive market does not exist in reality, the more a market approaches the
perfect competition assumptions - namely many small firms competing, perfect substitutions between
products sold by different firms, freedom of entry and exit, and perfect knowledge - the more intensely
competitive it becomes and the more it is likely that firms produce efficiently and reduce their supernormal
profits).

Monopoly
64. What conditions are necessary for a monopoly to exist? (Hint: one firm selling a product for which there
are no good substitutes. In this case the firm is the industry and supplies the whole market. The fact that
there is one firm indicates that there are barriers to entry. These assumptions are the exact opposite of the
assumptions underpinning perfect competition).
65. Draw a monopolist’s average revenue curve and marginal revenue curve. What is the relationship between
the two curves? (Hint: they are both backward bending, but the MR curve passes midway between the
vertical axis and the AR curve at any given price).
66. How does a monopolist maximise profits in the short run and in the long run?
67. What do you understand by deadweight loss, when comparing a monopoly with perfect competition?
68. What leads to barriers of entry into a market?
69. What do you understand by price discrimination by a monopolist?
70. What are the disadvantages and advantages of a monopoly compared to perfect competition?

Monopolistic Competition
71. What are the assumption underpinning monopolistic competition?
72. What type of demand (average revenue) curve and marginal revenue curve does a firm operating as a
monopolistic competitor face?
73. How are price and output of a firm determined under monopolistic competition in the short run?
74. How are price and output determined of a firm under monopolistic competition in the long run?
75. What is the difference between the long run equilibrium of a firm operating as a perfect competitor when
compared to another operating under monopolistic competition?
76. What is the difference between the long run equilibrium of a firm operating as a monopolist when
compared to another operating under monopolistic competition?
77. What do you understand by non-price competition?

Oligopoly
78. What do you understand by oligopoly?
79. What do you understand by perfect and imperfect collusion?
80. Why is collusion undesirable?
81. What do you understand by price leadership?
82. What do you understand by game theory and why is this relevant to Oligopoly?

VII. Distribution theory

83. What determines demand for labour? (Hint: the principal economic factors are the wage rate, with a
negative effect, the output of the firm with a positive effect, and technology, with a negative effect. A
diagram can be drawn with labour demand on the horizontal axis and wage rate on the vertical axis,
leading to a curve with a negative slope, and letting this curve shift with changes in output and
technological advance).
84. What do you understand by marginal physical product, value of the marginal product and marginal value
product of labour? Why are these concepts associated with labour demand?
85. Draw a labour supply curve, assuming that labour supply by households responds positively to an increase
in the wage rate.
86. Show how demand for and supply of labour interact to establish the market wage rate.
87. Why is the setting of minimum wage considered, in theory, to lead to unemployment?
88. What do you understand by monopsony in the labour market?

4
VIII. Public goods and externalities
89. What are public goods? (Hint: these goods are non-excludable in that individuals cannot be excluded from
using the good, and non-rivalrous, in that the use of the public good by one individual does not reduce its
availability to others).
90. What do you mean by free riding, with regard to the supply of public goods?
91. What are external benefits and external costs (externalities)?
92. Why are public goods and negative externalities associated with market failure?
93. Why are environmental concerns associated with public goods and externalities? (Hint: The physical
environment can be considered as a public good when it not owned by anybody and when individuals
cannot be excluded from using it. Pollution of the environment is a negative externality which distorts
prices, as the external cost of pollution is not factored in the cost of production, unless it is taxed).
94. How can government intervention correct market failure? (Hint: The government can use three main tools
to encourage action conducive to desirable use of resources when the price mechanism does not work,
namely (a) moral suasion or education (b) economic instruments as carrot (subsidy) and stick (tax) and (c)
command and control, backed by legislation and enforcement.