Microeconomics: Markets, Elasticity & Market Structures
Chapter concept map
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Key formulas
Price Elasticity of Demand
ε_D = (% ΔQ) / (% ΔP) = (dQ/dP) × (P/Q)
|ε_D| < 1 = inelastic; |ε_D| > 1 = elastic; |ε_D| = 1 = unit elastic.
Lerner Index
L = (P − MC) / P = 1 / |ε_D|
Measures monopoly power. L=0 in perfect competition; L=1 in pure monopoly.
Subtopic 1 / 5
Supply, Demand & Price Controls
The market clears where quantity supplied equals quantity demanded. Government controls disrupt this:
- Price ceiling (below equilibrium) → shortage. Suppliers produce less than consumers want.
- Price floor (above equilibrium) → surplus. More is supplied than demanded.
⚡ Exam callout: a binding constraint is one that actually changes behaviour. A price ceiling above the equilibrium price does nothing. The distortion only happens when the ceiling is below market price.
Worked example
Rent control set at €800/month when the equilibrium rent is €1,200/month. Ceiling is binding → landlords supply fewer flats, tenants demand more → shortage. If rent control were set at €1,500/month, it would be non-binding and have no effect.
Exam strategy
Focus on understanding underlying concepts — exam questions test application, not memorization.
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