ACCA Applied Knowledge · Business and Technology

Microeconomic factors: formula sheet

Full chapter guide

Key formulas

Equilibrium condition: Quantity demanded = Quantity supplied; The equilibrium price is the price at which this holds.
Surplus (excess supply): Surplus = Quantity supplied − Quantity demanded, when price is above equilibrium; Price tends to fall.
Shortage (excess demand): Shortage = Quantity demanded − Quantity supplied, when price is below equilibrium; Price tends to rise.
Shift rules: Demand ↑ → price ↑, quantity ↑; Demand ↓ → price ↓, quantity ↓; Supply ↑ → price ↓, quantity ↑; Supply ↓ → price ↑, quantity ↓; Holds when only one curve shifts and the curves have normal slopes.
Own price change: Price change → movement along the curve, not a shift; Only non-price factors shift a curve.
Price elasticity of demand (PED): PED = % change in quantity demanded ÷ % change in price; Result is normally negative. Exams usually ignore the sign and talk about size. Above 1 is elastic, below 1 is inelastic.
Income elasticity of demand (YED): YED = % change in quantity demanded ÷ % change in income; Positive = normal good, negative = inferior good, above 1 = luxury.
Cross elasticity of demand (XED): XED = % change in quantity demanded of A ÷ % change in price of B; Positive = substitutes, negative = complements.
Price elasticity of supply (PES): PES = % change in quantity supplied ÷ % change in price; Normally positive. Above 1 is elastic supply.
Percentage change: % change = (new − old) ÷ old × 100; Always divide by the original figure, not the new one.
Effect on total revenue: Elastic: price rise cuts revenue. Inelastic: price rise increases revenue.; Price cuts do the opposite. At unit elasticity revenue stays unchanged.
Shortage: Shortage = Quantity demanded − Quantity supplied, at the maximum price; Applies only when the maximum price is below equilibrium. If it is at or above equilibrium, it has no effect.
Surplus: Surplus = Quantity supplied − Quantity demanded, at the minimum price; Applies only when the minimum price is above equilibrium.
Equilibrium: Quantity demanded = Quantity supplied; Solve the demand and supply equations together to find equilibrium price and quantity.
Tax revenue: Tax revenue = Tax per unit × Quantity sold after the tax; Use the new quantity, not the old one.
Subsidy cost: Subsidy cost = Subsidy per unit × Quantity sold after the subsidy; Use the new quantity.
Direction of shifts: Indirect tax: supply shifts left. Subsidy: supply shifts right.; The demand curve does not move. Price and quantity move along it.
Social cost: Social cost = private cost + external cost; Negative externality: the market ignores external cost, so output is too high.
Social benefit: Social benefit = private benefit + external benefit; Positive externality: the market ignores external benefit, so output is too low.
Public good test: Public good = non-excludable AND non-rival; Both features must hold for a pure public good. A private good is excludable and rival.
Matching the fix: Negative externality → tax or regulation; positive externality or merit good → subsidy or provision; public good → state provision; monopoly → competition policy; information gap → disclosure rules; Typical matches. Other tools can also be valid if you justify them.
Perfect competition: Many firms + identical product + free entry/exit = price taker; Firm accepts the market price. Normal profit in the long run.
Monopolistic competition: Many firms + differentiated product + easy entry = some pricing power; Competes on branding, quality and advertising. Close substitutes limit price.
Oligopoly: Few large firms + high barriers + interdependence; Firms watch rivals. Prices are often stable. Collusion is possible but usually illegal.
Monopoly: One firm + very high barriers = price maker; Can restrict output and raise price. May earn abnormal profit long term.
Concentration ratio: Concentration ratio = combined market share of the largest n firms; A high ratio, such as the top 4 firms holding most sales, points to oligopoly.
Total cost: Total cost = Fixed costs + Variable costs; Fixed costs stay the same in the short run; variable costs rise with output.
Average (unit) cost: Average cost = Total cost ÷ Output; Economies of scale mean this falls as the firm grows; diseconomies mean it rises.
Variable cost: Total variable cost = Variable cost per unit × Output; Variable cost per unit is assumed constant within the normal range of output.
Scale rule: Economies: average cost falls as scale rises. Diseconomies: average cost rises as scale rises.; Applies to the long run, when all inputs can change.

Quick revision

A rise in price causes a movement along the demand curve. A change in another factor shifts the curve.
At equilibrium, quantity demanded equals quantity supplied.
Price elasticity of demand = % change in quantity demanded ÷ % change in price.
Elastic demand means the response is larger than the price change. Inelastic means it is smaller.
Income elasticity is positive for normal goods and negative for inferior goods.
A price ceiling set below equilibrium creates a shortage. A price floor set above equilibrium creates a surplus.
A subsidy lowers the cost of supply and shifts the supply curve to the right.
Negative externalities are costs imposed on third parties. Positive externalities are benefits to third parties.
Public goods are non-excludable and non-rival, so private firms struggle to provide them.
A monopoly is a single seller with high barriers to entry and strong pricing power.
Perfect competition has many sellers, identical products and no barriers to entry.
Economies of scale lower average cost as output grows. Diseconomies raise it when a firm gets too large.

Common mistakes

Treating a change in the good's own price as a shift in the demand curve. Fix: Own price changes only move you along the curve. Only other factors shift it.
Mixing up the effect of a rise in the price of a substitute and of a complement. Fix: Substitutes compete, so a rise in the price of one increases demand for the other. Complements are used together, so it reduces demand.
Dividing by the new figure when calculating percentage change. Fix: Always use (new − old) ÷ old. Write the base next to the figure before dividing.
Inverting the formula, giving price change ÷ quantity change. Fix: Put the effect on top. Quantity is the response, so it is the numerator.
Saying a price ceiling always causes a shortage. Fix: Always compare the control price with equilibrium first.
Mixing up a ceiling and a floor. Fix: Ceiling = maximum price, protects buyers, shortage. Floor = minimum price, protects sellers, surplus.
Treating any cost to the producer as a negative externality. Fix: An externality must fall on a third party outside the transaction. Costs the firm pays itself are private costs.
Calling a good a public good because the government provides it. Fix: Use the test: non-excludable and non-rival. Education is usually a merit good, not a pure public good.
Confusing monopolistic competition with monopoly. Fix: Remember that monopolistic competition has many firms and easy entry. Monopoly has one firm.
Saying oligopoly firms always collude. Fix: Say collusion is possible, but it is usually illegal. Many oligopolies compete on non-price factors without agreements.

Exam tips

Read the first words of the question for the cause. If it is the good's own price, the answer is a movement along the curve, not a shift.
Under time pressure, name the curve first, then the direction, then the result. This avoids most errors.
In multiple response questions, check each option against the shift rules separately before selecting.
Watch for 'change in demand' versus 'change in quantity demanded'. They are different answers.
When a number entry question gives quantities at prices, find where the two quantities match.
In Section A, the sign and the comparison with 1 often decide the answer. Check these before doing full arithmetic.
For multiple response questions, read the number of options you must select and tick exactly that many.
Number entry questions may ask for a specific rounding or ask you to ignore the sign. Read the instruction before typing.