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Microeconomic concepts

Microeconomic concepts are involved with decisions made by firms and households. The specific concepts being focused on are:  

  • marginal utility and demand
  • diminishing returns and supply
  • elasticity of demand
  • elasticity of supply
  • market structures (excluding perfect competition and monopoly)
  • role of prices and profits in determining resource allocation.

Teaching and learning for a topic involving microeconomic concepts from the list above would typically require a minimum of three different microeconomic concepts to be studied.

Key concept indicators

For each microeconomic concept:

  • Defines or describes the microeconomic concept.
  • Processes and/or presents sufficient data or information related to the microeconomic concept to support:
    • a detailed explanation of the microeconomic concept
    • a justification about the implications of microeconomic concept.
  • Illustrates the microeconomic concept on an appropriate economic model.
  • Provides a detailed explanation the microeconomic concept that is supported by reference to both:
    • specific processed and/or presented data or information
    • information on the economic model used to illustrate the concept.
  • Provides a detailed explanation to justify the implication of the micro economic concept for one of:
    • a consumer
    • a producer
    • government.

Note: The justification will need to be supported with references to evidence from both an economic model and processed and/or presented data or information.

An in-class consumption experiment is a possible context for the marginal utility and demand microeconomic concept

  • To introduce students to the benefit of thinking at the margin, get them to reflect on decisions they have made in a real life scenario. 
    For example, you and a couple of friends go to a movie (that is highly rated by critic) but you all realise after 20 minutes you aren’t going to enjoy it. One friend suggests leaving and going to his house to play pool but the other argues that it would be silly to waste the $12 you’ve each spent on a movie ticket. 
    What would an economist do? 
    Answer:  Play pool – because once you’ve started watching the movie the ticket is a sunk cost (that is, can't be recovered), so the real problem you face is: do you spend an hour and a half watching a boring movie, or do you go to a friend’s house to play pool? Since no extra cost is associated with these choices and the benefit received from playing pool is higher than watching a boring movie, the rational choice is to play pool.
  • Once students have an understanding of thinking at the margin, you could conduct an in-class experiment. For example, get students in groups to continuously drink cups of coke. Before each cup is drunk, students should record how much they would be prepared to pay for it (which represents the marginal utility of that cup). This data could be recorded in a table (see below).
Quantity of cups MU ($)









  • By observing their data tables students will see MU falls as quantity consumed increase (that is, Law of Diminishing MU) and when students are given the optimum purchase rule, they (P= MU) they should be able to derive a demand schedule for coke.

Note: If students have learned how to write detailed explanations 1 they should also be able to use the optimum purchase rule to explain why the slope of the demand curve for coke.

  • To see the implication of this for consumer decision making, students could be introduced to the consumer equilibrium rule (see below) which states that rational consumers will organise their limited income so that the MU per dollar is the same for the bundle of goods that they consume. The teacher could provide students with tables showing the MU of Coke and Pepsi at a variety of different prices. By applying the consumer equilibrium rule students would see how raising the price of coke will increase the quantity of Pepsi (a substitute) they consume.


1 – detailed explanations to economic questions typically have three parts. For example, What is the answer, Why is this the answer, How do you know?

For example 

Use optimum purchase rule to explain the negative slope of the demand curves for coke.


The demand curve for coke slopes downwards to the right because consumers will only purchase coke if the price is lower than (or equal to) the marginal utility received from consuming it. The MU received from the first unit of is $1.50 so they will buy if the price is $1.50 (see point 1 P1/Q1 on the demand curve). However the MU for larger quantities is lower so coke consumers will only increase the quantity they demand if the price falls to match the lower MU. For example to purchase 3 cups the price needs to fall to 75 cents the Mu of the 3rd cup causing the demand curve to slope downwards to the right (see point 2 P3/Q3 on the demand curve).

Note: Hypothetical evidence has been added to show how an economic model could be used to support a detailed explanation.

Last updated May 10, 2013