ECON5001 Microeconomic Theory

How ECON5001 is assessed

What ECON5001 covers

ECON5001 runs in two halves — Phan builds the neoclassical core (consumer choice through production and welfare) and Kesten pivots to strategic interaction (game theory, oligopoly, matching and auctions) — and these 11 chapters map that teaching order, each anchored by one canonical model you must set up and solve.

The first half builds the neoclassical core — preferences and utility, demand and the Slutsky decomposition, exchange and the two welfare theorems, choice under uncertainty, and production and costs. The second half turns strategic: monopoly and price discrimination, game theory and Nash equilibrium, oligopoly (Cournot, Stackelberg, Bertrand), and the market-design topics of stable matching and auctions.

The exam does not reward recalling definitions — it rewards solving. Every chapter has one canonical model, and you earn marks by setting it up cleanly (objective, first-order or tangency condition, constraint) and grinding the algebra under time pressure.

The strategic back half — Nash equilibria, reaction-function algebra, deferred acceptance and auction strategy — is where marks are most often won or lost because it is the most algorithmic and the least textbook-linear.

Worked example · free

Monopoly: price, markup and deadweight loss

Key terms

Marginal rate of substitution (MRS)

The slope of an indifference curve: the rate at which a consumer will just trade good 2 for good 1 while staying indifferent. MRS = MU1/MU2; at an interior optimum it equals the price ratio p1/p2.

Tangency condition

The interior optimal-choice rule, MRS = p1/p2 (equivalently MU1/p1 = MU2/p2, equal 'bang per buck'). It fails for perfect substitutes, perfect complements and concave preferences, where the optimum is a corner.

Slutsky decomposition

Splitting the effect of a price change into a substitution effect (always opposite to the price change) and an income effect (sign depends on normal vs inferior). A Giffen good is an inferior good whose income effect outweighs the substitution effect.

Pareto efficiency

An allocation from which no one can be made better off without making someone worse off. In an exchange economy it requires equal marginal rates of substitution, MRS_A = MRS_B; the contract curve is the locus of all such allocations.

Walrasian (competitive) equilibrium

Prices at which every consumer optimises as a price-taker and all markets clear. The First Welfare Theorem says it is Pareto-efficient; the Second says any efficient allocation can be reached as one after lump-sum redistribution of endowments.

Expected utility (von Neumann-Morgenstern)

Rational agents maximise the probability-weighted utility of outcomes, EU = sum p_i u(x_i), not expected monetary value. Concave u means risk aversion, so the certainty equivalent lies below expected wealth and the gap is the risk premium.

Cost minimisation & MC/AC curves

Minimising input cost subject to an output target gives TRS = -w1/w2 and the cost function c(w,y). Marginal cost cuts average variable cost and average total cost from below at their minimum points.

Lerner index (markup)

A monopolist's market power: (P - MC)/P = -1/elasticity. The more inelastic demand is, the larger the markup. Because marginal revenue must be positive, a monopolist always produces on the elastic part of demand.

Nash equilibrium

A strategy profile in which every player best-responds to the others, so no one can gain by a unilateral deviation. Found by best-response (underlining) sweeps, iterated elimination of dominated strategies, or intersecting reaction functions.

Subgame-perfect equilibrium

A refinement for dynamic games: a strategy profile that is a Nash equilibrium in every subgame, found by backward induction. It rules out non-credible threats that ordinary Nash equilibrium would allow.

Cournot / Stackelberg / Bertrand

The three oligopoly benchmarks: Cournot (simultaneous quantity choice, equilibrium at the intersection of reaction functions), Stackelberg (a quantity leader exploits the follower's reaction function for a first-mover advantage), and Bertrand (price competition, which drives homogeneous-goods prices to marginal cost).

Deferred acceptance & stable matching

The Gale-Shapley algorithm in which proposers propose and receivers tentatively hold their best offer. It always yields a stable matching (no blocking pair), is optimal for the proposing side, and is strategy-proof only for the proposers.

ECON5001 FAQ

Questions students ask in each ECON5001 chapter

Is elasticity the same as the slope of the demand curve?

No — and this is the most common Week-1 mistake. The slope ∂Q/∂p depends on units and is constant along a linear demand curve, while elasticity ε = (∂Q/∂p)(p/Q) is unit-free and changes at every point because the ratio p/Q changes. On a straight-line demand curve, demand is elastic at high prices, unit-elastic at the midpoint, and inelastic at low prices. Chapter 01 · Markets, Demand, Supply & Elasticity

Why can't two indifference curves ever cross?

Suppose they crossed at a bundle A, with B on the first curve and C on the second, where B has strictly more of every good than C. Same-curve indifference gives A ∼ B and A ∼ C, so by transitivity B ∼ C. But monotonicity (B dominates C) forces B ≻ C. B ∼ C and B ≻ C contradict, so the curves cannot cross. The marks are in naming both axioms — transitivity to chain the indifferences and monotonicity to force the strict preference. Chapter 02 · Preferences, Utility & the MRS

How do I know whether to use the tangency condition or look for a corner?

Read the utility function. A product such as x1^a x2^b is Cobb-Douglas and smooth-convex, so the interior tangency MRS = p1/p2 applies. A sum ax1 + bx2 is perfect substitutes — the indifference curves are straight, so there is no tangency and you compare bang-per-buck MU1/p1 versus MU2/p2 and buy only the winner (a corner). A min{ax1, bx2} is perfect complements — solve the proportion ax1 = bx2 with the budget. Concave preferences also give a corner. Always check at the end that quantities are positive; a negative answer signals the true optimum is a corner. Chapter 03 · Consumer Choice, Demand & Comparative Statics

What is the single most important condition in this topic?

Pareto efficiency requires MRS^A = MRS^B. Computing both marginal rates of substitution and comparing them is the opening move of essentially every exchange-economy exam question: equal MRSs means the allocation is efficient (on the contract curve) with no gains from trade; unequal MRSs means it is inefficient and the gap tells you the direction of beneficial trade. Chapter 04 · Exchange & the Welfare Theorems

Do I multiply or divide by (1+r) when discounting?

It depends on the direction in time. To move money forward (today → next period) you multiply: FV = m(1+r). To move money back (next period → today) you divide: PV = m/(1+r). The single most common slip in this chapter is dividing when you should multiply or vice versa, so write down which way in time you are travelling before you reach for the factor. The same (1+r) is the slope of the intertemporal budget line, so it appears everywhere in the two-period problem. Chapter 05 · Intertemporal Choice, Labour-Leisure & Uncertainty

What's the difference between diminishing marginal product and decreasing returns to scale?

They answer different questions. Diminishing marginal product is a SHORT-RUN idea — you increase ONE input while holding the others fixed, and each extra unit adds less output (∂²f/∂xᵢ² < 0). Decreasing returns to scale is a LONG-RUN idea — you scale ALL inputs up together and output rises less than proportionally. They can coexist: a constant-returns Cobb-Douglas (exponents summing to 1) still has diminishing marginal product in each input. Answering 'decreasing returns' just because the marginal products diminish is one of the most-tested traps in this chapter. Chapter 06 · Production & Costs

When should a competitive firm shut down?

In the short run, shut down when the price falls below minimum average variable cost (p < min AVC), because every unit then loses money even before fixed cost, and the firm is better off producing zero and eating the sunk fixed cost −F. If min AVC ≤ p < min AC the firm makes a loss but keeps producing, because shutting down would forfeit the whole of F. Exit (leaving the industry) is a separate long-run decision, made when p < min AC. Chapter 07 · Perfect Competition & Market Equilibrium

Why is marginal revenue below the demand curve for a monopoly?

Because the monopolist faces the whole downward-sloping demand, so to sell one extra unit it must cut the price on EVERY unit, not just the last one. The gain from the extra unit (+P) is partly offset by the lost revenue on existing units (Q·P′(Q), a negative term), so MR = P + Q·P′(Q) < P. For linear inverse demand p = a − bQ this gives MR = a − 2bQ — the same intercept as demand but twice the slope. Writing MR with the same slope as demand is the most common and most expensive mistake in this topic. Chapter 08 · Monopoly & Price Discrimination

What is the difference between a dominant strategy and a Nash equilibrium?

A dominant strategy is best for one player regardless of what anyone else does — a property of a single strategy. A Nash equilibrium is a whole profile in which every player is best-responding to the others, so no one can gain by deviating alone. Dominant strategies are stronger but rare; if each player happens to have one, the dominant-strategy profile is automatically a Nash equilibrium, but most games have Nash equilibria without any dominant strategy. Chapter 09 · Game Theory

What's the difference between Cournot, Stackelberg and Bertrand?

They differ on two questions: what firms choose and when. Cournot = quantities chosen simultaneously. Stackelberg = quantities chosen sequentially (a leader moves first). Bertrand = prices chosen simultaneously. The solution machinery is the same every time — write profit as a function of both firms' choices, take the first-order condition for a reaction function, then solve the reaction functions together. The model name only fixes the choice variable and the timing. Chapter 10 · Oligopoly: Cournot, Stackelberg & Bertrand

What exactly makes a matching stable?

Two conditions. It must be individually rational — nobody is paired with a partner they would rather be single than have — and it must have no blocking pair, meaning there is no man and woman who would both prefer to abandon their assigned partners for each other. The blocking-pair test is the operative one in almost every exam question: 'everyone is matched' is NOT the same as stable, so you earn the verification mark by hunting for a blocking pair and showing none exists. Chapter 11 · Matching Markets & Auctions

How to study for the exam

Treat ECON5001 as a collection of canonical models rather than a list of facts, because the exam rewards solving under time pressure.

For each of the 11 chapters, identify the one model that defines it and rehearse a single fixed routine — state the objective, write the first-order or tangency condition, impose the constraint, solve, then verify your answer (check signs, corners, and whether you read price off demand rather than MR).

Front-load the neoclassical core (consumer choice, exchange, costs) early in semester so the Canvas quizzes are easy marks, then invest your heaviest practice in the strategic back half (game theory, Cournot/Stackelberg/Bertrand, matching and auctions), which is the most algorithmic and where exam marks are most often won or lost.

Work the provided problem sets and practice finals against the clock, redo each example with the source's own numbers after reading the method, and keep a running list of the common traps — confusing PS with profit, the slope of MR, profit vs quantity taxes, checking blocking pairs for stability — so they stop costing you marks.

Your AI Economics tutor for ECON5001

Stuck on a hard ECON5001 question? Sia is AskSia’s AI Economics tutor — ask any ECON5001 Microeconomic Theory question and get a clear, step-by-step explanation grounded in how the course is actually taught and assessed. Read this whole study guide free, then take your hardest questions to Sia.