Micro

• The Basic Economic problem


  Individual wants are infinite whereas resources (Land, labour, capital, enterprise) are finite (scarce) and there are therefore not enough resources to go round. It is therefore down to the market mechanism (supply and demand) to distribute these resources effectively through market prices.
• Opportunity cost


  Opportunity cost measures the cost of any choice in terms of the next best alternative foregone.
• A free good


  A free good is a good with no opportunity cost.
• The Production Possibility frontier (PPF)


  A diagram showing the combination of two or more goods that can be produced using all available factors of production efficiently.
• Capital goods 


  Goods that are used in producing other goods (ex: machinery)
• Consumer goods


  Goods that are bought and used by consumer (ex: bread)
• Why is the PPF concave to the origin?


  It is concave to the origin due to the increasing opportunity cost. Factors of production can not be substituted at a constant rate, instead, successive increases in the production of one good will lead to an increasing sacrifice in terms of a reduction in the other good. For examples, as an economy tries to increase the production of good x, such as cameras, it must sacrifice more of the other good, y, such as mobile phones. Therefore, we have increasing opportunity costs as we move along the PPF
• Full shift in PPFs


  a PPF will shift if something happens to increase/decrease productivity for both goods (i.e the whole economy)
• Outward shift in PPF examples


  1. Investment in capital
  2. Inward migration of younger, skilled workers.
  3. Discovery of new natural resources.
  4. Improved education, training and healthcare to lift labour productivity.
  5. Innovations that increase output per unit and reduce resource wastage.
• Inward shift in PPF examples


  1. Non-renewable resources run out (ex: oil)
  2. Failure to invest
  3. Natural disaster
  4. Damage of infrastructure
• Skewed shift in PPF 


  A PPF will be skewn if something happens to increase/decrease productivity for one good only.
• Specialisation


  When an individual, firm or country produces a narrow range of goods or services and over time develops a comparative cost advantage in producing these goods and services
• Productivity 


  Productivity is output per resource over a given time period (ex: output per worker per day)
• Free market


  A free market is where prices and quantityA free market is where prices and quantity of resources are determined by the forces of supply and demand.
• A market


  A market is the supply and demand for a specific good or services.
• The Demand curve


  It shows the relationship between the price of a good and the quantity of it that consumers are willing and able to purchase at any given price and at any given time.
• The demand curve slopes downward because of:

  1: The income effect - if the price of something decreases then there is more disposable income (YD) to buy more of it.

  2. The substitution effect - if the price of Good A falls below that of its competitors then cetris paribus (all things being equal) the customer will switch to purchase Good A instead.
• Utility


  The benefit a consumer gains from consuming a good.
• The law of diminishing marginal utility


  We assume given the income effect that consumers will always seek to maximize consumption. In reality the first unit of consumption of a good or service yields more utility than the second and susequent units, with a continuing reduction for greater amounts.
• Increase in demand (shift outwards)


  This occurs when the quantity that consumers are willing and able to purchase at any given price increases (ex; because that product may have increased in popularity)
• Decrease in demand (shift inwards)


  This occurs when the quantity that consumers are willing and able to purchase at any given price decreases (ex: Because that product may have decreased in popularity)
• Factors affecting demand decryption


  P-Population

  A-Advertising

  C-Cost of switching

  I-Income (disposable)

  F-Fashion

  I-Income Tax

  C-Complements

  S-Substitues
• Factors affecting demand 


  PACIFICS
• Supply


  The supply is the quantity of a good or service that a producer is willing and able to supply onto the market at a given price in a given time period.
• Why does the supply curve slope upwards ? 


  1. The Profit incentive: If the supply price of the product a business produces rises then they have an incentive to increase their supply.
  2. New entrants coming into the market: Higher prices may create incentives for other businesses to enter the market and take advantage of the higher prices
• Increase in Supply (shift outwards) 


  When there is an increase in the quantity of a good or service that a producer is willing and able to supply onto the market at a given price (ex: due to a decrease in the cost of a firm’s raw materials)
• Decrease in Supply (shift inwards)


  When there is a decrease in the quantity of a good or service that a producer is willing and able to supply onto the market at a given price (ex: due to an increase in a firm’s cost of raw materials)
• Factors that shift the supply curve


  PINTS WC
• Factors that shift the supply curve


  P-Productivity

  I-Indirect taxes

  N-Number of firms

  T-Technology

  S-Subsidies

  W-Weather

  C-Costs of production
• Equilibrium Market Prices


  Equilibrium means a state of equality or balance between market demand and supply. Prices where demand and supply are out of balance are called points of disequilibrium.
• Excess Supply leads to a surplus


  Quantity demanded<Quantity supplied
• Excess demand leads to a shortage


  Quantity supplied < Quantity demanded
• Consumer Surplus


  Consumer Surplus is the difference between the total amount that consumers are willing and able to pay for a good or service and the market price. It is indicated by the area under the demand curve and above the market price.
• Producer surplus 


  Producer Surplus is the difference between the price producers are willing and able to supply for a good or service for and the price they actually receive. It is indicated by the area above the supply curve and below the current market price.
• Complements - Joint demand


  Joint demand is where an increase or decrease in the demand of one good leads to an increase or decrease in demand of a by-product.
• Substitutes 


  A good's demand is increased when the price of another good is increased
• Joint supply 


  Joint supply is where an increase or decrease in the supply of one good leads to an increase or decrease in supply of a by-product.
• Labour Market


  Where the workers sell their labour and employers buy the labour. It consists of households supply of labour and firms demand for labour
• Labour is a derived demand

  The demand for labour is directly linked to demand for a good or service, for example an increase in the quantity demanded for goods and services will bring about an increase in the demand for labour to produce those additional goods/services
• Demand for labour


  The demand for labour shows how many workers an employer is willing and able to hire at a given wage rate in a given time period