Micro (Theme 1)

• Microeconomics examines individual consumers, firms and markets in the economy
• ceteris paribus means in all other things being equal, or in other words, when all other factors are held constant
• A positive statement in economics is a statement which can be tested by observation and experimentation.
• A normative statement in economics are subjective statements that are based on the opinions of the person

  𝐊𝐞𝐲 𝐭𝐞𝐫𝐦𝐬 𝐭𝐨 𝐥𝐨𝐨𝐤 𝐨𝐮𝐭 𝐟𝐨𝐫 𝐚𝐫𝐞:

  • Right
  • Wrong
  • Should
  • Could
• The economic problem is the lack of resources to meet the needs of the population. which leads to the decisions of:

  • What to produce?
  • How to produce it?
  • For Whom to produce for?
• An opportunity cost is the cost of the next best alternative that is given up when a decision is made.
• A command economy (COMMUNISM) is a system where the government controls the economy (fop's) and allocates resources.
• A free market economy is an economy where the government does not interfere with the free market, instead the private sector owns the fop's and the price mechanism allocates what is made and who buys it
• Adam smith was an economist argued that individuals pursuing their own self-interest, in a free market economy, would inadvertently benefit society as a whole (invisible hand)
• Karl Marx believed that society was fundamentally divided into classes, with the bourgeoisie (the wealthy owners of the means of production) exploiting the working class. He argued that this class struggle would result in a communist society where property is collectively owned and there is no class distinction.
• Fredrick Hayek advocated for limited government intervention and free markets as it allowed for more individual freedom. He warned against excessive government intervention, arguing that it could lead to economic stagnation
• Specialisation is when individuals, firms and economies focus on a particular task or area of expertise
• Division of labour is where the production process is broken down into sperate tasks, carried out by a group or worker. (Occurs when specialisation has taken place)
• Behavioural economics disputes rationality and utility maximisation, arguing that emotional, social and psychological factors can influence decision making
• Traditional economics believe consumers are always rational and always look to maximise their utility when they make consumption decisions
• Demand is the quantity of a good or service that consumers are willing and able to buy at a given price
• Effective demand is the demand for goods and services that is backed by the ability to purchase it
• The law of demand states that as the price of a good or service increases, the quantity demanded decreases. vice versa.
• Marginal utility is the additional benefit gained from consuming one more unit of a good or service.
• Diminishing utility is the idea that the satisfaction we get from a good decreases as we consume more of it
• Movement along the demand curve

  
• PASIFICS are non-price factors that cause a shift in the demand curve

  P: population

  A: advertisement

  S: substitution

  I: income

  F: fashion/trends

  I: Interest rates

  C: compliments/confidence

  S: seasons
• Derived demand is the demand for a good or service that is a result of the demand for another good or service. e.g. steel is a derived demand for cars
• Complimentary demand is when demand for one good causes consumers to demand more of another good.
• Supply is the quantity of a good or service that producers are willing and able to supply at a given price
• The law of supply states that as the price of a good increases, the quantity supplied by producers will also increase. vice versa
• PINTSWC are cause of shifts in the supply curve

  P: Productivity

  I: Indirect tax

  N: Number of suppliers

  T: Technology

  S: Subsidy

  W: Weather

  C: Cost of production
• The price mechanism describes how prices act as signals to guide economic activity.
• The functions of price are:

  • Allocation of resources
  • Rationing
  • Signalling
  • Incentives
• Functions of price

  • Allocation of resources: when the price of a good or service increases, it indicates that there is a higher demand for it, prompting producers to allocate more resources to its production.
• Functions of price

  • Rationing: Prices help to ration scarce goods and services. When a good or service becomes scarce, its price tends to rise.
• Functions of price

  • Signaling: Prices convey information about the relative scarcity or abundance of goods and services and demonstrate where resources are required.
• Functions of price

  • Incentives: Prices provide incentives for producers to allocate resources efficiently. Higher prices indicate increased demand, motivating producers to produce more of a particular good or service. While lower prices signal decreased demand, encouraging producers to reallocate resources to more profitable uses.
• Market equilibrium is when Demand= supply. Also refered to as the market clearing price
• A subsidy is a grant given by the government to a business to encourage them to increase the supply of something
• Interrelated markets are markets that are closely related to each other such as the market for cars and the market for petrol
• PED (price elasticity of demand) measures the extent (%) to which demand for a product changes in response to a change in price
• Price elasticity of demand = %change in quantity demanded /%change in price
• If PED is less than one then its inelastic
• If PED is greater than one then its elastic