Microeconomics

• Economics


  A social science that focuses on human behaviour in relation to economic activities and examines how individuals, households, businesses, and governments make decisions and allocate resources in the pursuit of their goals (welfare maximisation)
• Economics


  • Utilises empirical evidence and quantitative analysis, like natural sciences
  • Economists can't conduct experiments in the same way to study economic phenomena, unlike scientists
  • Economists often deal with unpredictable variables and varied individual preferences, making it challenging to establish universally applicable laws or principles, unlike natural sciences
• Ceteris paribus


  Assuming that only one factor is changing and only focusing on the effect of the change in that one factor
• Positive statements


  Statements that can be tested using evidence to see if they are true or false
• Normative statements


  Statements that cannot be tested and are based on value judgement
• Methodology used to test economic theories


  1. Making an observation

  2. Forming a hypothesis

  3. Making a prediction based on the hypothesis

  4. Testing the prediction
• Policy decisions


  Usually value judgements (opinions) made on the basis of the factual evidence (positive statements)
• Moral judgement


  A decision on what is right and wrong
• Political judgement


  Deciding what is best for the country and for the popularity of your political party
• Central purpose of economic activity


  The production of goods and services to satisfy needs and wants
• Key economic decisions


  • What to produce
  • How to produce
  • Who is to benefit from the goods and services produced
• What to produce?


  The government and private sector consider opportunity costs
• How to produce?


  Firms aim to minimise costs and maximise profits
• Whom to produce?


  Those willing and able to pay the asking price can get the goods or services. Consumers with the most purchasing power will benefit the most
• Factors of production


  • Capital
  • Enterprise
  • Labour
  • Land
• Capital


  Man-made goods used in the production of other goods such as machinery, infrastructure
• Enterprise


  Risk-taker/ decision maker
• Land


  Natural resources
• Renewable resources


  Resources that can replenish naturally over time, meaning they won't run out (e.g. sunshine, wind and waves)
• Non-renewable resources


  Resources that will not replenish after use, meaning they'll run out (e.g. coal, oil and natural gas)
• Fundamental economic problem


  Scarcity resulting from limited resources and unlimited wants
• Scarcity


  Choices have to be made about how scarce resources are allocated between different uses
• Opportunity cost


  The benefit of the next best option which is lost while making a decision
• Production possibility diagrams


  • Illustrate resource allocation, opportunity cost and trade-offs, unemployment of economic resources, economic growth
  • All points on the boundary are productively efficient but not always allocatively efficient because costs are minimised, however more of one good can't be produced without sacrificing another good
  • Don't show anything about demand - they show the maximum potential output
  • Changes to the unemployment rate will not cause a change to the PPF as it is based on factors like resources, technology and migration/immigration
  • On the curve is productively efficient, inside the curve is productively inefficient as resources aren't utilised completely, outside the curve is unattainable with current resources, and an outward shift shows economic growth
• Productive efficiency


  An economy's ability to produce maximum output with minimum costs
• Allocative efficiency


  An economy's ability to distribute goods and services optimally, considering consumer preferences
• Trade-off


  Any situation where making one choice means losing something else. It involves the opportunity cost of making a decision
• Utility


  The satisfaction derived from consuming goods or services
• Total utility


  The total satisfaction derived from consuming all units of goods/ services
• Marginal utility


  The additional benefit derived from consuming one extra unit of the good or service
• Whenever marginal utility is positive, total utility will be increasing
• A decrease in total utility means that marginal utility is negative
• Law of diminishing marginal utility

  As quantity consumed increases, the marginal utility derived from each additional unit falls
• Law of diminishing marginal utility


  Supports a downward sloping demand curve. Since consumers receive less benefit from each additional unit consumed, they are willing to pay less for each extra unit. This means that, as quantity increases, the price decreases
• Rational decision making


  When a consumer behaves rationally if they make decisions which maximise their own utility
• Irrational decision making


  When a consumer makes a decision which does not maximise their utility
• Symmetric information


  Consumers and producers have equal market information, allowing for sound decision making and a more efficient allocation of resources
• Imperfect information


  Makes it difficult for economic agents to make rational decisions and is a potential source of market failure
• Asymmetric information


  When one party knows more information than another party in a transaction
• Incomplete information


  When someone doesn't have full information about the benefits or costs of their decisions