Micro

• Opportunity cost

  Measures the value/benefit of the next best alternative use of resources forgone.
• Shifts in PPF

  • Changes in productivity and efficiency e.g. motivation of workers, technological advancements.
  • Changes in management of existing resources e.g. better/worse.
  • Changes in available factors of production e.g. changes in size of workforce, raw materials.
• Specialisation and division of labour

  Specialisation = a system of organisation where economic units such as households and nations are not self-sufficient but concentrate on producing certain goods and services and trading the surplus with others.

  Division of Labour = Specialisation by workers where the production of a good is broken up into many separate tasks performed by one person
• Income elasticity of demand

  • Measures the responsiveness of quantity demanded to a change in income - YED
  • %change QD/%change Y
  • Positive YED = normal good
  • Negative YED = inferior good
  • Necessity = 0-1
  • Luxury = >1
• Cross elasticity of demand

  • Measure the responsiveness of quantity demanded for one good following a change in price of another good - XED.
  • %change QDa/%change Pb
  • Positive XED = substitutes
  • Negative XED = complements
  • Strong = >1
  • Weak = 0-1
• Price elasticity of supply 


  • Measure the relationship between change in quantity supplied and a change in the goods own price
  • %change QS/%change P
  • If supply is elastic, producer can increase output without a rise in cost or time delay
  • When PES > 1 = elastic
  • When PES < 1 = inelastic
  • When PES = 0 = perfectly inelastic
  • When PES = infinity = perfectly elastic
• Price elasticity of Demand

  • Measures the responsiveness of demand after a change in the goods own price
  • %change QD/%change P
  • When PED > 1 = elastic
  • When PED <1 = inelastic
  • When PED = 1 = unitary elastic
• Factors affecting PED

  • Availability of substitutes
  • Necessity or luxury
  • Proportion of income spent on the good
  • Habit forming good - (tobacco)
  • Brand loyalty
• Factors affecting PES

  • Spare production capacity
  • Stocks of finished products and components
  • ease and cost of factor substitution/mobility
  • time period and production speed
  • State of economy
  • Perishable goods
• Causes of shifts in the demand curve

  • Changing prices of substitutes in competitive demand
  • Changing price of complements in joint demand
  • Changes in the real disposable income of consumers
  • Changes in distribution of income
  • The affects of advertising and marketing
  • Interest rates
• Causes of shifts in the supply curve

  • Changes in the unit costs of production
  • Changes in the exchange rate
  • Advances in technology
  • The entry of new producers in the market
  • Favourable weather conditions
  • Taxes, subsidises, and government regulation
• The price mechanism

  1. Signalling - helps determine where and how recourses should be allocated e.g. if prices increase, this signals to producers that demand is high and they should increase production.
  2. Incentive - When prices are high, this attracts producers into the market in search of higher profits
  3. Rationing - when demand > supply, prices are bid up so that the good/service is rationed out to those who can afford to pay
• Diminishing marginal utility

  • Utility = a theoretical measure of consumer benefit
  • Marginal utility = the utility (satisfaction) gained from each additional unit of consumption
  • Total utility will normally rise as additional units are consumed while marginal utility will tend to diminish with each extra unit
  • Implies that total utility will increase but at a diminishing rate.
• Market Failure

  Market Failure = the price mechanism causes an inefficient allocation of resources, leading to a net welfare loss

  Causes of market failure:

  • externalities
  • public goods
  • information gaps
  • monopoly power in markets
• Indirect Tax

  • A tax levied on goods and services rather than on income or profits.
  • Specific/unit tax - a fixed amount of tax placed on a particular good/service
  • Ad Valorem - a tax levied as a percentage of the value of a good/service
• Incidence of tax

  The incidence of tax refers to how the burden of tax is distributed between firms and consumers.

  When PED is inelastic = consumer burden is greater then producer burden

  When PED is elastic = consumer burden is less then producer burden
• Externalities

  Externalities = costs or benefits that are external to an exchange.

  Negative production externalities: Social cost = private cost + external cost.

  Positive consumption externalities: Social benefit = private benefit + external benefit.

  
• Public goods


  Public goods are missing from the free market, but they offer benefits to society. They have two key characteristics:

  • They are non-rivalry, which means that one person's use of the good doesn't stop someone else from using it.
  • They are also non-excludable, meaning that you cannot stop someone from accessing the good and someone cannot chose not to access the good

  Free rider problem: you cannot charge an individual a price for the provision of a non-excludable good because someone else will gain the benefit from it without paying anything
• Minimum


  Minimum price - the lowest price a good is allowed to be sold for

  Arguments for:

  • increases demand for higher quality goods
  • cheaper to implement
  • reduces over consumption of goods with negative externalities

  Arguments against:

  • costly
  • increased revenue for firms rather then government
  • could encourage black market
• Pollution permits


  A limit placed on firms' carbon emissions through the issue of permits

  How they work:

  • They are an attempt to solve the problem of pollution by creating a market for it by using the price mechanism to internalise external costs.
  • The government decides an efficient amount of pollution
  • corresponding number of permits released to firms for free
  • These can be traded amongst firms so that low polluters can sell high polluters and make a profit
  • Total amount of free permits is reduced each year as firms become greener