Unit 01

• What is a PPC?

  It shows the maximum output combinations of 2 goods a country could produce when all its resources are fully and efficiently employed and technology remains constant.

  It can be used to demonstrate the concept of opportunity cost and efficiency.
• PPC


  A movement from a point on the PPC to a point within the PPC involves a rise in unemployed resources/unemployment.

  A movement from a point within the PPC to a point on the PPC involves 0 opportunity cost.
• Short run EG

  • If the overall demand in the country increases, many of the unutilized resources in the country will be employed and the country's output may increase.
  • This could continue as long as there are unemployed resources in the country.
• Depreciation


  An allowance for the wear and tear of capital goods.
• Factors that shift the PPC outwards

  1. When net investment is positive (=gross investment-depreciation)
  2. When the quantity of resources in the country increases
  3. When the quality of resources in the country improves
  4. When there is technological progress
• Capital goods


  Goods that are used to produce other goods, whereas consumer goods provide satisfaction to the user immediately.
• Specialization

  Occurs when different individuals/firms/regions concentrate on providing a narrow range of goods or services or concentrate on one or a narrow range of tasks.
• Division of labor

  • The breaking up of a large production process/task into several smaller, simpler parts, so that each worker or a group of workers could undertake these different tasks.
  • Productivity of workers (output per worker) rise and unit cost of production falls.
• Advantages of specialization/DoL

  1. Increase in skill and dexterity
  2. Time-saving
  3. Takes advantage of individual aptitudes and temperaments
  4. The use of specialized machines can enhance worker productivity
  5. Firms may be able to easily automate the production process
• Disadvantages of DoL

  1. Boredom and alienation
  2. Interdependency
  3. Workers acquire narrow skills
  4. Inflexible production process
• Money

  The means by which goods and services are exchanged
• Functions of money

  1. It serves as a medium of exchange
  2. It is a unit of account
  3. It is a store of value
  4. It is a standard of deferred payment
• Financial markets

  • Includes banks, the stock market, bond market.
  • It is any arrangement that facilitates buyers and sellers to exchange financial instruments such as stocks, bonds, and foreign currency.
• Role of financial markets

  1. To facilitate saving
  2. To make funds available to governments, businesses, and individuals
  3. To facilitate the exchange of goods and services
  4. To provide forward markets in commodities and currencies
  5. To provide a market for equities
• Rationality


  Where economic agents act in a way to maximize their net benefits.
• Bias

  Psychological factors that influence the way people make decisions.
• Types of bias

  1. Default bias/Status quo bias
  2. Loss aversion
  3. Anchoring effect
  4. Confirmation bias
  5. Ostrich bias
  6. Availability heuristic
• Describe each bias

  • DB: occurs because humans are usually resistant to change
  • LA: occurs when we emphasize losses more than potential gains
  • AE: when we value a product by focusing on an anchor or an imprint in our mind. We then use that as a reference point in making decisions
• Description contd...

  • CB: the tendency for humans to only remember and confirm information that supports their views.
  • OB: our tendency to ignore the negative information and only focus on the positive.
  • AH: overestimating the likelihood of something happening because a similar event has either happened recently or because we feel very emotional about a previous similar event.
• Reasons for irrationality

  1. Consumers follow the behavior of others/are influenced by their social networks/follow social norms/herding behavior.
  2. Consumer's habitual behavior
  3. Inertia
  4. Consumers have limited computational capacity
  5. Consumers need to feel valued
  6. Bounded rationality
• Nudges and framing

  • Nudges: used by choice architects to change someone's behavior in a very easy and low-cost way.
  • Framing: consumer choices are influenced by how information is presented.
• Economic systems

  The network of inter-relationships between households, firms, and the government.
• Types of economic systems

  1. Command/centrally planned economies
  2. Free market economies
  3. Mixed economies
• Command economies

  • Resources are owned by the government.
  • Prices of goods and services are determined by the government.
• Advantages

  • As prices are usually artificially kept low by the govt, inflation in these economies tends to be low.
  • The distribution of income is usually more equal.
  • Production of de-merit goods might be limited
  • Exploitation of workers via low wages is unlikely to happen.
  • Exploitation of consumers may not occur as the govt will not charge high prices.
• Disadvantages

  • Consumer choice is limited as the variety of goods and services is poor.
  • No incentive to become more efficient or even to work hard as they are unlikely to be rewarded for it.
• Free market economies

  • Resources are owned by the private sector - individuals and firms
  • The price mechanism allocates resources and determines prices.
• Advantages

  • Consumer choice is very high.
  • The level of competition is very high. Therefore the efficiency of production tends to be high. The quality of the products and innovation also tends to be high.
  • The incentive to work hard, be more productive, and to innovate is very high.
• Disadvantages

  • Income inequality is usually high.
  • Price volatility tends to be high.
  • The exploitation of labor through low wages and the exploitation of consumers through high prices is possible.
  • Firms may ignore external costs.
• Mixed economies

  • Resources are owned by the private sector and by the public sector.
  • Resources are allocated and the prices are determined by the price mechanism and by the govt.
• Advantages

  • Consumer choices. Firms will try to innovate and produce a large variety of goods and services to meet demands. Govts may produce goods that are under-provided by the market. The citizen's standard of living is high.
  • Government involvement may guarantee affordability.
  • Reduce income inequalities.
  • Govt will attempt to reduce price fluctuations.
  • De-merit goods will be discouraged.
  • Minimize negative externalities by imposing green taxes or through regulation.
• Disadvantages

  • Governments tend to impose heavy income taxes. This may act as a disincentive to work.
  • May lead to inefficient allocation of resources
  • May result in unemployment and hinder economic growth.
  • May result in government failure, complacency, and inefficiency.
• Utility

  The satisfaction a consumer receives when he consumes a good.
• Marginal utility

  The additional satisfaction a consumer receives when he consumes one more unit of a good.
• Demand

  A person's willingness and ability to purchase a good.
• Law of demand

  Quantity demanded of a good rises as its price falls and quantity demanded will fall as its price rises.
• Income effect

  An increase in the price of a good causes a decrease in the purchasing power of a consumer's income.
• Substitution effect

  An increase in price changes the relative prices of other goods and induces buyers to substitute the purchase of one good with another.
• Exceptions to the rule

  • Giffen goods: demand for these rises when its price rises
  • Veblen/Ostentatious: demand for these rises as its price rises
  • Speculative goods: demand rises when price rises
• Factors that influence demand

  • Change in price
  • Changes in income
  • Changes in income tax rates
  • Changes in the price and availability of other goods.
  • Changes in tastes/fashion/popularity
  • Changes in population (size/sex/age)
  • Seasonal factors
  • Advertising/campaigns
  • Availability of credit
  • Speculation