MODULE 1 SUMMARY SHEET

• Scarcity


  Situation where there exist unlimited wants and needs for goods and services but limited resources to satisfy those wants and needs
• Free good


  A good that is naturally abundant in supply and has no opportunity cost in production
• Free goods


  • air, salt water
• Economic good


  A good that is scarce relative to its demand and has opportunity cost in production. There is usually a price charged to obtain the good.
• Opportunity cost


  The next best alternative forgone (i.e what you had to give up for what was chosen)
• Forms of opportunity cost

  • Implicit cost
  • Explicit cost
• Implicit cost


  Opportunity cost that does not involve a monetary payment. The opportunity cost is directly borne by the individual.
• Explicit cost


  Opportunity cost that involves a monetary payment. The money payment is generally made to compensate the person who has actually incurred the actual opportunity cost. This payment in effect transfers the burden of the opportunity cost to the one making the payment.
• Rational choice


  The best possible (optimized) decision, from the point of view of the decision maker
• Choices made due to scarcity

  • What to produce
  • How to produce
  • For whom to produce
• Production Possibility Frontier (PPF)


  A diagrammatic representation of the maximum possibilities of output of two or more goods a society can produce given a society's level of resources and available technology within a given time period
• Assumptions of the PPF

  • Only two goods are produced
  • Technology is constant
  • Resources are fixed in quantity
  • Resources are fixed in quality
  • Resources are mobile between the production of the two goods or service
  • All resources are fully employed in the production of both goods
• Slope of the PPF


  The rate at which units of Good Y must be sacrificed to obtain units of Good X. The rate of exchange tells us about the opportunity cost.
• Regions on the PPF

  • Attainable region
  • Unattainable region
  • Efficient point
  • Inefficient region
• Efficiency means producing the maximum output from the available resources used in production, using the least-cost methods to produce specific quantity of output, using the fewest resources to produce specific quantity of a good or a service, and using factors of production in the most productive way
• Shapes of PPF curves

  • Concave
  • Convex
  • Linear
• As you move along the curve of a concave PPF

  The opportunity cost increases
• As you move along the curve of a convex PPF

  The opportunity cost decreases
• As you move along the linear PPF curve


  The opportunity cost remains constant
• Shifts of the PPF

  • Improvement in technology
  • Increase in factors of production
  • Decrease in factors of production
  • Natural disasters
• When the PPF shifts outwards, it is called Economic Growth
• Positive statements are factual statements about what is, made without one's opinion. Normative statements are statements about what ought to be, made with one's opinion.
• Utility


  The satisfaction gained from consuming a good or service
• Total Utility


  The total satisfaction derived from consuming all units of a good or service
• Utils


  The unit used to measure utility
• Marginal Utility


  The additional satisfaction received from the consumption of one more unit of a good or service. Formula: change in total utility/change in quantity
• Law of diminishing marginal utility

  As more and more units of a good or service are consumed, the additional satisfaction derived from each successive unit will decrease over time
• Assumptions about consumer behaviour

  • Utility maximisers
  • Prefer more to less
• Different approaches to utility

  • Cardinal approach
  • Ordinal approach
• Cardinal approach


  Utility is quantifiable or measurable in definite numbers. The unit of measurement is utils.
• Ordinal approach


  Utility is a psychological phenomenon and hence cannot be measured. It can only be ranked or ordered according to preferences.
• Consumer equilibrium for single good commodity

  Occurs where Marginal Utility = Price
• If Marginal Utility > Price


  The consumer is in disequilibrium, where the satisfaction derived from consuming the last unit of the good is greater than the price that the consumer is asked to pay. The consumer will increase consumption until Marginal Utility = Price.
• Under a single good framework, consumer equilibrium occurs where Marginal Utility = Price or alternatively where Marginal Utility/Price = 1
• Derivation of the demand curve

  As the market price falls, consumers will increase consumption of the commodity in order to achieve equilibrium where Marginal Utility = Price

  
• Equi-marginal principle


  The principle that explains how a consumer allocates their limited income among various goods and services to obtain maximum satisfaction. The consumer will allocate their income such that the marginal utility per dollar spent is equal across all goods.
• The limitations of the cardinal approach to utility are that utility satisfaction is subjective and depends on the consumer, and the case of intoxicants where consumption initially increases utility but then decreases it
• Indifference curve


  The graphical representation of various alternative combinations of bundles of two goods among which the consumer is indifferent

  
• Indifference curve


  Graphical representation of various alternative combinations of bundles of two goods among which the consumer is indifferent

  
• Indifference schedule


  • Combination 1 (1A, 15B)
  • Combination 2 (2A, 10B)
  • Combination 3 (3A, 6B)
  • Combination 4 (4A, 3B)
  • Combination 5 (5A, 1B)