microeconomics

• purpose of economic growth

  produce goods and services to meet our needs and wants
• basic economic problem


  infinite wants with finite resources
• factors of production


  labour-human input

  capital-man made resources

  land-natural resource

  enterprise-ability to organise
• factor of production rewards


  land=rent

  labour=wage

  capital=interest

  enterprise=profit
• economic agents


  consumers=total utility

  workers=wage + benefit from work

  producers=profit

  government=social welfare
• statements


  positive=objective facts that are proved (rise in NMW decreases employment)

  normative=opinions carry valued judgement (gov should increase healthcare spending)
• opportunity cost


  value of next best alternative foregone when choice is made
• production possibility frontier PPF


  shows maximum output combination of 2 products an economy can achieve when all resources fully efficiently employed. they're curved as law of diminishing return (marginal output of consumer goods diminishes as more factor resources allocated)

  
• PPF productive efficiency

  A=inefficient some resources unemployed

  B/C/D=efficient all resources fully employed

  E=unattainable
• outward shift in PPF

  increase in quantity of factors of production

  increase in quality of factors of production

  advanced technology
• inward shift in PPF

  decrease in quality and quantity of factors of production
• consumer behaviour assumptions


  make choices independently

  fixed, consistent preferences

  full information

  optimal choice given preferences
• law of diminishing marginal utility

  law of diminishing marginal utility=as consumer buys and consumes more unit of a good, extra satisfaction gain diminishes. higher quantities, consumers less willing to buy at higher price

  total utility= total satisfaction from buying units of good

  marginal utility=change in total utility from consuming extra unit of good
• imperfect information


  information failure= having incomplete, inaccurate information

  information gaps=buyer and seller don't have full access to information leading to market failure
• information failure

  symmetric information= markets to work and buyers to sell need same information

  asymmetric information= buyers and sellers have different amount of information

  adverse selection=those who have insurance are at highest risk

  moral hazard=being insured can make you careless
• policies addressing information failure

  labelled products

  hard hitting anti-speed adverts

  campaigns raising awareness on drinking, driving, abuse

  laws
• demand concepts

  effective demand=demand by intention and ability to buy

  latent demand=willing but unable to buy

  joint demand=demand for one linked to another

  competitive demand=close substitute goods

  derived demand=demand for one drives demand for another

  composite demand=demand for one than 1 use
• movements along demand


  law of demand= as price falls, quantity demanded rises

  extension in demand=lower price higher demand

  contraction in demand= higher price lower demand

  
• factors that cause shift in demand


  taste/preferences

  income

  price of related good

  population size

  interest rate

  law
• why demand slopes down


  substitution effect= consumers favour good that are cheaper

  real income effect=if price fall, consumers gain purchasing power so extra income can be used to buy more
• consumer irrationality


  bounded rationality and bounded self control

  bias in decision making

  importance of altruism and perception on fairness

  choice architecture and framing

  nudges and choices
• price elasticity of demand

  responsiveness of quantity demanded of good to change in price.

  PED= (%change quantity demanded)/(%change in price)
• values for PED

  PED is negative as quantity demanded inversely related to price

  perfectly inelastic demand=0

  relatively inelastic= 0-1

  perfectly elastic= infinity

  relatively elastic=1-infinity

  unit elastic= 1

  
• PED and total revenue

  elastic= as price rises, TR falls

  inelastic= as price rises, TR rises

  unit=no changes
• factors influencing PED


  substitutes availability

  cost of switching suppliers / brand loyalty

  degree of necessity

  percent of income spent on it
• uses of PED


  determination of pricing policy

  competition of substitutes

  price discrimiination
• income elasticity of demand


  responsiveness of demand for good to change in income

  YED= (%change in demand) / (% change in income)
• YED values


  normal goods=positive YED

  inferior goods= negative YED

  positive YED= 0-1 as income rise, small rise in demand

  positive YED=1-infinity as income rise, large rise in demand

  negative YED=as income rise, demand falls
• uses of YED


  effect of recession/growth in demand

  business planning for product range

  help firms anticipate further demand
• cross elasticity of demand

  responsiveness of demand for good to change in price of related good

  XED= (% change demand good A) / (% change price of good B)
• values of XED


  XED 0-1= goods weak substitute (+)

  XED 1-infinity=goods strong substitute (+)

  XED 0-(-1)= goods weak complements (-)

  XED (-1)-(-infinity)= goods strong complements (-)
• uses of XED


  marketing strategies

  if competition changes price, firms can see effect on demand
• supply concepts


  joint supply=goods derived from single production

  individual supply=producers supply of goods

  market supply=all producers supply to market summed
• movement along supply


  law of supply=as price fall, quantity supplied falls

  
• why supply slopes upward

  higher market price motivate firms to supply more as expect profit. producing more increases marginal cost of production so need higher prices to cover costs
• shifts in supply


  cost of production

  technology

  weather/climate/pandemic

  indirect tax/producer subsidies

  substitute prices/ firms in market
• price elasticity of supply

  responsiveness of quantity supplied of good to change price

  PES= (%change quantity supplied) / (%change in price)
• values of PES


  perfectly inelastic=0

  relatively inelastic=0-1

  perfectly elastic=infinity

  relatively elastic=1- infinity

  unit elastic-1

  
• factors influencing PES

  time period

  spare capacity/stock level

  barriers to enter

  producer substitute availability
• shifts in demand


  rise in demand=price rise and quantity rises

  fall in demand=price fall and quantity falls