micro crash course

• Economics

  The study of the basic economic problem
• Basic economic problem

  How to satisfy unlimited wants with limited resources
• Types of markets to satisfy the basic economic problem

  • Planned Economy
  • Free Market
  • Mixed Market
• Planned Economy

  All resources are allocated by the government (e.g. North Korea)
• Free Market

  All resources are allocated via the price mechanism (e.g. USA)
• Price mechanism

  Interaction of supply and demand coming together to form an equilibrium price and quantity
• Mixed Market

  Resources are allocated via both the price mechanism and government intervention
• Market failure

  When the price mechanism leads to a resource allocation which is allocatively and/or productively inefficient
• Factors of Production

  • Land
  • Labour
  • Capital
  • Enterprise
• Positive statements

  Facts which can be either proven or disproven against tested theories
• Normative statements

  Value judgements which cannot be proven or disproven
• Ceteris paribus

  When all other variables are held constant
• Public goods

  Goods which exhibit non-rivalry and non-excludability (e.g. street lights, national defence)
• Quasi public goods

  Goods which only have one of the components of public goods (e.g. public beach)
• Public goods

  Lead to the free rider problem, which is an example of market failure
• Free rider problem

  Homeless people benefiting from street lights without paying taxes to fund them, an inefficient allocation of resources and hence market failure
• Private goods

  Goods which are rivalrous and excludable (e.g. Coke/Red Bull from the supermarket)
• Demerit goods

  Goods which cause negative externalities (e.g. passive smoking)
• Negative externalities

  Costs to a 3rd party not included in the price of the good
• Merit goods

  Goods which cause positive externalities (e.g. education, vaccinations)
• PPC (Production Possibility Curve)

  Shows the maximum production of a country between two goods or groups of goods when all resources are fully utilised
• If the economy is on the PPC, there is no spare capacity and the economy is operating at maximum efficiency
• If the economy is within the PPC, there is spare capacity and the economy is not operating at maximum efficiency
• If an economy uses their current resources better, they move closer to the PPC but the PPC itself doesn't move
• If an economy gets access to new resources or is able to make better use of its current resources, the whole PPC will shift outwards
• If an economy gets access to less resources or is able to make worse use of its current resources, the whole PPC will shift inwards
• Opportunity cost

  The cost of the next best alternative foregone
• If a PPC is perfectly straight, this shows a constant opportunity cost
• If a PPC is curved, there is not a constant opportunity cost and the ratio of how many goods must be sacrificed of Good A to achieve more of Good B will change
• PED (Price Elasticity of Demand)

  The responsiveness of Demand to a change in Price
• Positive PED

  Positive correlation, as price goes up, demand goes up (Luxury goods)
• Negative PED

  Negative correlation, as price goes up, demand goes down (Normal goods)
• Inelastic PED

  Between -1 and 1, less responsive (e.g. alcohol, tobacco, oil)
• Elastic PED

  Greater than 1 or less than -1, more responsive (e.g. gum, KitKat, Walkers, Red Bull)
• YED (Income Elasticity of Demand)

  The responsiveness of Demand to a change in Income
• Positive YED

  Positive correlation, as income goes up, demand goes up (Normal goods)
• Negative YED

  Negative correlation, as income goes up, demand goes down (Normal goods)
• Inelastic YED

  Between -1 and 1, less responsive (e.g. alcohol, tobacco, oil)
• Elastic YED

  Greater than 1 or less than -1, more responsive (e.g. gum, KitKat, Walkers, Red Bull)
• XED (Cross Price Elasticity of Demand)

  The responsiveness of Demand for Good A to a change in Price of Good B