Micro

• Rational decision makers


  Undertake a decision that maximises their net benefit
• Net benefit


  Total benefits less total costs
• Costs


  • Direct costs
  • Indirect costs
• Direct cost


  The cost of resources that will be used in the chosen alternative
• Must exclude sunk costs from decision making- which are resources used before making the decision as they are no longer relevant
• Absolute advantage


  The ability to produce a good using fewer inputs than another producer
• Comparative advantage


  The ability to produce a good at a lower opportunity cost than another producer
• It is not possible for a party to have a strict comparative advantage in both goods
• Marginal benefit


  The increment in total benefits by taking an action or increasing the level of activity by one unit
• Marginal cost


  The increment in total costs by taking an action or by increasing the level of activity by one unit
• To maximise net benefit, one would take an action/increase the level of activity as long as MB exceeds MC. If MC exceeds MB it is no longer worthwhile to continue as net benefit would be decreasing
• The optimal level of activity occurs when MB = MC or when the derivative of the net benefit function equals zero
• Perfectly competitive markets


  • Multiple buyers and sellers who are price takers, with no market power
  • No product differentiation (homogenous goods or services)
• Demand curve


  Downward sloping because as price increases, less people demand the product (less quantity traded)
• Law of demand


  Price and quantity are inversely related
• When a price changes

  We see movement along the demand curve and a change in quantity of demand
• When another factor changes that affects demand

  There is a shift in the demand curve
• Increasing demand


  Demand curve shifts to the right (or up)
• Decreasing demand


  Demand curve shifts to the left (or down)
• Supply curve


  Upward sloping because as price increases, sellers are more willing to supply (increase quantity)
• Law of supply


  Price and quantity are positively related
• When price changes


  There is movement along the supply curve and a change in quantity supplied
• When another factor changes that affects supply

  There is shift in the supply curve
• Increasing supply


  Supply curve shifts right (downwards)
• Decreasing supply


  Supply curve shifts left (upwards)
• Normal goods


  Income and demand are positively related (as income increases, demand increases)
• Inferior goods


  Income and demand are inversely related (as income decreases, demand increases)
• Inferior goods


  • public transport tickets
• Substitutes


  The price of one good is positively related to the demand of another good. One substitute replaces the other
• As the demand of one substitute good increases


  The demand of the other substitute good decreases
• Complements


  The price of one good is inversely related to the demand of another good. The two complements are typically consumed together
• Demand of both complementary goods


  Increase and decrease simultaneously
• Market equilibrium


  • Occurs when demand and supply have been brought into balance
  • The quantity demanded is the same as the quantity supplied
  • No excess or shortage of goods
  • Occurs where the supply and demand curve intersect
  • Market will always clear at equilibrium

  
• When P does not equal P* (market price is not the equilibrium price)

  The competitive process will drive the price to converge to P*
• If the price is higher than the equilibrium price


  The quantity supplied would be greater than the quantity demanded (excess supply). Therefore, suppliers will discount goods to P* in order to sell them.
• If the price is lower than the equilibrium price


  The quantity demanded would exceed quantity supplied, meaning there is a shortage. Therefore, buyers will bid up (be willing to pay for higher) prices.
• Positive demand shock


  Causes buyers to demand a greater quantity at every given price, leads to an increase in demand (demand curve shifts right)
• Positive demand shock


  Increase in P* and Q*
• Immediate effect of positive demand shock


  Excess demand, however there is upward pressure to increase price so there is no excess in the long run
• Negative demand shock


  Causes buyers to demand a lesser quantity at every given price, leads to a decrease in demand (demand curve shifts left)