Micro econs

• Consumption


  The act of using up a good or service
• Utility


  The satisfaction one gets from consumption of a good or service
• Utils


  Units for measuring utility/satisfaction
• Consumption Bundle


  The set of all the goods and services an individual consumes
• Total Utility


  The total benefit a person gets from the consumption of goods
• Marginal Utility


  The additional satisfaction a consumer gains from consuming one more unit of a good or service
• As the quantity consumed of a good increases, the marginal utility will eventually decrease. This decrease in marginal utility is due to Principle of Diminishing Marginal Utility.
• To calculate marginal utility

  Marginal Utility = Total Utility (current) - Total Utility (previous)
• As consumption increases


  The cumulative satisfaction level still increases, however each new increase is less than the previous increase
• Budget Constraint


  The total cost of purchase cannot be more than one's income/budget
• Budget Line


  It represents all consumption bundles (i.e. possible combinations of different goods) that an individual can purchase if the budget is spent completely
• Budget line


  Shows the affordable consumption bundles given the consumer's budget and prices of the goods
• Indifference curve


  Shows all the consumption bundles that give the same amount of total utility for an individual
• Higher indifference curve means higher total utility
• A rational individual prefers bundles that lie on a higher indifference curve due to higher satisfaction
• An individual is indifferent (i.e. does not have a preference) to any bundles that lie on the same indifference curve
• Optimal Consumption Bundle is where the indifference curve is tangent to the budget line
• Factors affecting optimal consumption bundle

  • Change in price of the good
  • Change in income or budget
• Increase in income or same proportional decrease in prices of both goods


  Causes optimal consumption bundle to move due to an outward parallel shift of budget line
• Decrease in price of Good X

  Causes optimal consumption bundle to move due to an outward pivot shift of budget line along "X" axis
• As consumption increases, the total satisfaction level still increases, however each amount of increase is less than the previous amount due to the principle of Diminishing Marginal Utility
• A rational consumer would not consume an additional unit when it generates negative marginal utility, even when that unit is free
• Any two consumers faced with the same budget and prices, will make different consumption choices because consumers have different preferences
• Change in a consumer's optimal consumption bundle can be caused by a change in price of the goods and/or a change in budget/income
• A conventional indifference curve is bowed because of the principle of Diminishing Marginal Utility
• Central Economic Problem


  Scarcity, Choices, Opportunity Cost/tradeoff, Benefits versus costs
• Factors of Production


  • Land
  • Capital
  • Entrepreneurship
  • Labour
• Scarcity


  Limited time and resources, Imposes choices on decision-makers
• Opportunity Cost


  The cost of a decision measured in terms of the next best alternative forgone
• Governments make choices


  To maximize social benefits and minimize social costs, based on limited funds from tax
• Individuals make choices


  To maximize their satisfaction levels (or utility)
• Companies make choices


  To maximize their profits
• Production Possibility Frontier (PPF)


  A curve that shows the maximum combinations of goods and services that can be produced by an economy in a given time period, given all resources are fully utilized
• Points outside PPF show scarcity - Unattainable given constant technology/resources in the economy
• Points within PPF (Actual output) show resources are under-utilized in the economy
• Points on PPF (Potential output) show optimal utilization of resources
• Movement from a point inside the PPF to a point on the PPF


  Could be due to better utilization of resources as the economy recovers from a recession
• Reasons for outward shift of the PPF

  • Increase in the QUANTITY of resources such as labour, land and capital
  • Increase in the QUALITY of resources such as through training and education
  • Increase in the level of TECHNOLOGY, results in better methods of production
• The PPF is a concave curve because not all resources used to produce garments and cars are equally suited at producing both goods
• Economic Systems


  • Pure Market Economy
  • Command economy
  • Mixed economy