Micro Economics

• Cetirus Paribus

  • The "ceritus paribus" assumption means "holding other things constant" or "all other things being equal"
• Law of Demand

  • This principle states that, all other things being equal, when the price of a goods or services decreases, the quality demanded increases, and conversely, when the price increases, the quantity demanded increases.
• Opportunity Cost

  • The cost of any choice measured in terms of the next best alternative forgone (sacrificed)
• Positive Statements

  • They are objective statements that can be tested and evaluated based on empirical evidence. Often used for economic analysis, predictions and empirical research. They involve cause and effect theories.
  • Example: An increase in consumer income tends to lead to higher demand for normal goods
• Value Judgement

  • It is a subjective opinion or decision about something's rightness, wrongness or usefulness based on a person's values or preferences
• Normative Statements

  • They are subjective statements - they carry one or more value judgements about what ought to be. They involve personal beliefs, moral considerations, or policy preferences. Normative statements are not testable through empirical analysis alone.
  • Example: The central bank should prioritise full employment over controlling inflation.
• What does ONS stand for?

  • Office for National Statistics
• Scarcity

  • The fundamental economic problem is how best to make decisions about the allocation of scarce resources among competing uses so as to improve and maximise human happiness and welfare. Scarce means limited in availability
• What is the Fundamental Economic problem?

  • The fundamental economic problem is how best to make decisions about the allocation of scarce resources among competing uses so as to improve and maximise human happiness and welfare.
• What is a Production Possibility Frontier (PPF)

  • Also known as production possibility curve (PPC), is a graphical representation that illustrates the maximum output of 2 goods or services that an economy can produce given its available resources and technology, assuming full utilisation of resources and a fixed level of technology. The PPF is a fundamental concept in economics used to illustrate scarcity, trade-offs and opportunity costs.
• What could cause an outward shift in the PPF

  • Increase in Natural Resources
  • Technological Advancements
  • Human Capital Development
  • Investment in Capital
• PPF/PPC

  • For the PPC to shift outwards there needs to be either an increase in factor inputs available or an improvement in the efficiency or supply.
  • An outward shift of the PPC means that the total output of both beef and wheat can increase. This is an improvement in a country's potential output (economic growth).
• 3 key types of economic efficiency that the PPF diagram highlights

  • Productive Efficiency
  • Allocative Efficiency
  • Dynamic Efficiency
• Productive Efficiency

  • It occurs when an economy is producing goods and services at the lowest possible cost, given its existing technology and resources.
• Allocative Efficiency

  • It occurs when an economy is producing a mix of goods and services that best aligns with customer preferences and social needs. It represents the ideal distribution of resources among different goods to maximise overall satisfaction.
• Dynamic Efficiency

  • It refers to an economies ability to grow and expand its production possibilities overtime. This involves shifting the PPF outward through technological advancements, investments and innovations. (Profits invested into research + development)
• What is the Division of Labour?

  • The division of labour occurs where the production process is broken down into many separate tasks.
  • Division of labour can raise output per person as people become proficient through constant repetition of a task.
  • This is called 'Learning by doing'
  • The division of labour is fundamental principle in modern industrial economies, and its associated with the concept of specialisation
• Advantages of Division of Labour

  • Division of labour involves the specialisation of individual tasks in a production process.
  • Division of labour can lead to higher output per person / per hour worked which means improved productivity.
• Disadvantages of Division of Labour

  • Unrewarding repetitive work requires little skill can cause alienation and eventually causes lower productivity.
  • Workers may take less pride in work and quality suffers.
  • Increased risk of repetitive strain injuries at work.
  • People move to less boring jobs creating a problem of high worker turnover and increased hiring/training costs.
• What is Specialisation?

  • Specialization refers to the process by which individuals, firms, or regions concentrate their efforts on producing a narrow range of goods or services in which they have a comparative advantage.
  • Specialisation is often based on the principle of comparative advantage, which suggests that individuals, businesses or countries should focus on producing goods or services in which they are relatively more efficient or have a lower opportunity costs compared to others.
• Advantages of Specialisation

  • Higher labour productivity and rising business profits.
  • Specialisation creates a surplus output that can be traded for mutual benefit.
  • Lower prices cause higher real incomes and GDP growth.