BSNS113

2023 study

Microeconomics

positive economics concerns the description quantification and explanation of economic phenomena. Focuses on facts and cause-and-effect behavioural relationships with observations

Production Possibilities Frontier

PPF curve is the curve that represents efficient production/allocation of resources

assumptions about PPF

• a fixed level of production tech

• a fixed amount of productive resources

• all resources are fully employed

to maximise PPF shift first those resources most suited to production of services relative to production of goods

• we reallocate resources that are most suited to the production of good, X relative to production of good Y, to MAXimize efficiency

• meaning the opportunity cost of producing an extra unit is as small as it can be

resource heterogeneity

each type of resource varies in its characteristics that are relevant to production of the two types of products. CRITICAL element in our economic system is a method for allocating resources to their relatively most productive use

opportunity cost

of any activity is the value of the next best activity forgone

opportunity cost drives

the curve of the PPF, any increase in one factor of production requires a decrease in the prooduction of the other

technically efficient combinations are

point on the PPF

technically inefficent combinations are

points below the PPF

Unsustainable combinations are

points outside of the PPF

sope of the curve =

Quantity of goods and Quan of services

The slop of the pff is the opportunity cost of

producing one more unit of services

comparative advantage is

when a country/person can produce a good with lower opportunity cost

Absolute advantage is

the country/person who produce more of both

terms of trade is the

price which both parties would sooner source the good/service - this price is between opportunity cost of each party - also called relative prices

large scale production contributes to comparative advantage because

lowers opportunity cost

The LongRunAverageCost

decreases at a decreasing rate due to diminishing returns from additional input specialization. - eventually LRAC stops decreasing, MES (minimum efficient scale is the output level at lowest point on AC curve

the demand curves slopes downward because of

substitution effect: if the price of a good decreases, consumers substitute out of other higher priced goods and consume more

the demand curves slopes downward because of 2

Income effect: if the price of a good decreases, the consumer purchasing power increases so they buy more of everything they like

the demand curves slopes downward because of 3

The law of diminishing marginal returns: at some point the marginal utility for consuming another unit decreases

consumers will keep buying as long as

marginal value is equal or less than price

Vertical interpretation of demand curve

marginal value = quantity

horiztonal interpretation

quantity demand = price

supply curve slopes upward because

the law of diminishing returns applies to the factors of production

suppliers will keep producing if

price is equal to or greater than price

vertical interpretations of supply curve

marginal cost = quantity supplied (MC=Qs)

horizontal interpretations of supply curve

quantity supplied = price Qs=p

Equilibrium price is also called market clearing price , ie when the market is at equilibrium the

market clears

Comparative statics is finding

the net effect on market equilibrium, change in Q and P

If both supply and demand decrease:

Equilibrium quantity decreases but the change in equilibrium price is indeterminate

if both supply and demand increase

Equilibrium quantity increases but the change in equilibrium price is indeterminate

If demand decreases and supply increases

Equilibrium price decreases but the change in equilibrium quantity is indeterminate

If demand increases and supply decreases

Equilibrium price increases but the change in equilibrium quantity is indeterminate

four types of goods

normal, inferior, substitute and complementary

all increase in income increase

demand if the good is normal

an increase in income decreases demand if

if the good is inferior

an increase in the price of the substitute good increases

the demand curve

an increase in the price of a complementary good decreases

the demand curve

a price change moves us

along the supply curve

a change in any other vairable

shifts the entire supply curve

elasticity measures the percent change in

Q with each one percent change in P

if elasticity is less than 1 its

inelastic

if elasticity is 1

it is unit elastic

if elasticity is more than 1

its elastic

demand tends to be less elastic when

• price is a small proportion of the rand on graph

• good substitutes are not available

• the good iis necessity rather than a luxury

normal goods have income elasticity

greater than 1

inferior goods have income elasticity

\

less than 1

price ceiling is a limit on the

extent prices are allowed to rise

a price ceiling binds only if the

ceiling price is below equilibrium and therefore a ceiling has no effect, if it is above equilibrium

to find DWL from price ceiling and price floor, find

total surplus from before implementation and compare it to after, difference is DWL

Price ceiling is a limit

on the extent prices are allowed to rise

price ceiling only

binds only if the floor is above equilibrium and therefore has no effect if the floor is below equilib

if producers pay the tax

the supply curve shifts upwards by the size of the tax

if consumers pay the tax

the demand curve shifts down by the size of the tax

however if both pay the tax

it depends on elasticity

how much the price rises from excise tax depends on

the price elasticities of demand and supply

when a market is in equilibrium it maximises surplus, by

allocating the right amount of product to those who value it most, produced by those who can do it at the lowest cost

DWL from an excise tax is usually from the loss of

fewer units being traded and is also called excess burden of tax. the excess burden is smaller when D or S is inealistic

the DWL from a subsidy is from the

extra units produced when the cost of these goods exceeds MV for producers

If NZ has a comparative advantage over the world, domestic price will be

below world price

if other countires have a comparative adavntage over nz

domestic price will be above world price - if dom price is above world price, they will import

a traffic creates DWL due to

loss from product not traded and opportunity cost of not producing something more effcient

The left hand triangle represents the

loss of efficiency from units not produced/consumed

the right hand triangle represents the opportunity cost of producing

the extra goods domestically when they can be imported cheaper and those resources can be used for something else more efficient

import quotas have the same effect on consumer surplus, producer surplus and DWL as

tariffs do

the difference (import quotas & tariffs) is that

the revenue from quotas go to private import license holders, not the GOVT

private goods are

non-excludable and non-rival

public goods are

excludable and rival

common goods are

non excludable and rival

club goods are

excludable and non-rival

tragedy of the commons

what is common to the greatest number has the least care bestowed upon it

tragedy occurs because

access to a scarce resource is unrestricted/unpriced

abate means to

reduce or remove nuisance (negative externality)

DWL is there if marginal social cost (MSC) is greater than MC because

it means the cost to society is greater than the cost for producers/private cost

equi-marginal principle

• assume that the consumers objective is to maximize their utility given their income and that they generally succeed

• Which implies that we always get the same utility from the last dollar spent on every good we buy

ENdowment effect

• bias occurs when we overvalue something that we own, regardless of its objective market value

• people place greater value on things once they own them

loss aversion

• the pain of losing is psychologically about twice as powerful as the pleasure of gaining

• so, people are more wiling to take risks behave dishonestly to avoid a loss than to make a gain

• loss aversion is used to explain; endowment effect, sunk cost and status quo bias

ultimatum game

if someone gets to decide how to split 100$ between them and someone else, they’d rather choose 99$ for them and $1 for the other IF they’re being completely rational. - however, people care more about fairness, and they’d spilt it more evenly in practice

GINI COEFFcient

is used to compare income inequality between countries etc. it is a number between 0 and 1

a small gini means

more equal income distribution and larger gini means more unequal

utilitarianism

suggest the goal is to maximze total utility so is for income redistribution

libertariansim

individuals should all have an equal opportunity to succed, they chose how to take advantage of the opportunites and live with the results

highly competitive markets have many

suppliers, easy barriers to entry and therefore zero economic profit in the long run

homogenous product

perfect competition

differentiated product

monopolistic competition

less competitive markets have

difficult entry and potential long run profitability

one supplier, no subsitutes

monopoly

few suppliers, same or close subsitutes

oligopoly

TR(total revenue) =

the amount a firm receives for its sale of output

TC(total cost)

the amount a firm pays for inputs into production

revenue structure varies with market structure, cost

structure doesnt

accounting profit is total revenue minus

firms explicit cost

economic profit is total revenue minus total

opportunity cost (incl implicit and explicit costs )

explicit cost are input cost that

require direct outlay of money

implicit cost are input cost that

do not require outlay of money

production function

q= f(k,l,n)

short run

sufficiently short so that at least one input cannot be varied

long run

sufficiently long so that all inputs can be varied

long long run

so that technical relationships (f) changes

Dimiinishing marginal product

• the margnial product of an input declines as the quality of the input increases, eg labour when producing in factory

• the law: the marginal product of an input declines as the quan of the input increases

• short run situation where at least one input is constant