Econs

Scarcity

The problem arising from limited resources and unlimited wants.

Opportunity cost

The value of the next best alternative forgone when a choice is made.

Choice

The act of selecting among alternatives including the selected option.

Marginal benefit

The additional benefit gained from consuming or producing one more unit of the good/service.

Marginal cost

The additional cost incurred from consuming or producing one more unit of the good/service.

MC=△TC/△Q

OR △TVC/△Q

Area under marginal benefit curve

The sum of marginal benefit for the quantity under consideration is equal to total benefit of those quantity under consideration.

Productive efficiency

Achieved when the firms in an economy are producing the maximum output for the given amount of inputs

Fully utilising all available resources

OR producing a given output with the least cost combination of inputs.

Allocative efficiency

Achieved when the current combination of gds & svcs produced and consumed allows the society to attain the greatest level of satisfaction.

Production Possibility Curve

Shift of 1. curve? 2. point?

Shows the maximum attainable combination of 2 gds & svcs that can be produced in an economy when all available resources are used fully and efficiently at a given state of technology.

Shift of curve: improvement in quality/quantity of FOP

Shift of point: greater utilisation of resources

Note: Do not say more efficiently used resources

Actual economic growth

The increase in the output actually produced in the economy and is measured by the % annual change in national output actually produced.

Shift of point on PPC→ greater utilisation of FOP

Potential economic growth (long-run economic growth)

The increase in the productive capacity of the economy

Shift of the PPC

↑ in quantity/quality of FOP, technological advancements

Factors affecting demand

-change in income

-change in price of related goods

-change in consumer taste and preferences

-change in expectations

Factors affecting supply

-increase in number of firms

-good weather

-lower COP

-change in price of related goods

Demand

The quantity of a well-defined commodity that consumers are both willing and able to buy at each and every price during a given period of time, ceteris paribus.

Supply

The quantity of a well-defined commodity that producers are both willing and able to produce at each and every price during a given period of time, ceteris paribus.

Complements in consumption

Goods used in conjuction with one another in the satisfaction of a particular purpose.

Increase in price of good A leads to fall in demand for good B.

Substitutes in consumption

Goods that can be used in place of one another for the satisfaction of a particular purpose.

Increase in price of good A leads to rise in demand for good B.

Goods in joint supply

Goods that are produced in the same production process.

Increase in price of good A will lead to increase in supply of good B.

Goods in competitive supply

Goods that use the same factors of production.

Increase in price of good A leads to lower supply for good B.

Law of demand

In a given time period, the quantity demanded of a product is inversely related to its price, ceteris paribus.

Supply curve

Shows the relationship between the price and quantity supplied of a well-defined commodity. It shows the quantity supplied of a well-defined commodity that producers are both willing and able to sell at each possible price during a given period of time, ceteris paribus.

Law of supply

In a given time period, the quantity supplied of a product is directly related to its price, ceteris paribus.

Law of diminishing marginal utility

Beyond a certain point of consumption, as more and more units of a good or service aer consumed, the additional utility a consumer derives from consuming successive units decreases.

Derived demand

Describes a market in which a good is demanded not for its own sake but for the purpose of producing another good.

→the demand for an input is derived from the dd for the output that uses the input e.g. ↑ dd for tables, ↑ dd for carpenters

Producer surplus

Difference between the price that producers in the market are prepared to sell their good or service and how much they actually receive.

Consumer surplus

Difference between the price producers in the mkt are prepared to pay and how much they actually pay

Price Elasticity of Demand

measures the degree of responsiveness of the quantity demanded of a good to a change in its price, ceteris paribus

%change in QD/%change in price

PED=1

unitary price elastic, change in the price of a good leads to an equal proportionate change in quantity demanded

PED=0

perfectly price inelastic, change in price leads to no change in QD

PED=∞

perfectly price elastic, change in price leads to an infinitely large effect on QD

Factors affecting price elasticity of demand

-Availability and closeness of substitutes eg greater number of substitues larger PED value

-Degree of neccessity eg food high neccessity hence demand is relatively price inelastic

-Proportion of income spent on the product eg greater proportion of income spent on good, greater its price elasticity of demand

-Time period (good is) considered eg consider substitutes

Price Elasticity of Supply

measures the degree of responsiveness of quantity supplied of a good to changes in its price, ceteris paribus

%change in QS/%change in price

PES<1

-long production time

-short shelf life

-immobile factors of production

XED

measures the degree of responsiveness of demand of one good to a change in price of another good, ceteris paribus

%change in QD at each price of good A/%change in price for good B

XED>0

XED>1

XED<0

XED< -1

substitutes

close substitutes

complements

close complements

YED

measures the degree of responsiveness of demand of a good to a change in income, ceteris paribus

%change in QD/%change in income

YED>0

YED>1

0<YED<1

YED<0

normal goods

luxury goods

necessities

inferior goods

price ceiiling

the maximum legal price set below the free market equilibrium price

purpose of price ceiling

reduce the price of necessities

limitations of price ceiling

1. shortage of the good

   1. consumers will consume a lower quantity

2. rationing of the good

   1. price ceiling on milk, price of milk ↓ , shortage as QD>QS

price floor

the minimum legal mkt price set and allowed by the govt above the free mkt equilibrium price

purpose of price floor

1. improve welfare

→ improve incomes of farmers by guaranteeing farmers a higher price for their crops so they can have more profit

2. raise minimum wage

→ reduce income inequality, low income workers can have higher incomes

taxes

involuntary payment of funds to the government by a household or firm for which the household or firm receives no good or service in return

purpose of tax

→ tax revenue subsidises healthcare, improve infrastructure

→ ↓ amt of demerit goods e.g. cigarettes, govt want to discourage

social surplus

consumer surplus + producer surplus + government

subsidies

direct & indirect

the payment of money to a household or firm by the government for which it receives no good or service in return

direct: cash benefits, old-age pensions

indirect: subsidised education/healthcare, concessionary bus fares for the elderly

purpose of subsidies

1. Increase consumption of merit goods (education, healthcare)

2. Lower price of basic necessities

e.g. Msia subsidised fuel to help low income households afford fuel

3. Help firms get through a recession and earn more profit e.g. farmers

quotas

the legal limit set by the government on the Qty of a good that can be transacted in a market

purpose of quotas

to protect domestic firms from foreign firms, reducing foreign supply

economic efficiency

where each good is produced at minimum cost and individuals & firms get maximum benefits from their resources

Law of increasing opp cost

the more a good is produced, opp cost of additional output ↑

Marginal Cost ↑

Public goods- 3 things and their definitions

Gds/svcs that have the features of non-rivalry, non-excludability and non-rejectability

Consumption of the good or service by an individual does not reduce the benefits of the good available to others

It is not possible to provide the good or service to only one person without it thereby being available for others to enjoy

Individuals are unable to choose to forgo consumption or prevent themselves from benefitting from the good once it is provided

free-rider problem

a situation in which an individual is able to enjoy the benefits from the consumption of a gd or svc without having to pay for the consumption of the gd or svc

Externality

occurs when some of the costs/benefits associated with the production/consumption of a gd ‘spillsover’ onto third parties, that is, to parties other than the immediate seller or buyer, for which no compensation is paid

Mkt failure

exists when the free mkt fails to allocate resources efficiently

Negative externality

Results in?

when priv consumption/production creates an external cost to the society that is not internalised by private consumers and/or firms

Results in divergence btw MPC & MSC

Mkt failure from

1. Productive efficiency

2. Allocative efficiency

1. Firms cannot use the lowest cost combination of labour & capital to produce goods and this leads to productive inefficiency→ mkt failure

2. When demand rises, firms want to ↑ Qty SS so they will need more labour and capital BUT firms cannot get these FOPs so they cannot ↑ Qty & the shortage of gds & svcs persists, resulting in a misallocation of resources and mkt failure

Asymmetric information

Example?

One party in the mkt (prod/consumers) has more info about the product than the other resulting in a distortion of incentives and inefficient mkt outcomes

2nd hand car market / insurance mkt