Econ Microeconomics and Intro

What is economics?

The study of the allocation of resources

What are the three big questions in economics?

What will we produce? How will we produce it? For whom?

What are the four factors of production?

Land, labour, capital and enterprise

What is the invisible hand?

The market will manage itself even without government intervention

What is opportunity cost?

The value of the next best alternative that is forgone when making a choice

What are free goods?

Goods with zero opportunity cost

What is a PPC/PPF?

Production possibilities frontier/curve

What does a PPF model show?

The max combo of 2 goods than an economy can produce in a given period of time with its factors of production maximised

What is demand?

The quantity of a good/service that consumers are willing and able to purchase at a given price

What is the law of demand?

Quantity demanded and price have an inverse relationship, ceteris paribus

What does ceteris paribus mean?

all else being equal

Why is there an inverse relationship between Qd and P?

Income effect: The good is less affordable to consumers as price increases

Substitution effect: People switch to alternatives if price increases too much

Shift of curve vs contraction/expansion along the curve for supply and demand

Change in non-price determinant: shift

Change in price: movement along

Non-price determinants of demand

Population/demographic changes

Income

Related goods prices

Advertising

Tastes and preferences

Expectations of future price

Seasonal factors

What is PED?

The responsiveness of Qd in relation to P

PED = %∆Qd ÷ %∆P

What do PED/PES values mean?

> 1 is price elastic

< 1 is price inelastic

= 1 is unitary elastic

= 0 is perfectly inelastic

= ∞ is perfectly elastic

Note that PED will be negative but the absolute value is what is interpreted.

What is revenue?

Effect of PED on revenue

Non-price determinants of supply

Profitability of alternative products

Indirect taxes

Number of firms

Technology

Subsidies

Weather/unexpected shocks

Cost of production

What is PES?

The responsiveness of Qs in relation to P

PES = %∆Qs ÷ %∆P

What is YED?

The responsiveness of Qd in relation to income (Y)

YED = %∆Qd ÷ %∆Y

Percentage change

(difference between new and old ÷ old) x 100

Non-price determinants of PES

Mobility of factors of production

Ability to store

Spare capacity
Time

Non-price determinants of PED

Substitutes

Proportion of income

Luxury vs necessity

Addictive
Time

What is a market?

The interaction of consumers (demand) and producers (supply)

S vs Qs and D vs Qd

S and D refer to the whole curve while Qs and Qd refer to a specific point on the curve

What is consumer surplus?

The difference between what a consumer is willing to pay for a good vs the price they actually pay

What is producer surplus?

The difference between the price a producer is willing to receive for a good vs the price they actually receive

What do YED values mean?

< 0 is inferior good (like stamford street co)

0-1 is income inelastic (normal good, necessity)

> 1 is income elastic (normal good, luxury)

What are price ceilings?

When the government/market regulator sets a max price (prevents producers from raising price above it)

Advantages of price ceilings

Protects consumers from rising prices of essential goods and services