Micro

Ceteris paribus

Ceteris paribus

FOP

• Land

  • Natural resources

• Labor

  • all human effort

• Capital

  • tangible facilities

• Entrepreneurship

  • Risk taker, management

  • Manages the FOP

Command economies

Pros, cons of command economies

Market economies

pros, cons of market economies

Microeconomics

Subject that studies the behavior of individuals and firms in making decisions regarding the allocation of limited resources to satisfy unlimited wants and needs.

Economic vs free goods

Opportunity costs, and importance

the value of the next-best alternative when a decision is made

PPC Assumptions

1. Resources are fixed \n 2. All resources are fully employed \n 3. Only two things can be produced. (of similar production to be realistic) \n 4. Technology is fixed. \n 5. Unrealistic

PPC looka at capacity to produce not price

PPC

points on curve is potential output

Increasing cost PPC

Opportunity cost increases

PPC curve increases

• increases in Q or Quality of FOP

• Potential output increase

homo economics

'Economic man', economic decisions are always made rationally. Rational people maximize utility (being the most useful), for wealth and own interest.

Reallocation

Moving resources of one to another production

Redistribution

Changing the levels of output/income

Price mechanisms

• Signilling

  • High price

    • signals to consumers to consumer less

      • To producers to produce more-higher profits

• Rationing

  • More scarce

    • demand exceeds supply

    • Higher price, conserved

• Incentive

  • Prices incentive certain behaviors

  • high wage = work

  • High price = join market, produce

PPC - effect of Capital goods (investment)

Marginal utility

Satisfaction or usefulness obtained from acquiring one more unit of a product. Utility is subjective (meaurement of satisfaction). Helps determines prices.

Efficiency

Output produced by fewest resources

Circular flow of income model

mixed economy more gov intervention

Planned economy, no private sector -gov controls resource and product sector

fractional reserve banking

a banking system that keeps only a fraction of funds on hand and lends out the remainder

Rational consumer choice assumptions

utility maximization, Perfect information (all info on choices),

Behavioral econ ctritizes this

Cognitive biases

systematic influences in thinking

Limits to rationality

Bounded rationality - Limits in ability to process all information, thus consumers seek a satisfactory outcome instead of the best

Bounded self-control: People are self contorled only within limits

Bounded selfishness: selfish within limits

Imperfect information

Nudges

when have limited finances do

• Choice architecture

  • framing to influence choice

  • Illusion of free choice

Pros of behavioral econ

• Create more socially responsible outcomes

Cons of behavioral econ

• Like a gov regulation but disguised as choice

• Unexpected outcomes Electricity neighbours comparison People who spent lower, will spend more

• Not in individuals benefit

Growth maximiztion for firms why?

satisficing

A decision-making strategy where one chooses the first option that meets the minimum requirements, rather than seeking the optimal solution.

For firm: Instead of maximizing one objective achieve satisfactory result from multiple

Critiques of rational behavior

Dual proccess theories

Demand

Law of diminishing marginal utility

the principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time

Veblen goods

Shifts of demand

• Income

• Preference

• Substitute goods

• Complementary goods

• Number of consumers

Supply

Shifts of supply

• Costs of FOP

• Quality/efficiency of FOP

  • Tech advancements

• Price of goods

  • competing for same resources

  • Joint supply - products that result from use of other resources

• Producer price expectations

  • Rising prices, may withhold supply from market

• Number of firms

• Government intervention

  • Subsidies

    • encourage production

  • Indirect taxation

    • decrease supply

    • Taxes paid of G&S

Allocative Efficiency

Consumer and producer surplus

When consumers pay price below willing and able to pay

When producers sell at price above willing and able

MSC,MB, MC

• MSC: the cost that society pays as a result of the production of additional units or utilization of a good or service

• Demand is MB because as each extra unit consumed, benefit decreases. So the curve shows how customers only willing to pay if price falls.

• Supply is MC because extra unit produced, cost increases. So price must increase to cover the costs (curve shows price willing to accept to produce additional unit)

PED

elastic vs inelastic

• More responsive to price changes

• Less responsive

Elasticity along Demand curve

Higher price, more elastic

Lower price, less elastic - price so low no one cares

PED Determinents

• Time period

  • More time = more elastic

  • Have more time to respond

• SPLAT

  • sub

  • proportion

  • Luxury

  • Addiction

  • Time

YED

The eagle curve

YED on the economy/industries

YED on recessions

PES

PES and graph intersecitons

PES determinents

• Length of time

  • more time higher PES

• Mobility of FOP

  • Ease of shifting FOP

• Spare/unused capacity of firms

  • More capacity higher PES

• Ability to store stocks

  • Quicker to react

• Rate of input cost increases

  • Higher rate - lower PES

  • Don’t want the costs, harder to get FOP

PES of primary vs manufactured and PES vs price flunctuations

• Agri has unstable revs

  • so gov will support

Why govs intervene + Methods

• Tax revenue

  • low ped good

• Support for firms

  • Smaller firms to be able to compete with larger

  • Encourage the production of certain good

• Protect domestic firms

  • tariffs, import quotas

  • Trade protection measures

• Support low-income households

  • Meet basic needs

• Decourage production of certain good

  • tax

• Influence consumption levels

  • Demerit merit goods

  • With subsidies, direct provision of goods, nudges, taxes

  • Command and control methods

    • compulsary education

• Correct market failure

  • Not allocative efficient

• Promote equity

  • Fairness

  • Helps redistribute income

Price ceilings - consequences, how it looks

• Lower P

• Lower Qs

• Lower Rev

• Higher Qd

• Disequilibrium

  • Shortage

  • Not enough resources allocated

Dealing/effects with/of shortages? - rations

• Non-Price rationing

  • Divide up resources

    • no longer use price

• Underground markets

  • Buying/selling that isn’t recorded

  • illegal

  • Those willing to pay more

Price ceiling welfare impacts

MB>MC

Consumers gaining more benefit than cost of society to produce

• Consumers partially gain and lose

  • Those buying lower price win

  • Cannot then lose

• Producers are worse off

How gov reduce shortage

• Demand left

  • Reduce price for substitute goods, using subsidies

  • Or rationing good

• Shift s curve right

  • Subsidies, less tax

  • Direct provision

    • Buffer stock

Calculating surplus, and loss of trapezium

• Sum of Vertical parallel lines

Price floors

Why price floors

• Protect resource markets

• Protect product markets

• Minimum wages

Price floors and surplus

• Gov must buy off

• Dispose surplus through

  • Exports

  • Storing

  • Or just pay them the money but don’t produce good

Consequneces of price floor

• Firm inefficiency

  • No incentive to reduce costs

• Overallocation

• Welfare impacts

  • Consumers: a

  • Producers gain from S above to Qs, below Pf

    • F is not welfare loss bcs it’s gained through this

  • Gov must buy the excess supply from Qs to Qd rectangle

    • Welfare loss = rectangle-f

• Other countries

  • Worse off for them bcs selling at lower price so may lower market price in world

Taxation

• Increase prices

Why govs impose tax

Consequences of taxation

• Underallocation'

• Tax burden

  • shared by consumers and producers

Subsidies

Why subsidies

Impacts of susbidies

• Producer surplus gained is bcs of the subsidy they get

  • Producer rev = Pp x Qsb

• Consumer surplus gained bcs of lower price

• Calculating

  • just add on the surplus

  • Producer: ((Pp - S1 int) x Qsb)/2

  • Consumer: ((D int-Pc) x qsb)/2

• Foreign producers cannot compete with lower price

Command and control regulations - limitations

an approach to protecting the environment that sets strict legal limits and threatens punishment for violations of those limits

• No incentive to improve quality beyond standard

• Not applicable for all firms

  • smaller firms cannot handle

• Large firms can lobby

• Sacrifice quality/effectiveness

• Not the most efficient in reducing environemental impacts

  • Taxes better

Comand and control pros

• Used when strong compliance is needed

• solutions to problems are well-known

Perfect comp Characteristics (HL)

Monopoly (HL)

Monopolistic competition (HL)

Oligopoly (HL)

• homo or hetero

Competition and market power (HL)

Theory of firm (HL)

Firms acts in interest of maximizing profits

Calculating costs of firms (HL)

Perfect competition price and revenue graph (HL)

• No influence on price

  • So must accept the market

Non-Perfect competitiion revenue graph (HL)

MR. DARP

explicit vs implicit costs (HL)

MC vs AC (HL)

Long run AC curve - short vs long (HL)

• Long run = normal profit in PC and MPC

Economies of scale (HL)

the property whereby long-run average total cost falls as the quantity of output increases / FOP increases

Profit (HL)

• Short run only can have abnormal profit in Mon Comp and Perfect comp

Profit max output (HL)

For non-perfect, need to go up to D

Normal profit meaning (HL)

Common pool resources

Sustainability

The use of resources in a way that does not result in fewer or lower quality of resources for future generations

Renewable vs non

Market failure

• The failure to allocate resources efficiently

MPB and MPC meaning

Negative production externalities

Welfare loss in negative production externalities

• Only need to know about the welfare loss

• It is a loss of social benefits due to overproduction of the good caused by the externality.

Policies to correct negative production externalities (market-based)

• indirect/piguevian taxes

• Carbon taxes

  • Taxes on emissions

  • Firms are incentivized to switch to greener sources

• Tradable permits

  • Permits to pollute issued to firms

    • over particular time period

  • Traded in market

  • Firms can sell the permits unused

    • Incentivizes to switch

    • MSC decrease

Pros and cons of market-based policies to correct NPE

• Tradable permits

  • need to determine cap

    • cap too high, no effect

    • too low, hardships for firms

  • How to distribute fairly

    • Big firms won’t feel cost of permits

  • requires strong gov to uphold

• Taxes

  • politically difficult

  • How will it affect consumers

    • low income cannot pay a higher price

  • Large firms can just pay tax

  • Identifying which pollutant is harmful and how to value the harm

• Countries

  • Disadvantaging themselves against other countries

    • Output will decrease

    • If other country doesn’t use

  • Malaysian haze, indo

Gov regulation to correct NPE

Pros, Cons of gov reg on NPE

Collective self-governance

Education on NPE