ECONS Microeconomics Book 1

microeconomics

concerned with individual markets, consumer and producer behaviours, government choices

macroeconomics

concerned with the economy as a whole, economic aggregates like national income and output, inflation, growth, unemployment

positive statement

factual, can be tested

normative statement

expresses an opinion or value judgement, cannot be tested

positive economics

formulating and testing of economic theories, using analysis to make inquiry

normative economics

study of human behaviours, opinions, value judgement interjected into the analysis

why does scarcity occur?

human wants are unlimited, while the resources available to satisfy those wants are limited

what are the factors of production (relating to scarcity)?

capital — man-made resources used for further production (office buildings, machinery)

enterprise — human resources who take risks and innovate

land — natural resources (constrained by geographical size and accessibility)

labour — human effort of someone willing and able to work

what is opportunity cost?

the value of the next best alternative forgone when an option is chosen

what is opportunity cost like at a consumer level?

consumers have limited income but unlimited desires to fulfil, they need to decide how much to spend and save while also buying goods and services

what is opportunity cost like for producers?

aim to maximise their profits, deciding the types of goods and services to produce with limited resources

what is opportunity cost at a governmental level?

aim to maximise welfare, cannot fulfil all of citizens’ desires with limited economic resources like the government budget

What are the assumptions of a PPC?

• the utilisation of a fixed quantity of resources

• full and efficient use of those resources

• a given state of technology

What does a point lying on a PPC indicate?

choices

What do points lying outside of a PPC indicate? What is it caused by?

scarcity — the unattainable combinations of output

caused due to a lack of resources to meet combinations of the 2 goods

What does a point lying inside a PPC indicate? Why?

unemployment

there is inefficient use or under-utilisation of available resources — product efficiency not achieved

What concept is shown through the negative slope of a PPC?

opportunity costs

What does the shape of the PPC indicate?

increasing opportunity cost

What is the Law of Increasing Opportunity Cost?

resources are not equally adaptable to alternative uses — some factors of production more suited for production of one good than the other

What is indicated by an outward shift in a PPC? Why?

an increase in quantity and/or quality of productive resource

OR

an improvement in state of technology

this will allow economy to produce a previously unattainable combination of output as it is not possible to produce more from a given resource base

represents an increase in economy’s ability to produce more goods and services — achieving potential economic growth

What does an inward shift in a PPC indicate?

reduction in amount of resources available — maximum amount of goods and services than can be produced in economy from given resource base has decreased — negative potential economic growth

What is capital accumulation?

increased production of capital goods which adds to society’s stocks of these goods

allows economy to grow at a faster rate in the future

What is the opportunity cost of producing more capital goods (comparing to consumer goods)?

quantity of consumption goods devoted in the present forgone — lower current standard of living for citizens

What is marginal benefit (of an activity)?

the increase in total benefit the results from carrying out an additional unit of the activity

What is marginal cost (of an activity)?

the increase in total cost that results from carrying out an additional unit of the activity

What is the Law of Diminishing Marginal Utility?

as the quantity of a good consumed increase per period or time, eventually each unit of the good provides less utility, marginal utility / benefit decreases — each subsequent unit of a good is less valued than the previous one

What is the Marginalist Principle to maximise satisfaction?

marginal private benefit = marginal private cost

What is the MPB and MPC of producers?

MPB: revenue earned by producers

MPC: wages, cost or raw materials etc.