Economics - Microeconomics

What is Economics?

• study of how humans use limited resources to satisfy unlimited wants

• study of the production, consumption, and distribution of goods and services

Economics: Key Concepts

• Scarcity

• Choice

• Efficiency

• Equity

• Economic Well-Being

• Sustainability

• Change

• Interdependence

Factors of Production (FoPs)

• Land: anything taken from the planet, grown or mined

• Labor: workers

• Capital: physical or financial resources used to produce value in an economy, any man-made tool, tangible and intangible

• Entrepreneurship: people who invest time and effort and take on financial risks in the hope of profit

Ex: Disneyland Parks

• Land: oil, cleared land, metal, food resources

• Labor: cast, technicians, board members, ride conductors, security

• Capital: electricity, employee training programmes

• Entrepreneurship: expanding parks, production managers, advertisers, designers

Demand: Definition

• the quantity of a product a consumer is willing and able to purchase at various prices

Law of Demand

• when the price of a product increases, the quantity demanded decreases and vice versa, ceteris paribus

• The Income Effect

  • change in consumer purchasing power from a change in price

  • when price increases, purchasing power decreases

• The Substitution Effect

  • consumers will substitute goods/services that become relatively more expensive

• The Law of Diminishing Marginal Utility

  • utility gained from the next unit is lower the utility gained from the previous unit

Ceteris paribus

• all other factors held constant

Determinants of Demand

• number of buyers

• taste and preference

• income (normal goods and inferior goods)

• price of related goods (substitute goods or complementary goods)

Normal Goods

• as income increases, the demand for a product increases

Inferior Goods

• as income increases, the demand for a product decreases

Substitute Goods

• two alternative goods that could be used for the same purpose

Ex: Coca-Cola vs Pepsi

Complementary Goods

• goods that are purchased separately but are used together

Economic Assumptions

• Ceteris Paribus: “all things being equal” to isolate the impact of one variable

• Rational Consumers: assume that consumers make decisions based on logic and reason, aiming to maximize utility given available information

• Utility Maximization: assumed to make choices that will give them the highest level of satisfaction or happiness

• Perfect Knowledge: assume all consumers and producers have perfect knowledge