micro

1.1 Scarcity

  • Definition of Scarcity: Scarcity refers to the situation where human desires for goods, services, and resources surpass available quantities.

  • Factors of Production: Resources in the economy can be categorized into four main types:
      - Land: Includes natural resources such as timber, water, minerals, and any other resources extracted from nature.
      - Labor: Represents the efforts exerted by workers in the production process.
      - Capital: Comprises manufactured assets such as machinery, buildings, tools, and other goods used to produce goods and services.
      - Entrepreneurship: Involves the capacities for risk-taking, innovation, and the organization of resources to facilitate production.

1.2 Resource Allocation and Economic Systems

  • Resource Allocation Definition: The allocation in economics refers to the process of saving resources for future generations and ensuring equitable distribution.

  • Types of Economies:
      1. Traditional Economy:
         - Characteristics:
           - Predominantly agrarian, where most families are involved in farming.
           - Subsistence production is typical; what is grown is what is consumed.
           - Little economic progression or innovation due to reliance on historical methods.
      2. Command Economy:
         - Characteristics:
           - Economic activities are directed by a governing body or ruling class.
           - The government determines the produced goods and services, pricing, methods of production, and worker compensation.
      3. Market Economy:
         - Characteristics:
           - Represents a system that facilitates interactions between buyers and sellers, whether individuals or businesses.
           - Production and supply of goods and services hinge on demand.
      4. Mixed Economy:
         - Characteristics:
           - Combines elements from traditional, command, and market economies.

  • Globalization:
      - Expansion of cultural, political, and economic ties worldwide.
      - Driven by:
        - Lower shipping and air cargo costs.
        - Advances in computing and telecommunications.

  • Trade Definitions:
      - Exports: Goods and services produced domestically and sold internationally.
      - Imports: Goods and services brought from abroad for sale domestically.

  • Gross Domestic Product (GDP):
      - Measurement of total production in an economy.

Page 4 Concepts

  • Consumption: The use of goods and services by consumers.

  • Net Exports: The difference between a country's total value of exports and imports.

  • Expenditures: The act of spending funds.

  • GDP: The total monetary or market value of all final goods and services produced within a country's borders in a specific time frame.

  • Investment: The allocation of resources, usually capital, towards production with the expectation of future returns.

  • Government Spending: Outlays by the government to support various economic functions.

  • Nominal GDP:
      - Definition: GDP measured in current dollars, not adjusted for inflation.

1.3 The Opportunity Cost

  • Definition of Opportunity Set: Encompasses all feasible opportunities for expenditure within a given budget.

  • Economic Efficiency: Points on the curve reflect optimal resource utilization, while those outside it indicate inefficient or unattainable resource use.

  • Concept of Opportunity Cost:
      - Positive Opportunity Cost: Indicates the profit potential being sacrificed when opting for an alternative.
      - Negative Opportunity Cost: Suggests that the alternative choice renders less advantage than the chosen option.

  • Examples of Opportunity Cost:
      | Option | Expected Annual Return | Potential Profit/Interest |
      |----------------------------------|-----------------------|----------------------------|
      | Investing in Real Estate | 8% | $80 per year |
      | Putting Money into Bonds | 2% | $20 per year |

1.4 Possible Production Frontier

  • Production Frontier: Reflective of opportunity costs; a graphical representation.

  • Productive Efficiency: Production capability indicates that increasing quantity of one good necessitates reduction in another good.

  • Allocative Efficiency: Represents the ideal mix of goods produced that aligns with societal desires.

  • Growth and Recession Indicators:
      - Right Shift: Indicates economic growth.
      - Left Shift: Signifies economic recession.

1.5 Comparative Advantage and Trade

  • Absolute Advantage:
      - Definition: Ability to produce a good or service with fewer resources than another entity.
      - Example:
        - If Country A produces 10 cars per hour and Country B produces 5 cars per hour, Country A holds the absolute advantage.

  • Comparative Advantage:
      - Definition: Capacity to produce a good at a lower opportunity cost than others.
      - Benefit of Trade: Trade is advantageous to both parties even if one is more efficient overall.
      - Example:
        - If Country A can produce either 10 cars or 5 trucks, and Country B can produce 6 cars or 3 trucks:
          - Illustrates specialization at lower opportunity costs.

  • Opportunity Cost Calculation:
      - The opportunity cost of producing one unit of a good can be expressed in terms of the alternative good sacrificed.

  • Comparative Advantage Calculation Example:
      - Brazil: 0.5 tons of wheat per barrel of oil.
      - USA: 2 tons of wheat per barrel of oil.
      - Conclusion:
        - Brazil has a comparative advantage in oil production.
        - The USA has a comparative advantage in wheat production.
        - Suggestions for specialization and trade to optimize resource allocation.

1.6 Cost-Benefit Analysis

  • Definition of Cost-Benefit Analysis (CBA): A systematic method in economics to evaluate alternatives, weighing their benefits against costs.

1.7 Types of Cost in Economics

Type of Cost

Definition

Examples

Opportunity Costs

Value of the next best alternative not chosen.

Profit from an alternative investment.

Sunk Costs

Costs incurred that cannot be recovered.

Research and development expenses.

Explicit Costs

Direct monetary expenditures made during transactions.

Wages, rent, materials.

Implicit Costs

Non-monetary opportunity costs of personal resources.

Owner's time and capital invested in production.

Social Costs

Total societal cost, combining private and external costs.

Pollution, health impacts.

Private Costs

Costs borne directly by the individual or firm involved.

Production costs, wages.

Economic Costs

Sum of explicit and implicit costs.

Explicit Costs + Implicit Costs

Accounting Costs

Total of all explicit costs known in financial accounting.

Salaries, rent.

1.8 Marginal Analysis and Consumer Choice

  • Law of Diminishing Marginal Utility: States that satisfaction gained decreases with each additional unit consumed.

  • Marginal Analysis: Decision-making process weighing additional benefits versus costs.

  • Marginal Benefit (MB): Additional satisfaction from consuming or producing an additional unit.
      - Example: Producing the 101st smartphone increases revenue by $200, hence MB is $200.

  • Marginal Cost (MC): Cost incurred upon producing or consuming an additional unit.
      - Example: Producing the 101st smartphone raises total costs by $150, thus MC is $150.

  • Decision Rule in Marginal Analysis:
      - If MB > MC: Execute the action.
      - If MB < MC: Do not execute the action.
      - If MB = MC: Optimal level reached.

  • Utility Maximization Rule: Consumers aim for decisions that enhance their utility.

2.1 Demand

  • Demand Definition: The quantity of a good or service that consumers are willing to purchase at various price points.

  • Law of Demand: Inversely relates price and quantity demanded; if price rises, quantity demanded decreases and vice versa.

2.2 Supply

  • Supply Definition: Amount of a good or service a producer is willing to supply at different price levels.

  • Law of Supply: Generally, increased prices lead to an increased quantity supplied.

2.3 Market Equilibrium and Consumer and Producer Surplus

  • Consumer Surplus: The difference between what consumers are willing to pay and what they actually pay.

  • Producer Surplus: The difference between what producers are willing to accept and what they actually receive.

  • Equilibrium Price: Point where quantity demanded equals quantity supplied.

2.4 Shifts in Demand Curve

  • Demand Curve Shifts: Rightward shift indicates increased demand, while a leftward shift signifies decreased demand.

  • Types of Goods:
      - Normal Goods: Demand increases with rising income.
      - Inferior Goods: Demand decreases with rising income.

2.5 Shifts in Supply Curve

  • Factors Influencing Supply:
      - Lower Costs of Production: Right shift.
      - Higher Costs of Production: Left shift.
      - Improved Natural Conditions: Right shift.
      - Poor Natural Conditions: Left shift.

  • Government Influence on Supply:
      - Higher taxes shift curve left.
      - Subsidies shift curve right.
      - New technologies shift curve right.

2.6 Effects of Government Intervention in Markets

  • Price Ceiling: Set maximum price, leading to shortages.

  • Price Floor: Set minimum price, leading to surpluses.

2.7 Price Elasticity of Demand & Supply

  • Elasticity Definition: Measures responsiveness of one variable to changes in another variable.

  • Price Elasticity of Demand: Calculated as the percentage change in quantity demanded divided by the percentage change in price.

  • Types of Elasticity:
      - Elastic: Greater than one, indicating high responsiveness.
      - Inelastic: Less than one, indicating low responsiveness.
      - Unitary: Equal to one, indicating proportional responsiveness.

2.8 Other Elasticities

  • Infinite Elasticity (Perfect Elasticity): Demand/supply changes infinitely with price shifts. Graphically shown as horizontal lines.

  • Zero Elasticity (Perfect Inelasticity): No change in quantity demanded or supplied with price shifts. Graphically depicted as vertical lines.

  • Income Elasticity of Demand: Ratio of percentage change in quantity demanded to percentage change in income.
      - Normal Goods: Positive elasticity.
      - Inferior Goods: Negative elasticity.

  • Cross-Price Elasticity of Demand: Percentage change in quantity demanded for one good in relation to price shifts of another good.

2.9 International Trade and Public Policy

  • International Trade: Exchange of goods and services among countries.

  • Free Trade: Unrestricted international trade without tariffs or quotas.

  • Economics of Scale: Increased production scale leads to lower average costs.

  • Tariffs: Taxes on imports that affect prices, revenue, and consumer surplus.

  • Quotas: Limitations on the amount of goods imported/exported influencing prices and surpluses.

  • Examples of Tariffs and Quotas:
      - Price differences in imported goods.
      - Historical quotas limiting Japanese car imports in the 1980s.

Trade Effects on Demand and Supply

  • Graphical Representation: Relating prices and quantities under different trade scenarios (e.g., free trade, no trade, partial protectionism).

  • Quantitative Effects: How varying policies shift demand and supply curves affecting overall market equilibria.