Econs

Economics is the study of the ways individuals and society decide to use scare/limited resources to satisfy their unlimited needs and wants

Micro

Focuses on the decisions of individual, households, firms and industry

Ceteris Paribus - all other things constant [everything else stays the same except for the change]

Economic Problem - limited resources to satisfy unlimited needs and wants

Opportunity Cost - next best alternative forgone

Questions when Decision making:

1. What to produce?

2. How to produce?

3. How much to produce?

4. Whom to produce for?

PPF - possible combinations of goods/services that can be produced

• Consumer Good: immediate goods

• Capital Good: investments to increase economy

Assumptions of PPF:

1. Resources are fixed

2. Economy is operating at max capacity and resources are utilised efficiently

3. Technology is fixed

4. There are only 2 types of goods

Points on PPF:

• If inside PPF the economy isn’t maximised and resources aren’t being allocated effectively

• If outside PPF it is an impossible point as resources are already maximised with current resources so there isn’t a possibility to reach that point without a change

• If on curve economy is maximised

Market: Where buyers and sellers exchange goods & services & resources

Classification of Competition:

1. no. of firms

2. degree of similarity in product

3. ease of entry and exit

4. no. of buyers and sellers

Competitive: Interaction between buyers and sellers where sellers are the price takers e.g. pasta

Non-Competitive: Little to no competition where sellers are price makers e.g. watercorp

Demand: Buying intentions of consumers where they are willing and able to buy at a particular price at the time

Law of demand: as price increases, demand decreases, vice versa

• Inverse relationship

  1. Income effect: price ↑, demand ↓ because of ↓ in purchasing power

  2. Substitution effect: price of one good ↑, other goods become more attractive

• Price Factors (Movement)

  1. increase in price: contraction

  2. decrease in price: expansion

• Non-Price Factors (Shifts) [increase and decrease]

  1. Level of disposable income - income increases, demand increases

  2. Price of related goods - substitute goods at lower price people buy it instead

  3. Interest rates - low rates means more spending or borrowing

  4. Number of buyers - ads, wealth and health impact buyers

  5. Taste/Trends/Consumer preference - taste change, demand change

  6. Consumer expectations - expectation that price ↑ in future, demand ↑

Supply: Quantity producers are willing and able to produce at a particular price at a time

Law of Supply: as price increases supply increase, vice versa

• Proportional relationship

• Price Factors (Movement)

  1. increase in price: expansion

  2. decrease in price: contraction

• Non-Price Factors (Shifts) [increase and decrease]

  1. Input price/Cost of production - increase in cost decrease in supply

  2. Technology - improvement in tech, decrease cost, increase supply

  3. Expectations - increase in price in future = decrease in current supply

  4. No. of sellers - increase in sellers = increase in supply

Market Equilibrium: occurs when consumers and producers come together and exchange a mutually agreeable quantity at a mutually agreeable price

• Shortage - price is lower than the =

• Surplus - price is above the =

• Price Mechanism: Adam Smith, father of Economics, talked about how free markets can motivate individuals, acting in their own self-interest, to produce what is societally necessary aka the invisible hand or price mechanism.

Elasticity

Finding Elasticity Equations

The Point Method

• (ΔQ/Qi) / (ΔP/Pi)

• %ΔQ/%ΔP

The Midpoint Method

• (ΔQ/Qav) x (Pav/ΔP)

PED: Measure of how demand reacts to change in price

Price Elasticity of Demand: shift is demand for a good or service when changes happen on a variable that consumers consider apart of purchasing decision

• Businesses and the Government follow PED as it is an indicator to price

Factors affecting PED

PES: change in supply relative to change in price

Factors affecting PES

Government Taxing

• Elastic goods are unlikely to be taxed compared to inelastic goods due to revenue

• Elastic goods cause Producer Tax index - producers taking on the burden of tax

• Inelastic goods cause Consumer Tax index - consumers taking on the burden of tax

• DWL (dead weight loss) is causes by tax as it is a loss of max efficiency which was avoidable

• TS (total surplus) is decreased with tax as CS [consumer surplus] and/or PS [producer surplus] decrease

• Governments tax to increase revenue

Price discrimination

• Businesses change their prices for different times/groups for customers

• Women haircuts > Men haircuts

• Uber at night > Uber at day

Market Efficiency

1. Producing goods/services that are desirable to consumers at lowest cost

2. Not possible to make someone better off without making someone worse off

3. Utilising scarce resources to make best possible decisions

4. All information is included in price so market isn’t overvalued or undervalued

Marginal Benefit: Max price consumers willing to pay for an additional good

• decreases as more goods are added as enjoyment/benefit decreases

• Can also be known as the price in demand curve

Marginal Cost: Min amount producer willing to sell for additional cost for + unit

• Increases as more units are made

• MC > Price producers will stop supplying

Consumer Surplus: Max amount consumer willing to pay vs what they pay

• CS > CE (consumer expenditure) increase in consumer welfare

• Max - actual

Producer Surplus: Min amount producers are willing to accept vs what they receive

• $ ↑, PS ↑

• PS > Cost of Production, ↑ economic welfare

Total Surplus: Measure of economic efficiency

• TS = TPS + TCS

• TPS = ½ (Actual - min) x Q

• TCS = ½ (Max - actual) x Q

Deadweight Loss: avoidable decrease in TS, preventing production of optimal output

• If market has DWL it is failing

Government Policies in Reducing Efficiency

Government reduces market efficiency to trade off for social benefit, equity and much more

• Market Restrictions

  • Limits supply

  • Taxi licenses

    → reduce congestion and pollution

• Price Control

  • Price Ceiling

    → Maximum price below equilibrium to protect consumers

    → Medicine

    → Rent

  • Price Floor

    → Minimum price above equilibrium to protect suppliers from sellers

    → Milk

• Taxes

  • Raise revenue for government to improve efficiency of economy

  • Tax is added to supply such as cigarettes

  • GST

• Subsidies

  • A cash payment from government to business to encourage the production of goods an services (grant to firms)

    → shift to right as it reduces cost of production

  • Reduce pressure to improve efficiency in future

Market Failure

Occurs when resources aren’t allocated efficiently (TS isn’t maximised)

Government intervention:

• Improve efficiency

• Influence the nature of price

• Respond to fluctuation in economic growth

Types of Market Failure

• Market Power

  • only seller

  • price setters

  • product differentiation

  • Government intervention

    → ACCC prohibits price fixing and collusions [consumer law]

    → collusions reduce competition and increase profit

    → legislate, regulate

• Externality

  • when there are costs or benefits imposed on a third party that is not involved with the economic transaction

  • Private cost: cost incurred by producer and consumer

  • Social cost: cost on third party external to price mechanism

  • Private benefit: benefits reaped by producer and consumer

  • Social benefit: benefit society has, external to price mechanism

  • Within the 2 different types of externality it further splits into consumption and production externalities

  • Negative Externality

    → Production or consumption of a good or service that indirectly causes harm to third party e.g. smoking or pollution

    → Causes overconsumption and overproduction impacting peoples health through secondhand smoke and it harms the environment with ↑ CO2

    → PC<SC

    → Government intervenes with 2 types of policies:

    • Market Based

      → Taxing CO2

      → Taxing Cigarettes by certain percent each year

    • Command and Control

      → Regulating what age, demographic and groups can use product

      → Banning where product can be used

  • Positive Externality

    → Production or consumption of a good or service that indirectly benefits a third party e.g. beekeepers or vaccines

    → There is underconsumption and underproduction as the market is unable to see the benefits to third parties such as herd immunity and pollination

    → PB<SB

    → Government intervenes with 2 types of polices:

    • Market based

      → Subsidising the cost of production to producers to increase production

    • Command and Control

      → Making it mandatory for certain ages, demographics and people to have it

      → Prioritising the licenses needed

• Characteristics of goods

  • Rival Goods: by using good/service it effects other people using good or service

  • Excludable Goods: good can only be used by person who bought

  • Public Goods

    → Non-rival, non-excludable

    → Parks

    → private firms refuse to pay for these goods as they can’t be monetised and there is no profit from it

    → Governments pay for these goods as they benefit society

    → Problem with it is there are free riders who don’t contribute to the good but take advantage of it

  • Private Goods

    → Excludable, Rival

    → Household goods

    → People go buy things at the shop which cannot be used by others as they own the item

    → By buying the item it reduces the stock for others

  • Club Goods

    → Excludable, non-rival

    → Netflix

    → People buy good that others can’t use as it is theirs

    → By someone purchasing good it does not impact another purchasing good as their isn’t a set supply

    → Government can allow companies to set price above marginal cost levels

  • Common Resources

    → Rival, non-excludable

    → Ocean - fishing

    → Tragedy of the commons

    → Fish are free to get from the ocean but people become greedy and take more it will deplete the population of fish meaning others can’t take the same amount

    → Governments restrict the time, area and amount of fish people can take to protect the species and make sure there will be some in the future

    → There are people who disregard these laws made and it negatively impacts others