‭Basic Economic Concepts‬

‭➔‬ ‭Economics is the study of how to allocate scarce resources.‬

◆‭ ‬ ‭Microeconomics‬‭: how actors make decisional allocations‬‭of scarce‬
‭resources‬
◆‭ ‬ ‭Macroeconomics‬‭: how actions affect the overall economy‬
◆‭ ‬ ‭Microeconomics is about individuals, households, and firms;‬
‭Macroeconomics is about economies as a whole‬
‭➔‬ ‭Three economic questions:‬
◆‭ ‬ ‭what will be produced‬
◆‭ ‬ ‭how will it be produced‬
◆‭ ‬ ‭how will the output society produces be distributed‬
‭➔‬ ‭Factors of Production‬
◆‭ ‬ ‭Land, labour, capital, entrepreneurship‬
‭➔‬ ‭There are four‬‭economic resources‬‭:‬
◆‭ ‬ ‭land, labour, capital, and technology‬
‭➔‬ ‭Scarcity and rivalry‬
◆‭ ‬ ‭Scarcity‬‭: Limited resource with potentially unlimited‬‭wants‬
◆‭ ‬ ‭Rival‬‭Goods: one person consuming it limits the ability‬‭for others‬
‭to use.‬
‭➔‬ ‭Normative statement‬‭: something someone thinks that‬‭world should be,‬
‭very opinion based.‬
‭➔‬ ‭Positive statement‬‭: something that can be tested‬
‭➔‬ ‭Property rights‬
◆‭ ‬ ‭Who owns what‬
◆‭ ‬ ‭Three elements for effective property rights:‬
‭●‬ ‭Exclusivity, enforceability, and transferability‬
‭●‬ ‭Exclusivity is the ability of the owner to be the only agent‬
‭who decides how a resource is used. Enforceability is the‬
‭ability to assert and defend ownership of a resource.‬
‭Transferability is the ability to transfer ownership of the‬
‭resource to someone else.‬
‭➔‬ ‭A‬‭price signal‬‭is information conveyed to consumers‬‭and producers, via‬
‭the prices offered or requested for, and the amount requested or offered of‬
‭a product or service, which provides a signal to increase or decrease‬
‭quantity supplied or quantity demanded.‬
◆‭ ‬ ‭People use price to figure out how much they are willing to pay for‬
‭things.‬
➔
‭ ‬ ‭A‬‭market failure occurs‬‭when property rights break down.‬
‭➔‬ ‭Command economy:‬
◆‭ ‬ ‭The government controls property rights, no private ownership‬
◆‭ ‬ ‭Effective for preventing market failures‬
‭●‬ ‭Little incentive to innovate‬
‭➔‬ ‭Ceteris Paribus‬
◆‭ ‬ ‭'all other things being unchanged or constant'. It is used in‬
‭economics to rule out the possibility of 'other' factors changing‬
‭➔‬ ‭Production Possibilities Frontier‬
◆‭ ‬ ‭The production possibility frontier (‬‭PPF‬‭) is a curve‬‭on a graph that‬
‭illustrates the possible quantities that can be produced of two‬
‭products if both depend upon the same finite resource for their‬
‭manufacture. The PPF is also referred to as the production‬
‭possibility curve.‬

◆‭ ‬
‭➔‬ ‭Opportunity Cost/Marginal Cost‬
◆‭ ‬ ‭What the cost of gaining more of one variable relative to the point‬
‭on the graph is.‬
◆‭ ‬ ‭Ie. The opportunity of 1 more rabbit is 40 berries relative to point E‬
‭➔‬ ‭PPF is heavily related to economic resources‬
‭➔‬ ‭Absolute Advantage:‬‭The ability of an actor to produce‬‭more of a good‬
‭or service than a competitor.‬
‭➔‬ ‭Comparative Advantage:‬‭The ability of an actor to‬‭produce a good or‬
‭service for a lower opportunity cost than a competitor.‬
‭➔‬ ‭Optimal decision making by rational agents (Max benefits, Min costs)‬
◆‭ ‬ ‭Explicit costs - direct payments that are used to determine‬
‭profitability.‬
◆‭ ‬ ‭Implicit costs - an opportunity cost equal to what a party has to‬
‭give up to use a certain service.‬
 ‭◆‬ * ‭ A rational agent compares the marginal benefit of an action to‬
‭its marginal cost. If marginal benefits are greater than or equal‬
‭to marginal costs, the action is worth doing.‬
‭➔‬ ‭Utility‬‭- the usefulness of an object (Measured in‬‭util units)‬
‭◆‬ ‭Marginal Utility‬‭- the benefit of consuming one more‬‭unit of a‬
‭product‬
‭◆‬ ‭*To determine how much to purchase of each product,‬
‭maximise the marginal utility per dollar‬

◆
‭ ‬
‭➔‬ ‭Law of Demand -‬‭quantity will decrease with price‬
‭➔‬ ‭Substitution effect‬‭- the decrease in sales for a‬‭product can be attributed‬
‭to consumers switching to cheaper alternatives when its price rises.‬
‭➔‬ ‭Income effect‬‭- the resultant change in demand for‬‭a good or service‬
‭caused by an increase or decrease in a consumer's purchasing power or‬
‭real income.‬
‭➔‬ ‭A‬‭normal good‬‭is one whose demand increases when people's‬‭incomes‬
‭start to increase, giving it a positive income elasticity of demand.‬
‭➔‬ ‭Inferior goods‬‭are associated with a negative income‬‭elasticity, where‬
‭demand goes down as income goes up.‬
◆‭ ‬ ‭The difference between a normal and an inferior good is that an‬
‭inferior good is something that people would readily dispose of‬
‭given the opportunity.‬‭Ie. A broken down car is an‬‭inferior good.‬
‭➔‬ ‭E‬‭p‬ ‭= %ΔQ/%ΔP (Elasticity of Demand = percent change‬‭in‬
‭quantity/percent change in price)‬
‭◆‬ ‭*|E‬‭p‬‭| < 1 = inelastic situation‬
◆‭ ‬ ‭*|E‬‭p‬‭| > 1 = elastic situation‬
 ‭◆‬ U ‭ nit Elasticity -‬‭a term that describes a situation in which a‬
‭change in one variable results in an equally proportional change in‬
‭another variable.‬
◆‭ ‬ ‭When a part of a graph is elastic, a decrease in price results in‬‭an‬
‭increase of total revenue.‬
◆‭ ‬ ‭When part of a graph is inelastic, a decrease in price results in‬‭a‬
‭decrease in total revenue‬
‭➔‬ ‭Cross Elasticity of Demand -‬‭how responsive a substitute‬‭is to another’s‬
‭change. (%Change in quantity‬‭service 2‬‭/%Change in price‬‭service‬‭1‭)‬ ‬
‭➔‬ ‭Price Takers‬‭- when sellers have no control over market‬‭price‬
‭➔‬ ‭Consumer Surplus -‬‭The welfare or benefit enjoyed‬‭by consumers who‬
‭pay a price lower than the price they would have been willing to pay.‬
‭◆‬ ‭*To find total consumer surplus, find the area of the triangle‬
‭formed by the highest consumer surplus and the quantity.‬

‭➔‬
◆‭ ‬ ‭Marginal cost is the total cost/amount produced‬
‭➔‬ ‭Profit Maximising quantity -‬ ‭when marginal cost intersects‬‭the‬
‭marginal revenue.‬
‭➔‬ ‭Minimum efficient scale -‬‭when the long run average‬‭cost curve no‬
‭longer declines.‬
◆‭ ‬ ‭When the minimum efficient scale approaches market size, the‬
‭market becomes more concentrated(less players).‬
◆‭ ‬ ‭Natural monopoly occurs when there is only one player‬
‭➔‬ ‭Perfect competition‬
◆‭ ‬ ‭Many seller and buyers‬
 ◆‭ ‬ I‭ dentical products‬
◆‭ ‬ ‭“Perfect information” - sellers and buyers perfectly understand the‬
‭market‬
◆‭ ‬ ‭No barriers to entry‬
‭➔‬ ‭Perfect competition - monopolistic competition - oligopoly - Duopoly‬
‭- monopoly‬
◆‭ ‬ ‭No differentiation -> high differentiation‬
◆‭ ‬ ‭Low barriers to entry - high barriers to entry‬
‭➔‬ ‭Imperfect competition‬‭- each firm has their own demand‬‭curve‬
‭Oligopolies:‬
‭-‬ ‭Collusion -‬‭when companies coordinate their prices‬
‭-‬ ‭Cartel -‬‭a formal agreement to conclude together‬
‭-‬ ‭Nash Equilibrium -‬‭a stable state of a system that‬‭involves several‬
‭interacting participants in which no participant can gain by a change of‬
‭strategy as long as all the other participants remain unchanged.‬

-‭ ‬ M‭ onopsony -‬ ‭1 employer and many potential workers‬

‭-‬ ‭Tragedy of the commons -‬‭a situation in which individuals‬‭with access‬
‭to a public resource (also called a common) act in their own interest and,‬
‭in doing so, ultimately deplete the resource.‬

‭To Study:‬
‭-‬ ‭Marginal product‬
‭-‬ ‭Allocatively efficient‬
‭-‬ ‭Complements or substitutes‬
‭-‬ ‭Price discrimination‬
‭-‬ ‭Deadweight loss‬
‭-‬ ‭marginal product of labour‬
‭-‬ ‭Gini coefficient‬
‭-‬ ‭Socially optimal‬
‭-‬ ‭Monopolistically competitive market‬
‭-‬ ‭Total profit test‬
‭-‬ ‭positive/negative externality‬
‭-‬ D
‭ eadweight loss is the difference between the MSB and the MSC‬
‭between the socially optimal quantity (Q1) and the privately optimal‬
‭quantity (Q2):‬

-‭ ‬
-‭ ‬ ‭Decreasing cost industry‬
‭-‬ ‭Marginal product‬
‭-‬ ‭Competitive market wage‬
‭-‬ ‭The competitive wage is the wage at the intersection of the labor‬
‭supply curve and the marginal revenue product of labor.‬
‭-‬ ‭Monopsony wage‬
‭-‬ ‭the intersection of marginal factor cost of labor and marginal‬
‭revenue product of labor, then go down to the labor supply curve to‬
‭find the wage the monopsonist will pay‬
-‭ ‬ ‭Marginal factor cost of labour‬
‭-‬ ‭Rental rate of capital‬