Microeconomics
Microeconomics Observation Interplay between theory and observation Through an observation of an event it would be tested by observing and creating a theory. Which then would be tested through collecting data and analysis, to tests its faults and validity. Historical events may lead to changes within the economy
Assumptions Assumptions are made to make the world easier to understand, for instance:
For an international trade assume the world only has 2 countries and 2 goods Change in numbers of dollars in circulation assume the price change is fixed or not much or flexible (only one form)
This is in order to focus our thinking, to have a better understanding of such event
Economic Model Model used to learn about the world through diagrams and equations By making it simple and omitting any unnecessary details to make it more focused and see what’s important Model 1: Circulatory – flow diagram A visual model of the economy that shows how money flows through markets A Model to explain in general terms on how the economy is organized, and how participants in the economy interact with one another
Circulatory – flow model
Due to its simplicity this model is useful to keep in mind when thinking about how pieces of economy fit together
Model 2: The production possibilities frontier A graph that shows the various combinations of output that the economy can possibly produce given the available factors of production and the available production technology Built using the tools of mathematics Assuming the economy produces 2 types of goods only See how many products can be produced given the resources. As resources are scarce, not all outcomes are feasible. By using this model we know that with the resources it has, the amount the economy can produce at any point on or inside the frontier An outcome is efficient if the economy is getting all it can from the scarce resources it has possible. Outcomes which aren’t efficient (point C) can be caused by:
Widespread unemployment the business is unable to hire enough workers
Hence, the economy is producing less than it could from its available resources Shows the trade – off, where it is shown that the only way to produce more of one good is to produce less of another good. Creating an opportunity cost, the cost of something is what you give up to get it, this model show the opportunity cost of one good is measured in terms of the other goods Deciding a course of actions by analyzing which action has less opportunity cost. In example in the box producing 1 ton of corn would only mean sacrificing 0.5 ton of beef and vice versa. In this case the corn has a lower opportunity cost than the beef (1 and 0.5) in addition also consider the market’s need (price, demands etc)
Calculating opportunity cost The result of the activity done = the next best alternative. The alternative is the opportunity cost Ex. 1 ton of corn = 0.5 ton of beef, hence the opportunity cost of 1 ton of corn is 0.5 ton of beef
Assumptions Assumptions are made to make the world easier to understand, for instance:
For an international trade assume the world only has 2 countries and 2 goods Change in numbers of dollars in circulation assume the price change is fixed or not much or flexible (only one form)
This is in order to focus our thinking, to have a better understanding of such event
Economic Model Model used to learn about the world through diagrams and equations By making it simple and omitting any unnecessary details to make it more focused and see what’s important Model 1: Circulatory – flow diagram A visual model of the economy that shows how money flows through markets A Model to explain in general terms on how the economy is organized, and how participants in the economy interact with one another
Circulatory – flow model
Due to its simplicity this model is useful to keep in mind when thinking about how pieces of economy fit together
Model 2: The production possibilities frontier A graph that shows the various combinations of output that the economy can possibly produce given the available factors of production and the available production technology Built using the tools of mathematics Assuming the economy produces 2 types of goods only See how many products can be produced given the resources. As resources are scarce, not all outcomes are feasible. By using this model we know that with the resources it has, the amount the economy can produce at any point on or inside the frontier An outcome is efficient if the economy is getting all it can from the scarce resources it has possible. Outcomes which aren’t efficient (point C) can be caused by:
Widespread unemployment the business is unable to hire enough workers
Hence, the economy is producing less than it could from its available resources Shows the trade – off, where it is shown that the only way to produce more of one good is to produce less of another good. Creating an opportunity cost, the cost of something is what you give up to get it, this model show the opportunity cost of one good is measured in terms of the other goods Deciding a course of actions by analyzing which action has less opportunity cost. In example in the box producing 1 ton of corn would only mean sacrificing 0.5 ton of beef and vice versa. In this case the corn has a lower opportunity cost than the beef (1 and 0.5) in addition also consider the market’s need (price, demands etc)
Calculating opportunity cost The result of the activity done = the next best alternative. The alternative is the opportunity cost Ex. 1 ton of corn = 0.5 ton of beef, hence the opportunity cost of 1 ton of corn is 0.5 ton of beef
