MICROECONOMIC PRINCIPLES – INTRODUCTION TO ECONOMICS ...

MICROECONOMIC PRINCIPLES – INTRODUCTION TO ECONOMICS & THE PRODUCTION POSSIBILITY FRONTIER – LECTURE 1 § Due to the scarcity of supply there is an inability to satisfy unlimited wants, hence consumers must make choices, which are often based off incentives § Economics: The social science which studies the choices of individuals, businesses & governments in their attempt to cope with scarcity, along with the incentives that influence these choices § Microeconomics: studying choices made by individuals & businesses & their impact MAJOR ECONOMIC QUESTION – how do choices end up determining what, how & for whom goods & services are produced § Goods & Services: objects that people value & produce to satisfy consumer wants § What: Total production in Australia - agriculture (4%), manufactured goods (26%), services (70%) § How: Goods & services are produced using factors of production o Land: natural resources o Labour: time & physical labour devoted to producing goods & services o Capital: tools, machines, buildings & other equipment businesses use o Entrepreneurship: human resource that organizes land, labour & capital § For Whom? goods and services received are dependent on the incomes people earn o land earns rent o labour earns wages o capital earns interest o entrepreneurship earns profit MAJOR ECONOMIC QUESTION – when do choices made in the pursuit of self-interest also promote social interest? § Self interest: choices made which will best benefit you § Social interest: efficient & equitable choices that results in an outcome which is beneficial for society as a whole § Efficiency: utilizing the available resources to produce goods and services at the lowest possible cost & in quantities that give the greatest possible benefit § Equity: choices are made in fairness THE ECONOMIC WAY OF THINKING A choice is a tradeoff § Scarcity (unlimited wants, limited resources) bring the implication of choice from the available alternatives § Every choice is a trade off/exchange – giving up one thing to attain another People make rational choices by comparing benefits and costs § By comparing costs and benefits, consumers aim to make a rational choice § Rational choice: a choice which achieves the greatest benefit over cost, which is dependent on an individual’s wants

MICROECONOMIC PRINCIPLES – CONSUMER THEORY: CONSUMER CHOICES & CONSTRAINTS – LECTURE 3 CONSUMPTION POSSIBILITIES § A household’s consumption choices are constrained by its income & the prices of the goods & services available § Budget line: describes the limits to the household’s consumption choices § Consumption possibilities are represented as combination along the budget line § Indivisible goods: goods which must be bought in whole units at the points marked § Divisible goods: goods which can be bought in any quantity § Any point outside the budget line is unaffordable THE BUDGET EQUATION: EXPENDITURE = INCOME

QA = Y/PA – (PB/PA) QB

§ §

Y/PA = real income PB/PA = relative price of one good in terms of another

A household’s real income (Y/PA) is expressed as a quantity of goods the household can afford to buy The relative price (PB/PA) is the price of one good divided by the price of another good, which determines the magnitude of the slope of the budget line o Shows how many of good A must be forgone to gain one more of good B

A CHANGE IN PRICES § A rise in the price of the good on the x-axis o decreases the affordable quantity o increases the relative price of the good o increases the slope of the budget line § A fall in the price of the good on the x-axis o Increases the affordable quantity o Decreases the relative price of the good o Decreases the slope of the budget line A CHANGE IN INCOME § A change in income brings a parallel shift of the budget line § As the relative price doesn’t change, the slope stays the same