Microeconomics
Microeconomics Economics: Foundations and Models Economics is the study of the choices people and societies make to attain their unlimited wants, given their limited resources. Marginal Analysis involves comparing marginal benefits and marginal costs. Scarcity: Unlimited Wants exceed the Limited Resources Available Trade-off: Producing more of one good/service means producing less of another good/service, because of scarcity Three Different Types of Economies – – –
Centrally Planned Economy: Government decides how economic resources will be allocated Market Economy: Firms in markets decide how economic resources will be allocated Mixed Economy: Government and firms decide how economic resources will be allocated
Consumer Sovereignty (Control) occurs because firms must produce goods/services that meet consumer wants. Efficiency and Equity – – – –
Productive Efficiency: Good/Service is produced using the least amount of resources Allocative Efficiency: Resources are best allocated Dynamic Efficiency: New technology and innovation are used over time Equity: Fair distribution of economic benefits between individuals and societies
Positive and Normative Analysis – –
Positive Analysis involves statements that can be tested by using the facts Normative Analysis involves making judgements which cannot be tested
Choices and Trade-offs in the Market Production Possibility Frontier: Curve showing the maximum achievable combinations of two products that may be produced with available resources
Comparative Advantage and Trade Trade: Act of buying or selling a good/service Absolute Advantage: Ability to produce more of a good/service than other producers using the same amount of resources Comparative Advantage: Ability to produce a good/service at a lower opportunity cost than other producers *Individuals/firms are better-off if they specialise in producing goods/services for which they have a comparative advantage by trading Example: Australia APPLES 12 3 0
New Zealand ORANGES
0 3 4
Australia’s Opportunity Cost for producing
NZ’s Opportunity Cost for producing
APPLES
ORANGES
6 3 0
0 3 6
12 Apples
=
4 Oranges
1 Apple
=
1/3 Oranges
6 Apples
=
6 Oranges
1 Apple
=
1 Orange
*Australia has a comparative advantage in producing Apples Australia’s Opportunity Cost for producing
NZ’s Opportunity Cost for producing
4 Oranges
=
12 Apples
1 Orange
=
3 Apples
6 Oranges
=
6 Apples
1 Orange
=
1 Apple
*New Zealand has a comparative advantage in producing Oranges The Interaction of Demand and Supply The Demand Side of the Market –
Quantity Demanded: The amount of a good/service that a consumer is willing and able to buy at a given price
–
The Law of Demand: When the price of a product decreases, the quantity demanded will increase. When the price of a product increases, the quantity demanded will decrease.
What Explains the Law of Demand? – –
Substitution Effect: Change in quantity demanded makes the good/service more/less expensive compared to other goods/services Income Effect: Change in the quantity demanded of a good/service that results from the effect of a change in price on consumer purchasing power
Variables that Shift Market Demand 1. 2. 3. 4. 5.
Prices of Related Goods Income Tastes Population and Demographics Expected Future Prices
The Supply Side of the Market – –
Quantity Supplied: The amount of a good/service that a firm is willing and able to supply at a given price. The Law of Supply: Increasing the price of a product increases the quantity supplied. Decreasing the price decreases the quantity supplied.
Variables that Shift Market Supply 1. 2. 3. 4. 5.
Prices of Inputs Technological Change Prices of Substitutes in Production Number of Firms in the Market Expected Future Prices
Market Equilibrium –
Quantity Demanded equals Quantity Supplied
– –
Shortage: Quantity Demanded is greater than the Quantity Supplied Surplus: Quantity Demanded is less than the Quantity Supplied
Responsiveness of Demand and Supply Elasticity is a measure of how much one variable responds to changes in another variable. The Price Elasticity of Demand The responsiveness of the quantity demanded to a change in price.
Centrally Planned Economy: Government decides how economic resources will be allocated Market Economy: Firms in markets decide how economic resources will be allocated Mixed Economy: Government and firms decide how economic resources will be allocated
Consumer Sovereignty (Control) occurs because firms must produce goods/services that meet consumer wants. Efficiency and Equity – – – –
Productive Efficiency: Good/Service is produced using the least amount of resources Allocative Efficiency: Resources are best allocated Dynamic Efficiency: New technology and innovation are used over time Equity: Fair distribution of economic benefits between individuals and societies
Positive and Normative Analysis – –
Positive Analysis involves statements that can be tested by using the facts Normative Analysis involves making judgements which cannot be tested
Choices and Trade-offs in the Market Production Possibility Frontier: Curve showing the maximum achievable combinations of two products that may be produced with available resources
Comparative Advantage and Trade Trade: Act of buying or selling a good/service Absolute Advantage: Ability to produce more of a good/service than other producers using the same amount of resources Comparative Advantage: Ability to produce a good/service at a lower opportunity cost than other producers *Individuals/firms are better-off if they specialise in producing goods/services for which they have a comparative advantage by trading Example: Australia APPLES 12 3 0
New Zealand ORANGES
0 3 4
Australia’s Opportunity Cost for producing
NZ’s Opportunity Cost for producing
APPLES
ORANGES
6 3 0
0 3 6
12 Apples
=
4 Oranges
1 Apple
=
1/3 Oranges
6 Apples
=
6 Oranges
1 Apple
=
1 Orange
*Australia has a comparative advantage in producing Apples Australia’s Opportunity Cost for producing
NZ’s Opportunity Cost for producing
4 Oranges
=
12 Apples
1 Orange
=
3 Apples
6 Oranges
=
6 Apples
1 Orange
=
1 Apple
*New Zealand has a comparative advantage in producing Oranges The Interaction of Demand and Supply The Demand Side of the Market –
Quantity Demanded: The amount of a good/service that a consumer is willing and able to buy at a given price
–
The Law of Demand: When the price of a product decreases, the quantity demanded will increase. When the price of a product increases, the quantity demanded will decrease.
What Explains the Law of Demand? – –
Substitution Effect: Change in quantity demanded makes the good/service more/less expensive compared to other goods/services Income Effect: Change in the quantity demanded of a good/service that results from the effect of a change in price on consumer purchasing power
Variables that Shift Market Demand 1. 2. 3. 4. 5.
Prices of Related Goods Income Tastes Population and Demographics Expected Future Prices
The Supply Side of the Market – –
Quantity Supplied: The amount of a good/service that a firm is willing and able to supply at a given price. The Law of Supply: Increasing the price of a product increases the quantity supplied. Decreasing the price decreases the quantity supplied.
Variables that Shift Market Supply 1. 2. 3. 4. 5.
Prices of Inputs Technological Change Prices of Substitutes in Production Number of Firms in the Market Expected Future Prices
Market Equilibrium –
Quantity Demanded equals Quantity Supplied
– –
Shortage: Quantity Demanded is greater than the Quantity Supplied Surplus: Quantity Demanded is less than the Quantity Supplied
Responsiveness of Demand and Supply Elasticity is a measure of how much one variable responds to changes in another variable. The Price Elasticity of Demand The responsiveness of the quantity demanded to a change in price.
