H1 Econs Microeconomics(Themes 1-2)

scarcity; situation where our limited resources(CELL) insufficient to fulfil unlimited wants of society >

choice must be made; which unlimited wants to be satisfied, which to sacrifice, based on maximising self-interest

next best alternative forgone when making a choice

curve showing all possible combinations of 2 goods that can be produced by an economy, assuming all resources fully & efficiently utilised, given fixed quantity of resources & level of technology

pt outside PPC >

output unattainable due to limited resources(scarcity)/constant technology

diff selection of pts on PPC >

while all pts productively efficient(fully, efficiently utilised), only 1 pt allocatively efficient

when > of 1 good produced, < of another good can be produced >

limited resources, economy decides what to produce >

opportunity cost increases as > of 1 good produced, > of another good forgone; resources not equally suited to produce all goods

pt inside PPC >

productively inefficient due to unemployment or under-utilisation of economic resources

pt on PCC >

economy at full employment, all resources fully & efficiently utilised

PPC shifts outwards >

produce > consumer goods, < capital goods > economy produce < goods in the future, < economic growth >

higher current SOL but fall in future SOL

produce > capital goods, < consumer goods > economy produce > goods in the future, productive capacity increases, > economic growth >

lower current SOL but rise in future SOL

increase in quantity of FOP,

increase in quality/productivity of FOP,

increase in state of technology(>R&D)

marginalist principle; economic agents make decisions by weighing MB, MC(including opportunity cost); decision desirable if MB>MC

marginalist benefit(MB); marginal utility(consumer), marginal revenue(producer), marginal social benefit(government)

marginal cost(MC); cost of purchasing/producing/providing additional unit of good(consumer), marginal COP(producer), marginal social cost(government)

consumer

maximise total utility; as consumer consumes additional units of good, marginal utility diminishes(LDMU), consumer only consumes additional unit of good if MB>MC; consume where MB=MC to maximise utility

producer

maximise total profit(T_R-T_C); producer only produces additional unit of good if MB>MC; produce where MB=MC to maximise total profit

government

maximise social welfare(T_SB-T_SC); consider social costs(private costs, external costs to society); encourage/discourage production/consumption of goods until MSB>MSC

must operate within constraints, thus trade-offs(opportunity costs) made >

ensure best decision given constraints, must weigh costs & benefits >

to measure -&+, must gather information & consider diff perspectives >

must recognise intended(assume rationale, economic conditions unchanged) & unintended(economic conditions change, imperfect info) consequences >

after decision made, changes(goals, constraints, info, perspectives) likely to occur, affecting decision, thus must review

market; process whereby G&S/FOP bought & sold

free market; one where eqm price, eqm qty of G&S determined via interaction of demand & supply factors -> price mechanism

price plays 3 fns in allocating resources

signalling fn; △price 'signal' producers, consumers about △ in market conditions >

what to produce

incentive fn; △price provide 'incentive' to reallocate scarce resources >

how to produce

rationing fn; △price 'ration' scarce resources to most willing, able to pay parties >

whom to produce for

w

price mechanism determines eqm price, eqm quantity through summation of individual consumers(demand) & individual producers(supply) >

eqm price, eqm quantity exists where quantity demanded = quantity supplied; no tendency for price/output to change

x-axis -> quantity

y-axis -> price

demand is inversely proportional to supply;

demand -ve gradient, supply +ve gradient

intersection b/w dd and ss is eqm price, eqm quantity

write 0 at start of axes

title graph; figure _: market of ___

amount of good/service consumers willing & able to buy @ various prices, over particular period of time, ceteris paribus

inverse relationship b/w price & quantity demanded of a good, ceteris paribus >

inverse due to LDMU; e.g, you really wanna buy a car(demand high), thus price is high as 1 unit will derive enough satisfaction that need not require another unit to be purchased

when you dont wanna buy a car(demand low), price is low as 1 unit will not derive enough satisfaction, thus requiring another unit to be purchased

quantity of good/service producers willing & able to sell @ various prices, over particular period of time, ceteris paribus

proportional relationship b/w price & quantity supplied of a good, ceteris paribus >

producers only willing to produce more if price increases as @ higher output, MC ↑

Expectations of future prices; consumers expect ↑price, buy > now avoid paying > in future

Govt regulation; changes consumption patterns -> changes in demand

Y(I)ncome of household; △income lead to △demand, normal good - dd ↑ when income ↑; luxury good - dd ↑ > than proportionately when income ↑; inferior good - dd ↓ when income ↑

Price of related good; substitute price ↑, dd for good ↑; complement price ↑, dd for good ↓

Taste, preference of consumers

Weather; △conditions affect demand

Interest rates; mortgage ↑, dd ↓, ease of credit ↑, dd ↑

Population changes; demographic increases, dd for that demographic ↑

Exchange rates; cheaper in other country, dd ↑

Weather

Expectation of future price level; producers expect ↑price, temporarily ↓qty sold, build up stocks, sell @ ↑ price

Technological changes; advancements enable producers use < FOP for same amount of goods; MC of production falls

Price of related goods; joint supply(by-products), ss ↑, ss of by-products also ↑; competitive supply(alternative pdts by 1 firm), ss of 1 good ↑, must ↓ ss of others

Input costs; COP ↑, profit ↓ w/ same selling price, ss ↓

Govt regulation; taxes, COP ↑, profits ↓, ss ↓; subsidies, COP ↓, profits ↑, ss ↑

Seller no.; no. of sellers ↑ enticed by profits, thus ss ↑

△ quantity supplied/demanded caused by △price, represented by movement along curves >

△ supply/demand caused by △non-price factors, represented by shift of curves

with other conditions remaining the same

non-price determinant of demand causes △dd, shifts dd >

@ original price, qty dd >/< than qty ss(assuming ss constant), resulting in shortage/surplus >

shortage ↑ price/surplus ↓ price >

as price ↑/↓, qty ss ↑/↓ while qty dd ↓/↑ until both qty ss, qty dd equal @ new >/< eqm qty & eqm price

non-price determinant of supply causes △ss, shifts ss >

@ original price, qty ss >/< than qty dd(assuming dd constant), resulting in surplus/shortage >

surplus ↓ price/shortage ↑ price, producers willing to accept < price to clear surplus/ producers > price to incentivise shortage >

as price ↓/↑, qty dd ↑/↓ while qty ss ↓/↑ until both qty dd, qty ss meet @ new eqm qty but </> price

both dd, ss ↑, eqm qty ↑; eqm price uncertain >

dd ↓ > ss ↑; eqm qty ↓, eqm price ↓

dd ↓ < ss ↑; eqm qty ↑, eqm price ↓

dd ↓ = ss ↑; eqm qty ↓, eqm price =

measures degree of responsiveness of quantity demanded due to a change in the price of the same good, ceteris paribus

measures degree of responsiveness of quantity supplied due to a change in the price of the same good, ceteris paribus

0<PED<∞, price elastic; △price causes > than proportionate △qty dd

0<PED<1, price inelastic; △price causes < than proportionate △qty dd

PED=0, perfectly price inelastic; △price causes no change in qty dd

PED=∞, perfectly price elastic, △price causes infinite △qty dd

PED=1, unitary elastic, △price causes proportionate △qty dd

PES>1, price elastic; △price causes > than proportionate △qty ss

PES<1, price inelastic; △price causes < than proportionate △qty ss

PES=0, perfectly price inelastic; △price causes no △qty ss

PES=∞, perfectly price elastic; △price causes infinite △qty ss

Proportion of income spent on good; > proportion spent on good, > price elastic

Availability of substitutes; > no. of subs, closer subs for good, > price elastic

Definition of good; broadly defined goods > price inelastic

Time period; over longer period of time, > subs, consumers' habits △ over time -> good > price elastic

Addictivity of good; addictive goods price inelastic

Spare capacity; spare capacity allows producers better respond to qty ss, > price elastic

Availability, mobility of FOP; > available, > price elastic, > mobile, > price elastic

Level of stocks/inventories; > available/durable stocks, > price elastic

Length(gestation period), complexity of production processes; > complex, takes longer to produce, > price inelastic

when supply ↑, eqm price fall, eqm qty rise>

demand > price elastic, price ↓ by smaller extent

demand > price inelastic, price ↓ by larger extent

when demand ↑, eqm price, eqm qty both rise >

supply > price elastic, small ↑ price lead to > than proportionate ↑ qty ss; shortage eliminated easily

supply > price inelastic, larger ↑ price required to eliminate shortage as qty ss ↑ by < than proportionately

demand price elastic, T_R ↑ when producer reduces price

demand price inelastic, T_R ↓ when producer reduces price

x-axis; units of labour

y-axis; wage

title; figure _: market for labour

market consists of firms demanding for labour & households that supply labour services

determinants of dd: dd for final goods/services produced, level of productivity & skills, experience & qualification

determinants of ss: population size & structure, govt policies on immigration & retirement, society's view on role of women

government setting prices on certain good/service by setting price ceiling(maximum) or price floor(minimum

highest permissible price producer can legally charge, price not allowed to rise above level set >

to protect consumers from higher eqm price, gov sets max price < eqm price >

producers produce @ lower qty while consumers willing, able consume @ higher qty >

leads to shortage as qty dd>qty ss >

consumers able to buy food @ max price better off, consumers unable to buy food @ max price but willing, able buy > max price worse off >

producers sell @ lower price, revenue ↓, may use cheaper FOP to ↓ COP >

produces may lose incentive to produce, close down; loss of jobs, unemployment rate ↑, govt collects < corporate, income taxes >

govt rations goods thru non-pricing rationing, may lead to black market >

long run; quality of good worsen as producers use cheaper FOP >

producers may reallocate resources, further worsening shortage

minimum price set by government above market eqm price deemed too low >

producers produce @ higher qty, consumers only willing, able purchase @ lower qty >

leads to surplus of qty supplied = QDQS >

consumers worse off, buying < of good @ ↑ price per unit; producers better off, producing @ ↑ price, earn ↑ revenue >

govt buys surplus @ min price, all producers benefit; surplus stored/destroyed >

storage expensive, destroying wasteful; opportunity cost due to ↑G >

long run; ↑G results in taxpayers burdened, pay ↑ taxes, producers become complacent due to lack of incentive to be cost efficient, waste resources >

profit-maximising, may overproduce instead of producing other good; enlarges surpluses, misallocates resources

restriction on quantity, employed to control qty of G&S exchanged in market if eqm output too high >

useful as govt directly reduce qty of good to optimal level instead of using price; may be limited by lack of info as gov unaware of optimal level of output >

given inelastic demand, eqm price will rise significantly, good < affordable, policy inequitable

indirect tax; imposed on producer, offsets to consumers; 2 types >

specific tax; fixed sum per unit sold >

ad valorem tax; % of value of good(GST)

direct tax; imposed on consumer, paid directly to govt

tax imposed, producers cut back supply, eqm output ↓, eqm price ↑ >

indirect tax shifts ss left, new eqm price, eqm output >

although producers sell goods @ Pb, must pay govt $PbPs of tax per unit; producers receive Ps per unit >

total tax revenue earned by govt is PbPs x new eqm qty

COP fall, ss of good rise; shifts ss of good to the right >

eqm price falls, eqm qty rises

efficiency; productive efficiency, producers minimise wastage of resources in their productive processes, achieved when the output is produced @ any pt on LRAC curve >

allocative efficiency, MSB=MSC, socially optimum level attained, society's welfare maximised

equity; fairness in distribution of essential G&S

x-axis; quantity

y-axis; cost/benefit

dd=MSB, ss=MSC

-ve externality occurs when MSC>MSB/MPC, society welfare falls

+ve externality occurs when MSB>MSC/MPB, society welfare not maximised as additional units can ↑ welfare further

deadweight loss(net reduction in net benefit to society when not socially optimal); shaded,

+ve externality - triangle b/w Qp<Qs

-ve externality - triangle b/w Qs<Qp

label MEC/MEB as divergence vertical divergence @ Qp

benefits/costs to third party not directly involved in production & consumption of good, such costs not reflected in price of product

MPC; cost borne by firm/consumer in producing/consuming > unit of good

MEC; cost to 3rd party not directly involved in production & consumption of > unit of good, cost not reflected in price

MSC; > SC from last unit of good produced/consumed; MSC=MPC+MEC

MPB; benefit to producer/consumer from production/consumption of 1 > unit of good

MEB; benefit to 3rd party not directly involved in production/consumption of > unit of good, benefit not reflected in price

MSB; additional SB from production/consumption of last unit of good produced/consumed; MSB=MPB+MEB

occurs when free market fails to achieve allocative efficiency of resources

define market failure, -ve/+ve externality >

explain MPC,MPB,MEC/MPC,MPB,MEB >

explain MEC/MEB existence, how leads to divergence b/w MPC<MSC/MPB<MSB as MSC=MPC+MEC/MSB=MPB+MEB >

draw diagram >

explain how market eqm(Qp,MPB=MPC), socially optimal(Qs,MSB=MSC) obtained >

compare free market,socially optimal level(overproduction Qp>Qs/underproduction Qs>Qp), explain deadweight loss(shaded) >

market failure occurs, market mechanism unable to achieve allocative efficiency of resources

gov imposes tax per unit=MEC@Qs >

firms forced to internalise external cost >

increase COP of firms >

MPC of producers ↑, MPC shifts left >

MPC=MSC, Qp decreases to Qs where MPC=MSB(socially optimal)

benefits; generate add. tax revenue, used by gov to fund other policies, correct MF; indirect taxes easily adjusted if gov realises new eqm qty not socially optimal; provide incentives for firms to ↓ external costs to reduce tax burden

limitations; gov finds it difficult to estimate exact tax amount, external costs difficult to define in monetary terms(tangible, intangible costs);

reduce supply, ↑price ↓qty, effectiveness depends on PED(how much);

unintended, larger ↑price, inequity for low-income consumers;

unintended, stump economic activity in poor countries, cant afford ↑cost, < incentive

depends on context, may shift MPC/MPB/MSC to correct MF >

1. ↑ MPC, ↑ COP >

shift MPC left to MSC, reduce Qp to Qs where MSC=MPC >

correct -ve externality

2. ↓ MEC directly, ↓ divergence b/w MSC,MPC >

new Qs closer to Qp >

↓ deadweight loss, reduce market failure

3. ↓ MPB, new market eqm where Qp falls to Qs, corrects MF

4. ↓ demand for good, ↓ MPB >

shift MPB left, new market eqm, consumption Qp falls to Qs, corrects MF

benefits; quick effective to ↓ overall level of production to Qs; avoid youth, most at risk, get addicted; easy for small country

limitations; administration cost of monitoring compliance, enforcement high; opportunity cost; no further action to ↓ problem

ban consumption completely if MEC too high where MSC=MSB=0 >

or control qty produced, reduce MEC

benefit; gov easily adjust quota, correct MF

limitations; quota set inaccurate, difficult accurately estimate Qs; costly, difficult to monitor

gov change taste & preference by raising awareness of MEC >

consumers < willing consume, MPB fall, shift left to decrease Qp to Qs >

corrects MF

benefits; long drawn effects, important for children(most at risk), reduce chances addiction; provide info to consumers to fully understand harmful effects

limitations; longterm policy, results seen only after long time as hard to change mindsets/habits; effectiveness depends on whether consumers willing change behaviour; expensive(money, resources), opportunity cost

(only for carbon emission)

firms able reduce emission; improve productive efficiency, ↓ emission >

↓ MEC, ↓MSC & MPC divergence >

shift MSC right, new Qs closer to Qp >

reduce MF, DWL

firms unable to; cant improve productive efficiency, emit > limit >

must buy permits to emit beyond limit, ↑COP >

↑ MPC, MPC shift left, Qp closer to Qs >

reduce MF

benefits; firms able emit < limit can sell permits to firms unable to, profits act as incentive, entice firms improve production methods; ↓ overall emissions, permit ss ↓, firms ↓ emissions as permit ss falls, permit prices ↑, > firms forced to < emissions

limitations; costs to monitor, measure CO2 emissions; cause unemployment if firms unable make profits from buying profits, shut down; shift production to other countries

to producer; subsidy given = MEB, ↓ COP >

producers > willing, able produce G&S, ↓ price of good >

MPC shift right, consumers ↑ consumption from Qp to Qs >

correct MF, eliminate DWL

to consumer; subsidy given = MEB, consumers > willing, able consume good >

shift MPB to coincide w/ MSB, ↑ consumption from Qp to Qs >

correct MF, eliminate DWL

benefits; easy to implement, extent can be adjusted easily; subsidy can be directly given to low income, improves accessibility to essential G&S

limitations; MEB difficult to measure(tangible,intangible benefits), underestimate/overestimate result in allocative inefficiency; opportunity cost; ppl may still not consume due to other reasons(beliefs)

gov enforces consumption of good, > ppl consume >

↑ MPB, shift MPB right to coincide w/ MSB >

↑ consumption from Qp to Qs, correct MF, eliminate DWL

benefits; goods w/ large MEB, gov deems necessary for entire popn to consume, subsidies alone may not help achieve desired consumption, regulations > effective

limitations; high costs, loopholes in monitoring compliance, enforcement; larger countries > difficult, costly to ensure all citizens obey

joint/direct provision by gov, ↑ market ss of good >

↓ price, marginal cost of consuming good ↓ >

MPC shift right where MPC coincides w/ MPB @ Qs, increase consumption from Qp to Qs

benefits; gov can monitor, ensure standards of G&S is provided @ acceptable level and affordable; presence of gov firms ↑ competition, ensure private firms dont charge high prices

limitations; costly pay wages of gov staff, must have sufficient tax revenue to provide heavily subsidised consumption, incur opportunity cost; not profit motivated, gov firms may be ran inefficiently, waste resources

gov encourage consumers internalise MEB of consuming goods >

change taste & preference of consumers, > willing to consume good >

↑ MPB, shift MPB coincide w/ MSB >

↑ consumption from Qp to Qs >

correct MF, eliminate DWL

benefits; long drawn effects, ↓ need for gov implement other policies for goods w/ high MEB; gov emphasise key messages, show @ high traffic places

limitations; long-term policy, effects only seen after long time; effectiveness depends on recipients response, difficult change mindsets,habits; opportunity cost

non-rivalry; 1 person's consumption doesnt ↓ amount available for others

non-excludable; difficult/impossible exclude non-payers from enjoying good

non-rejectable; unable refuse consumption of good once its produced

intervention not always effective to ↓ DWL >

bureaucracy, inefficiency

> wider reaching, detailed intervention required, > ppl, resources involved, may be used inefficiently; time lags due to bureaucracy; gov aims maximise efficiency, not w/ ↓ costs

poor information

gov may not know full extent of costs, benefits of policies; may deal w/ short-term problems leading to long-term costs

administrative cost

deciding what policies to implement costly, difficult to conclude if >/< intervention required due to normative issues/uncertainties

main aim of gov, improve current allocative efficiency