University of Sydney BUSS1040
BUSS1040
Economics for Business Decision Making
All products are subject to copyright law. Individual papers, notes and products may contain third party copyright materials. No products are to be
reproduced (photocopied, scanned, printed) or communicated between parties (friends, note shares) except in accordance with the Copyright Act 1968.
Products are provided for individual use only and should not be shared or used for any other purposes than individual needs. Products must not be placed on
school intranet, the internet or any mobile device. Breaches of these conditions will see legal repercussions in accordance with the Copyright Act 1968
,Lecture 1: Key concept and comparative advantage
What is economics
Definition
- The study of choice under scarcity, the study of how people use resources and respond to
incentives or the study of decision-making
- Market: a place where buyers and sellers of a particular good or service meet
- Microeconomics: focuses on individuals' behavior (consumers, firms, government) in markets.
Key ideas
- Scarcity: resources are limited, so not all wants, and needs can be met
Opportunity cost
Definition: the trade-offs between two values due to scarcity.
- “The value of the next best-foregone alternative”
- Only take the next-best choice into consideration, the third best choice is irrelevant
Total opportunity cost = explicit cost + implicit cost
- Explicit cost: direct payments for inputs for factors of product
- Implicit cost: value of foregone opportunities
o E.g. forgone wages, interest earnings
- Sunk cost: costs that have been incurred and cannot be recovered
Marginal analysis
Definition: additional or extra
- Marginal benefits: additional benefit when we buy an additional unit
- Marginal cost: additional cost incurred through buying an additional unit
- Depends on each person’s preference
- Marginal analysis allows us to examine the behaviour of individuals in the market
- Compare MB with MC
o MB > MC = should do
o MB < MC = should not do
o MB = MC: max utility (= consumer max satisfaction)
1
,Correlation & causation
- Correlation: an association between two or more factors whereby the factors are observed to be
increasing/decreasing together or moving in opposite directions.
- Causation: a change in one variable causes a change in another variable
→ Distinguish between correlation and causation: correlation does NOT imply a causation
Ceteris paribus
Definition: other things equal
- Economists examine the impact of one change at a time, holding everything else constant
o If we are interested in the impact of the change in the price of a good on the quantity
demanded, we analyse this holding income, and any other relevant variables constant.
The gains from trade
Definition: trade = economic interaction
- Trade is beneficial to both parties because it allows them to specialize in industries where they
have the comparative advantage, and trade with others for things that would cost them more to
produce personally.
- This principle holds even if one party has the absolute advantage in the production of both
goods; what matters is the comparative advantages or opportunity costs of the parties.
Gains from exchange:
- Allocate goods to those who value them most
- Improvements in income, production, and satisfaction owing to the exchange of goods or services
- Pareto improving: either both partiers are better of or no one is worse off
Absolute and comparative advantage
- Party A has an absolute advantage over Party B in the production of a good if, for a given amount
of resources, A can produce a greater number of that good than B.
- Party A has a comparative advantage over Party B in the production of a good if A's OC is lower
than B's OC.
→ Each person specialises in the good in which they have a comparative advantage
- Because economic pie increased in size everyone can be better off
o each party can obtain the good for a lower price than his/her opportunity cost
o E.g. Robert buys each meal for 3/10 basket of laundry while his opportunity cost of
cooking is 1/2 a basket of laundry.
2
, Week 2: Firm behaviour: production, costs and supply
Chapter 7: Production and costs
The short run and the long run
What is a firm?
- A firm, using the available technology, converts inputs – labour, machinery (often called capital),
natural resources (typically called land) – into output that is sold in the marketplace.
- Typically, a firm will require more than one input to produce its final output.
Short run: the period of time during which at least one of the factors of production is fixed
Long run: all factors are variable
Note
- the short run and the long run is not defined in relation to a set period of time, but rather in
relation to how long it takes for all of a firm’s inputs to become variable
Production
- Production function: shows the relationship between quantity of inputs used and the (maximum)
quantity of output produced, given the state of technology
- The production function can be represented by 𝑞 = 𝑓(𝐿)
Marginal product
Definition: refers to how output responds when there is an increase in the number of that input used
- Diminishing marginal product: MP becomes progressively smaller
o Short-run concept since the capacity constraint that drives the phenomenon will only exist
if at least one output is fixed
- Increasing marginal product: MP becomes larger
If we are given the production equation, we can use differentiation to find the MP of an input with respect
to L
We can differentiate again to work out how MP changes as we increase the quantity of an input.
- MP’ > 0 → increasing marginal product
3
BUSS1040
Economics for Business Decision Making
All products are subject to copyright law. Individual papers, notes and products may contain third party copyright materials. No products are to be
reproduced (photocopied, scanned, printed) or communicated between parties (friends, note shares) except in accordance with the Copyright Act 1968.
Products are provided for individual use only and should not be shared or used for any other purposes than individual needs. Products must not be placed on
school intranet, the internet or any mobile device. Breaches of these conditions will see legal repercussions in accordance with the Copyright Act 1968
,Lecture 1: Key concept and comparative advantage
What is economics
Definition
- The study of choice under scarcity, the study of how people use resources and respond to
incentives or the study of decision-making
- Market: a place where buyers and sellers of a particular good or service meet
- Microeconomics: focuses on individuals' behavior (consumers, firms, government) in markets.
Key ideas
- Scarcity: resources are limited, so not all wants, and needs can be met
Opportunity cost
Definition: the trade-offs between two values due to scarcity.
- “The value of the next best-foregone alternative”
- Only take the next-best choice into consideration, the third best choice is irrelevant
Total opportunity cost = explicit cost + implicit cost
- Explicit cost: direct payments for inputs for factors of product
- Implicit cost: value of foregone opportunities
o E.g. forgone wages, interest earnings
- Sunk cost: costs that have been incurred and cannot be recovered
Marginal analysis
Definition: additional or extra
- Marginal benefits: additional benefit when we buy an additional unit
- Marginal cost: additional cost incurred through buying an additional unit
- Depends on each person’s preference
- Marginal analysis allows us to examine the behaviour of individuals in the market
- Compare MB with MC
o MB > MC = should do
o MB < MC = should not do
o MB = MC: max utility (= consumer max satisfaction)
1
,Correlation & causation
- Correlation: an association between two or more factors whereby the factors are observed to be
increasing/decreasing together or moving in opposite directions.
- Causation: a change in one variable causes a change in another variable
→ Distinguish between correlation and causation: correlation does NOT imply a causation
Ceteris paribus
Definition: other things equal
- Economists examine the impact of one change at a time, holding everything else constant
o If we are interested in the impact of the change in the price of a good on the quantity
demanded, we analyse this holding income, and any other relevant variables constant.
The gains from trade
Definition: trade = economic interaction
- Trade is beneficial to both parties because it allows them to specialize in industries where they
have the comparative advantage, and trade with others for things that would cost them more to
produce personally.
- This principle holds even if one party has the absolute advantage in the production of both
goods; what matters is the comparative advantages or opportunity costs of the parties.
Gains from exchange:
- Allocate goods to those who value them most
- Improvements in income, production, and satisfaction owing to the exchange of goods or services
- Pareto improving: either both partiers are better of or no one is worse off
Absolute and comparative advantage
- Party A has an absolute advantage over Party B in the production of a good if, for a given amount
of resources, A can produce a greater number of that good than B.
- Party A has a comparative advantage over Party B in the production of a good if A's OC is lower
than B's OC.
→ Each person specialises in the good in which they have a comparative advantage
- Because economic pie increased in size everyone can be better off
o each party can obtain the good for a lower price than his/her opportunity cost
o E.g. Robert buys each meal for 3/10 basket of laundry while his opportunity cost of
cooking is 1/2 a basket of laundry.
2
, Week 2: Firm behaviour: production, costs and supply
Chapter 7: Production and costs
The short run and the long run
What is a firm?
- A firm, using the available technology, converts inputs – labour, machinery (often called capital),
natural resources (typically called land) – into output that is sold in the marketplace.
- Typically, a firm will require more than one input to produce its final output.
Short run: the period of time during which at least one of the factors of production is fixed
Long run: all factors are variable
Note
- the short run and the long run is not defined in relation to a set period of time, but rather in
relation to how long it takes for all of a firm’s inputs to become variable
Production
- Production function: shows the relationship between quantity of inputs used and the (maximum)
quantity of output produced, given the state of technology
- The production function can be represented by 𝑞 = 𝑓(𝐿)
Marginal product
Definition: refers to how output responds when there is an increase in the number of that input used
- Diminishing marginal product: MP becomes progressively smaller
o Short-run concept since the capacity constraint that drives the phenomenon will only exist
if at least one output is fixed
- Increasing marginal product: MP becomes larger
If we are given the production equation, we can use differentiation to find the MP of an input with respect
to L
We can differentiate again to work out how MP changes as we increase the quantity of an input.
- MP’ > 0 → increasing marginal product
3
