ECON1001 Introductory Microeconomics
ALL Notes Final Revision everything you
need to know University of Sydney
, 1. Key concepts and comparative
advantage
What is economics?
Economics is the study of choice under scarcity. Scarcity is faced by consumers, businesses, government,
countries and so on.
Choice involves consideration of explicit cost (e.g. $3.50 coffee) and implicit cost (value of 2nd
best alternative: giving up staying in bed)
Opportunity cost = explicit cost + implicit cost
Key issues that need to be addressed in an economy are:
1. What to produce
2. How to produce it; and
3. Who should get what is made
In a modern economy, these questions are typically resolved in the ‘market.’ A market is a place
where buyers and sellers of a particular good or service meet.
Markets can look quite different, from a traditional bazaar to an online trading site.
BUT government still play a critical role in markets, imposing taxes and regulations.
Our focus is on the behaviour of individuals (consumers, firms, government) in markets.
Scarcity and opportunity cost
Resources are limited, so that not all wants can be met – this is scarcity.
For example, if an individual uses her money to buy one product, she cannot use it to buy
something else
The opportunity cost of any choice is the value of the next best forgone alternative.
For example, a consumer buys product sandwich. Her next preferred product is sushi. Given this,
the opportunity cost of buying a sandwich is foregoing sushi
The same concept applies to how an individual spends their time or other resources
Opportunity costs include both explicit costs and implicit costs.
Explicit costs are costs that involve direct payment (would be considered costs by an
accountant)
Implicit costs are opportunities that are foregone that do not involve explicit cost
Example: Stephen decides to go to university, and his next best option is to work at a construction site
and earn $80K over the year.
, The explicit costs are those that Stephen must directly pay to go to university, such as student
fees, the cost of textbooks and so on
The implicit costs are the opportunities that Stephen must forego – that is, working at the
construction site and earning $80K
Opportunity cost does not include unrecoverable or sunk costs.
For example, if a business spent $100m on an advertising campaign last year, it cannot get that money
(or the effort spent) now by making a different decision.
Marginal analysis
Marginal cost: increase in cost caused by producing one additional unit.
Marginal benefit: increase in benefit caused by consuming on additional unit.
Mathematical tools:
o Derivatives, differentials, differential calculus, calculus used to calculate marginal values
o Algebra
Marginal analysis is useful as it allows us to examine the behaviour of individuals in the market.
If the marginal benefit (MB) of an activity is greater than its marginal cost (MC), an agent is
better off doing that activity; if the MB is less than the MC, they are worse off if they do.
Marginal analysis is a recurring theme in economics.
Ceteris paribus
Ceteris paribus = keeping everything else constant (change things one by one and see the effects).
In the real world, many things change at the same time (prices, income, tastes, taxes etc.) To
isolate the impact of one factor, economists examine the impact of one change at a time, holding
everything else constant – this is called ceteris paribus.
If we are interested in the impact of the change in the price of a good on the quantity
demanded, we analysis this holding income, and any other relevant variables constant
Correlation and causation
Correlation – when two or more factors are observed to be moving up, down in the opposite
directions together
Causation – a change in one variable brings about, or causes, a change in another variable
o Economic theory, providing a framework for how the world works, allows us to
distinguish between correlation and causation
, Trade & production possibility frontier (PPF)
The gains from trade
A basic tenant of economics is that trade makes people better off – it is beneficial for the two parties
implied.
Trade helps allocate goods to those who value them most. This is the gains from exchange.
Example: Baz has a bike he values at $10; Chloe is willing to pay up to $100 for the bike.
o Provided the price is between $10 and $100 both parties can be made better off by
trading the bike
o Note, the price determines how the gains from trade are split; a higher price suits the
seller, a lower price the buyer
Trade also allows people to take advantage of gains from specialisation, reducing overall costs of
producing and increasing output.
To show this, we first introduce the concept of the PPF.
Production possibility frontier (PPF)
PPF tells us what can be produced and what cannot.
A PPF graphs the output than an individual (or a country) can produce for a particular set of
resources
Suppose that Australia can use its resources given the state of technology to produce either
good X or good Y, or some combination of both
o This information can be shown on a graph
The PPF traces out combinations of the quantity of two
C
goods (X and Y) that can be produced if all resources are
used. Point B is attainable, as is A. Point C is
unattainable given current technology and resources.
ALL Notes Final Revision everything you
need to know University of Sydney
, 1. Key concepts and comparative
advantage
What is economics?
Economics is the study of choice under scarcity. Scarcity is faced by consumers, businesses, government,
countries and so on.
Choice involves consideration of explicit cost (e.g. $3.50 coffee) and implicit cost (value of 2nd
best alternative: giving up staying in bed)
Opportunity cost = explicit cost + implicit cost
Key issues that need to be addressed in an economy are:
1. What to produce
2. How to produce it; and
3. Who should get what is made
In a modern economy, these questions are typically resolved in the ‘market.’ A market is a place
where buyers and sellers of a particular good or service meet.
Markets can look quite different, from a traditional bazaar to an online trading site.
BUT government still play a critical role in markets, imposing taxes and regulations.
Our focus is on the behaviour of individuals (consumers, firms, government) in markets.
Scarcity and opportunity cost
Resources are limited, so that not all wants can be met – this is scarcity.
For example, if an individual uses her money to buy one product, she cannot use it to buy
something else
The opportunity cost of any choice is the value of the next best forgone alternative.
For example, a consumer buys product sandwich. Her next preferred product is sushi. Given this,
the opportunity cost of buying a sandwich is foregoing sushi
The same concept applies to how an individual spends their time or other resources
Opportunity costs include both explicit costs and implicit costs.
Explicit costs are costs that involve direct payment (would be considered costs by an
accountant)
Implicit costs are opportunities that are foregone that do not involve explicit cost
Example: Stephen decides to go to university, and his next best option is to work at a construction site
and earn $80K over the year.
, The explicit costs are those that Stephen must directly pay to go to university, such as student
fees, the cost of textbooks and so on
The implicit costs are the opportunities that Stephen must forego – that is, working at the
construction site and earning $80K
Opportunity cost does not include unrecoverable or sunk costs.
For example, if a business spent $100m on an advertising campaign last year, it cannot get that money
(or the effort spent) now by making a different decision.
Marginal analysis
Marginal cost: increase in cost caused by producing one additional unit.
Marginal benefit: increase in benefit caused by consuming on additional unit.
Mathematical tools:
o Derivatives, differentials, differential calculus, calculus used to calculate marginal values
o Algebra
Marginal analysis is useful as it allows us to examine the behaviour of individuals in the market.
If the marginal benefit (MB) of an activity is greater than its marginal cost (MC), an agent is
better off doing that activity; if the MB is less than the MC, they are worse off if they do.
Marginal analysis is a recurring theme in economics.
Ceteris paribus
Ceteris paribus = keeping everything else constant (change things one by one and see the effects).
In the real world, many things change at the same time (prices, income, tastes, taxes etc.) To
isolate the impact of one factor, economists examine the impact of one change at a time, holding
everything else constant – this is called ceteris paribus.
If we are interested in the impact of the change in the price of a good on the quantity
demanded, we analysis this holding income, and any other relevant variables constant
Correlation and causation
Correlation – when two or more factors are observed to be moving up, down in the opposite
directions together
Causation – a change in one variable brings about, or causes, a change in another variable
o Economic theory, providing a framework for how the world works, allows us to
distinguish between correlation and causation
, Trade & production possibility frontier (PPF)
The gains from trade
A basic tenant of economics is that trade makes people better off – it is beneficial for the two parties
implied.
Trade helps allocate goods to those who value them most. This is the gains from exchange.
Example: Baz has a bike he values at $10; Chloe is willing to pay up to $100 for the bike.
o Provided the price is between $10 and $100 both parties can be made better off by
trading the bike
o Note, the price determines how the gains from trade are split; a higher price suits the
seller, a lower price the buyer
Trade also allows people to take advantage of gains from specialisation, reducing overall costs of
producing and increasing output.
To show this, we first introduce the concept of the PPF.
Production possibility frontier (PPF)
PPF tells us what can be produced and what cannot.
A PPF graphs the output than an individual (or a country) can produce for a particular set of
resources
Suppose that Australia can use its resources given the state of technology to produce either
good X or good Y, or some combination of both
o This information can be shown on a graph
The PPF traces out combinations of the quantity of two
C
goods (X and Y) that can be produced if all resources are
used. Point B is attainable, as is A. Point C is
unattainable given current technology and resources.
