Microeconomics Notes
Microeconomics
Concepts to study ● Demand And Supply
● Market Equilibrium
● Behavioural Economics
● PED, YED
● PES
● Government Roles
● Market Failure
Notes
Basics
Factors of Production:
1. Land - This includes the land itself, everything that is under and above the land and everything that is found in and under the sea.
Therefore, this category encompasses all natural resources, such as minerals, oil reserves, natural gas, forests, rivers and lakes.
2. Labour - This is the human factor needed for production. It includes the physical and mental effort that people contribute to the
production of goods and services.
3. Capital - This is the physical capital stock used to produce goods and services. It includes all manufactured (human-made) resources,
such as machines, factories, roads and tools. Physical capital is also referred to as capital goods or investment goods.
4. Entrepreneurship - This is a special human skill, possessed by some people, involving the ability to develop new businesses by
organizing the other three factors of production – land, labour and capital – to produce goods and services, and taking the risks of
success or failure of the business, as profit is not guaranteed and investment may be lost.
Remember “CELL”
Opportunity Cost = The next best alternative that is given up when an economic decision is made.
,Free Market Economy
● Resources are privately owned by people and firms.
● All economic decisions are made by consumers and producers through the price mechanism.
Production Possibility Curve Model (PPC)
The model illustrates an imaginary economy that produces only two goods. These goods are produced with a combination of the available
resources that the country has, using the actual state of technology at a specific moment in time. The maximum combinations of goods and
services that the country can produce are drawn on the production possibility curve as shown on Figure 1.
Circular Flow of the Economy
,In this simple two-sector model, households are the owners of all factors of production and offer them to firms in exchange for an income.
Firms hire and organize these factors to produce goods and services, which are then consumed by households.
Households provide the factors of production: land, labor, capital and entrepreneurship. In exchange for their services, firms will pay for each
of these factors of production in different ways:
● For land, they will pay rent.
, ● For labor, they will pay wages.
● For capital, they will pay interest.
● For entrepreneurship, they will pay dividends.
NATIONAL INCOME = NATIONAL OUTPUT = NATIONAL EXPENDITURE
Demand Definition: The quantity demanded of a good or service, that consumers are willing and able to buy at various prices, ceteris paribus
The law of demand: The principle that as price increases the quantity demanded of a product will decrease.
3 Reasons Demand is Negative sloping: Assumptions of demand (HL)
1. Income Effect
When price of a product falls, and consumers income stay the same, we can assure quantity demanded increases ( Price ↓, Real Income ↑ - ↑
Quantity demanded)
2. Substitution effect
When consumers substitute relatively lower -priced goods
- As price increases, goods become more expensive, so consumers buy substitutes to save money
- As price falls, the good becomes relatively cheaper than it’s substitutes, do some consumers buy it in place of the substitutes
3. Law of decreasing marginal utility
Marginal Utility = the benefit gained from consuming one
additional unit of goods and services.
The principle that as additional units of a good or service are
consumed, the marginal utility will decline
Factors Affecting Demand:
- Price
- Advertising
- Price of complements
- Price of substitutes
- Interest rates
- Taxes ( direct)
Microeconomics
Concepts to study ● Demand And Supply
● Market Equilibrium
● Behavioural Economics
● PED, YED
● PES
● Government Roles
● Market Failure
Notes
Basics
Factors of Production:
1. Land - This includes the land itself, everything that is under and above the land and everything that is found in and under the sea.
Therefore, this category encompasses all natural resources, such as minerals, oil reserves, natural gas, forests, rivers and lakes.
2. Labour - This is the human factor needed for production. It includes the physical and mental effort that people contribute to the
production of goods and services.
3. Capital - This is the physical capital stock used to produce goods and services. It includes all manufactured (human-made) resources,
such as machines, factories, roads and tools. Physical capital is also referred to as capital goods or investment goods.
4. Entrepreneurship - This is a special human skill, possessed by some people, involving the ability to develop new businesses by
organizing the other three factors of production – land, labour and capital – to produce goods and services, and taking the risks of
success or failure of the business, as profit is not guaranteed and investment may be lost.
Remember “CELL”
Opportunity Cost = The next best alternative that is given up when an economic decision is made.
,Free Market Economy
● Resources are privately owned by people and firms.
● All economic decisions are made by consumers and producers through the price mechanism.
Production Possibility Curve Model (PPC)
The model illustrates an imaginary economy that produces only two goods. These goods are produced with a combination of the available
resources that the country has, using the actual state of technology at a specific moment in time. The maximum combinations of goods and
services that the country can produce are drawn on the production possibility curve as shown on Figure 1.
Circular Flow of the Economy
,In this simple two-sector model, households are the owners of all factors of production and offer them to firms in exchange for an income.
Firms hire and organize these factors to produce goods and services, which are then consumed by households.
Households provide the factors of production: land, labor, capital and entrepreneurship. In exchange for their services, firms will pay for each
of these factors of production in different ways:
● For land, they will pay rent.
, ● For labor, they will pay wages.
● For capital, they will pay interest.
● For entrepreneurship, they will pay dividends.
NATIONAL INCOME = NATIONAL OUTPUT = NATIONAL EXPENDITURE
Demand Definition: The quantity demanded of a good or service, that consumers are willing and able to buy at various prices, ceteris paribus
The law of demand: The principle that as price increases the quantity demanded of a product will decrease.
3 Reasons Demand is Negative sloping: Assumptions of demand (HL)
1. Income Effect
When price of a product falls, and consumers income stay the same, we can assure quantity demanded increases ( Price ↓, Real Income ↑ - ↑
Quantity demanded)
2. Substitution effect
When consumers substitute relatively lower -priced goods
- As price increases, goods become more expensive, so consumers buy substitutes to save money
- As price falls, the good becomes relatively cheaper than it’s substitutes, do some consumers buy it in place of the substitutes
3. Law of decreasing marginal utility
Marginal Utility = the benefit gained from consuming one
additional unit of goods and services.
The principle that as additional units of a good or service are
consumed, the marginal utility will decline
Factors Affecting Demand:
- Price
- Advertising
- Price of complements
- Price of substitutes
- Interest rates
- Taxes ( direct)
