YEAR 12
MICRO NOTES
,CONTENTS
Chapter 1: Economic Foundations............................................................................................... 4
WHAT IS A SOCIAL SCIENCE?...................................................................................................................................4
POSITIVE AND NORMATIVE ECONOMICS.............................................................................................................4
THE BASIC ECONOMIC PROBLEM...........................................................................................................................6
OPPORTUNITY COST...................................................................................................................................................7
THE PRODUCTION POSSIBILITY CURVE................................................................................................................8
THE PPC AND OPPORTUNITY COST.......................................................................................................................10
SPECIALISATION AND EXCHANGE.......................................................................................................................13
ADAM SMITH...............................................................................................................................................................14
ECONOMIC SYSTEMS................................................................................................................................................16
KEY ECONOMIC THINKERS: HAYEK, KEYNES & MARX..................................................................................17
ADVANTAGES AND DISADVANTAGES OF THE MARKET SYSTEM...............................................................19
RESOLVING WHAT, HOW AND FOR WHOM........................................................................................................20
CHAPTER 2: THE DETERMINATION OF PRICES............................................................................21
THE RATIONAL CONSUMER & UTILITY...............................................................................................................21
THE LAW OF DIMINISHING MARGINAL UTILITY..............................................................................................21
THE IRRATIONAL CONSUMER: AN INSIGHT INTO BEHAVIOURAL ECONOMICS......................................23
THE DEMAND CURVE...............................................................................................................................................25
Exceptions to the Law of Demand..................................................................................................................................27
THE SUPPLY CURVE..................................................................................................................................................27
THE EQUILIBRIUM PRICE.........................................................................................................................................29
CHANGES IN EQUILIBRIUM.....................................................................................................................................30
CONSUMER SURPLUS...............................................................................................................................................31
PRODUCER SURPLUS................................................................................................................................................32
1
,CHAPTER 3: ELASTICITY............................................................................................................. 34
PRICE ELASTICITY OF DEMAND............................................................................................................................34
INCOME ELASTICITY OF DEMAND........................................................................................................................41
CROSS ELASTICITY OF DEMAND...........................................................................................................................43
PRICE ELASTICITY OF SUPPLY...............................................................................................................................46
CHAPTER 4: TAXES AND SUBSIDIES........................................................................................... 50
INDIRECT TAXES........................................................................................................................................................50
SPECIFIC / PER UNIT TAXES....................................................................................................................................51
AD VALOREM TAXES................................................................................................................................................53
SUBSIDIES....................................................................................................................................................................54
CHAPTER 5: MARKETS IN ACTION.............................................................................................. 57
THE LABOUR MARKET.............................................................................................................................................57
THE DEMAND FOR LABOUR....................................................................................................................................57
THE ELASTICITY OF DEMAND FOR LABOUR.....................................................................................................59
THE SUPPLY OF LABOUR.........................................................................................................................................59
THE ELASTICITY OF SUPPLY FOR LABOUR........................................................................................................61
THE MARKET WAGE RATE......................................................................................................................................62
CURRENT LABOUR MARKET ISSUES....................................................................................................................62
THE SHARE MARKET................................................................................................................................................63
CHAPTER 6: MARKET FAILURE AND NEGATIVE EXTERNALITIES..................................................66
INTRODUCTION TO MARKET FAILURE................................................................................................................66
NEGATIVE EXTERNALITIES....................................................................................................................................66
NEGATIVE EXTERNALITIES FROM PRODUCTION.............................................................................................67
GOVERNMENT INTERVENTION..............................................................................................................................68
chAPTER 7: POSITIVE EXTERNALITIES........................................................................................73
INTRODUCTION TO POSITIVE EXTERNALITIES.................................................................................................73
ILLUSTRATING POSITIVE EXTERNALITIES.........................................................................................................74
GOVERNMENT INTERVENTION..............................................................................................................................75
INTRODUCTION TO COST BENEFIT ANALYSIS..................................................................................................76
COST-BENEFIT ANALYSIS.......................................................................................................................................76
USES AND LIMITATIONS..........................................................................................................................................78
CHAPTER 8: PUBLIC GOODS....................................................................................................... 81
2
, INTRODUCTION TO PRIVATE AND PUBLIC GOODS..........................................................................................81
GOVERNMENT INTERVENTION..............................................................................................................................82
CHAPTER 8: INFORMATION FAILURE.......................................................................................... 83
INTRODUCTION..........................................................................................................................................................83
INFORMATION FAILURE..........................................................................................................................................83
ASSYMETRIC INFORMATION..................................................................................................................................84
CHAPTER 10: FACTOR IMMOBILITY............................................................................................. 86
INTRODUCTION..........................................................................................................................................................86
FACTOR MOBILITY....................................................................................................................................................87
GOVERNMENT INTERVENTION..............................................................................................................................89
CHAPTER 11: UNSTABLE COMMODITY MARKETS.......................................................................91
INTRODUCTION..........................................................................................................................................................91
AGRICULTURAL AND COMMODITIES PRICES....................................................................................................91
BUFFER STOCK SCHEMES........................................................................................................................................92
MINIMUM PRICE SCHEMES.....................................................................................................................................94
MAXIMUM PRICE SCHEMES....................................................................................................................................95
CHAPTER 12: GOVERNMENT FAILURE........................................................................................98
CHAPTER 13: THE BIRTH & GROWTH OF FIRMS (AN INTRODUCTION TO BUSINESS ECONOMICS)
.................................................................................................................................................. 99
INTRODUCTION TO THE BIRTH AND GROWTH OF FIRMS...............................................................................99
TYPES OF FIRMS.........................................................................................................................................................99
THE MOTIVES FOR GROWTH................................................................................................................................100
INTERNAL GROWTH................................................................................................................................................101
EXTERNAL GROWTH...............................................................................................................................................102
THE REASON FOR THE EXISTENCE OF SMALL FIRMS...................................................................................104
DEMERGING..............................................................................................................................................................106
EVALUATION OF MERGERS..................................................................................................................................107
3
MICRO NOTES
,CONTENTS
Chapter 1: Economic Foundations............................................................................................... 4
WHAT IS A SOCIAL SCIENCE?...................................................................................................................................4
POSITIVE AND NORMATIVE ECONOMICS.............................................................................................................4
THE BASIC ECONOMIC PROBLEM...........................................................................................................................6
OPPORTUNITY COST...................................................................................................................................................7
THE PRODUCTION POSSIBILITY CURVE................................................................................................................8
THE PPC AND OPPORTUNITY COST.......................................................................................................................10
SPECIALISATION AND EXCHANGE.......................................................................................................................13
ADAM SMITH...............................................................................................................................................................14
ECONOMIC SYSTEMS................................................................................................................................................16
KEY ECONOMIC THINKERS: HAYEK, KEYNES & MARX..................................................................................17
ADVANTAGES AND DISADVANTAGES OF THE MARKET SYSTEM...............................................................19
RESOLVING WHAT, HOW AND FOR WHOM........................................................................................................20
CHAPTER 2: THE DETERMINATION OF PRICES............................................................................21
THE RATIONAL CONSUMER & UTILITY...............................................................................................................21
THE LAW OF DIMINISHING MARGINAL UTILITY..............................................................................................21
THE IRRATIONAL CONSUMER: AN INSIGHT INTO BEHAVIOURAL ECONOMICS......................................23
THE DEMAND CURVE...............................................................................................................................................25
Exceptions to the Law of Demand..................................................................................................................................27
THE SUPPLY CURVE..................................................................................................................................................27
THE EQUILIBRIUM PRICE.........................................................................................................................................29
CHANGES IN EQUILIBRIUM.....................................................................................................................................30
CONSUMER SURPLUS...............................................................................................................................................31
PRODUCER SURPLUS................................................................................................................................................32
1
,CHAPTER 3: ELASTICITY............................................................................................................. 34
PRICE ELASTICITY OF DEMAND............................................................................................................................34
INCOME ELASTICITY OF DEMAND........................................................................................................................41
CROSS ELASTICITY OF DEMAND...........................................................................................................................43
PRICE ELASTICITY OF SUPPLY...............................................................................................................................46
CHAPTER 4: TAXES AND SUBSIDIES........................................................................................... 50
INDIRECT TAXES........................................................................................................................................................50
SPECIFIC / PER UNIT TAXES....................................................................................................................................51
AD VALOREM TAXES................................................................................................................................................53
SUBSIDIES....................................................................................................................................................................54
CHAPTER 5: MARKETS IN ACTION.............................................................................................. 57
THE LABOUR MARKET.............................................................................................................................................57
THE DEMAND FOR LABOUR....................................................................................................................................57
THE ELASTICITY OF DEMAND FOR LABOUR.....................................................................................................59
THE SUPPLY OF LABOUR.........................................................................................................................................59
THE ELASTICITY OF SUPPLY FOR LABOUR........................................................................................................61
THE MARKET WAGE RATE......................................................................................................................................62
CURRENT LABOUR MARKET ISSUES....................................................................................................................62
THE SHARE MARKET................................................................................................................................................63
CHAPTER 6: MARKET FAILURE AND NEGATIVE EXTERNALITIES..................................................66
INTRODUCTION TO MARKET FAILURE................................................................................................................66
NEGATIVE EXTERNALITIES....................................................................................................................................66
NEGATIVE EXTERNALITIES FROM PRODUCTION.............................................................................................67
GOVERNMENT INTERVENTION..............................................................................................................................68
chAPTER 7: POSITIVE EXTERNALITIES........................................................................................73
INTRODUCTION TO POSITIVE EXTERNALITIES.................................................................................................73
ILLUSTRATING POSITIVE EXTERNALITIES.........................................................................................................74
GOVERNMENT INTERVENTION..............................................................................................................................75
INTRODUCTION TO COST BENEFIT ANALYSIS..................................................................................................76
COST-BENEFIT ANALYSIS.......................................................................................................................................76
USES AND LIMITATIONS..........................................................................................................................................78
CHAPTER 8: PUBLIC GOODS....................................................................................................... 81
2
, INTRODUCTION TO PRIVATE AND PUBLIC GOODS..........................................................................................81
GOVERNMENT INTERVENTION..............................................................................................................................82
CHAPTER 8: INFORMATION FAILURE.......................................................................................... 83
INTRODUCTION..........................................................................................................................................................83
INFORMATION FAILURE..........................................................................................................................................83
ASSYMETRIC INFORMATION..................................................................................................................................84
CHAPTER 10: FACTOR IMMOBILITY............................................................................................. 86
INTRODUCTION..........................................................................................................................................................86
FACTOR MOBILITY....................................................................................................................................................87
GOVERNMENT INTERVENTION..............................................................................................................................89
CHAPTER 11: UNSTABLE COMMODITY MARKETS.......................................................................91
INTRODUCTION..........................................................................................................................................................91
AGRICULTURAL AND COMMODITIES PRICES....................................................................................................91
BUFFER STOCK SCHEMES........................................................................................................................................92
MINIMUM PRICE SCHEMES.....................................................................................................................................94
MAXIMUM PRICE SCHEMES....................................................................................................................................95
CHAPTER 12: GOVERNMENT FAILURE........................................................................................98
CHAPTER 13: THE BIRTH & GROWTH OF FIRMS (AN INTRODUCTION TO BUSINESS ECONOMICS)
.................................................................................................................................................. 99
INTRODUCTION TO THE BIRTH AND GROWTH OF FIRMS...............................................................................99
TYPES OF FIRMS.........................................................................................................................................................99
THE MOTIVES FOR GROWTH................................................................................................................................100
INTERNAL GROWTH................................................................................................................................................101
EXTERNAL GROWTH...............................................................................................................................................102
THE REASON FOR THE EXISTENCE OF SMALL FIRMS...................................................................................104
DEMERGING..............................................................................................................................................................106
EVALUATION OF MERGERS..................................................................................................................................107
3
