Summary economics
Week 1
Lecture 1: consumer behaviour
Scarcity, cost-benefit analysis, rational choice
Ceteris paribus clause: all other factors in model remain the same
Utility/benefit
Difficult to measure utility
Marginal utility: extra benefit of adding one extra unit of product
Law of diminishing marginal utility
Marginal rate of substitution (MRS): The MRS of energy drinks for bananas represents the
number of bananas which the consumer has to give up for the gain of one additional energy
drink so that his or her level of his or her utility (satisfaction) remains the same
> ∆y ÷ ∆x = −p1 ÷ p2 > law of diminishing MRS: MRS decreases along indifference curve
Budget line: what can you afford to buy
Y = p1q1 + p2q2
Q2 = (y/p2)-(p1/p2) x Q1
Y = budget
P = price, Q = quantity
-p1/p2 = slope (relative price)
> price change: relative price and thus slope changes
> income change: shift of budget line (right with higher and left with lower income)
Best affordable consumption point
Intersection indifference curve and budget line > derive from demand curve
,Lecture 2: demand, elasticities and producer behaviour
Demand curve > high price = low quantity, low price is high quantity
Demand depends on:
1. Price > change will be among curve
2. Substitutions and complements
3. Income (or expected income)
4. Preferences
5. Population (number of consumers)
6. Expected price
Decrease of price:
1. Substitution effect: As prices rise, consumers will replace more expensive items with less
costly alternatives. Conversely, as the relative price of a good falls, consumers will purchase
more of it relative to substitute goods
2. Income effect: increase in real income as result of fall in price > higher indifference curve
> normal goods: income and substitution effect result in demand increase
> inferior goods: negative income and positive substitution effect
The income effect is the change in demand for a good or service caused by a change in a consumer's purchasing
power resulting from a change in real income. This change can be the result of a rise in wages etc., or because
existing income is freed up by a decrease or increase in the price of a good that money is being spent on.
3. An inferior good is a good whose demand decreases when consumer income rises (or
demand increases when consumer income decreases), unlike normal goods, for which the
opposite is observed
The income effect of a rise in the hourly wage rate
Positive income effect: When higher wages cause people to want to work more hours in
order to reach a target / desired income
Negative income effect: When a target income has been reached and people prefer
spending more time on leisure rather than earning more income
The substitution effect of a rise in the hourly wage rate
A rise in the real wage increases the opportunity cost of leisure
Therefore higher wages will always cause people to be incentivised to work longer hours via
the substitution effect
But the income effect may work in the opposite direction
, Price elasticity:
- Percentage change in q / percentage change in p
- Types of EP:
1. Complete inelastic: EP=0
2. Inelastic demand 0<EP>-1
3. Unit elastic EP: EP=-1
4. Elastic EP: EP<-1
Price elasticity Meat (2013-2014)
Price increase in %:
(5.09-4.45)/4.77 x 100 = 13.4
Demand decrease in %
(548-585)/566.5 x 100 = -6.5
Price elasticity: -0.065/0.134 = -0.485
Income elasticity
Percentage change in q / percentage change in income
1. Luxury goods: EP>1
2. Necessary goods: 0<EP<1
3. Inferior goods: EP<0
Law of increasing and diminishing return of labour
A concept in economics that if one factor of production (number of workers, for example) is
increased while other factors (machines and workspace, for example) are held constant, the output
per unit of the variable factor will eventually diminish.
Total costs: total variable costs / total fixed costs
Readings week 1
Factors of production:
1. Land (natural resources)
> income: rent
2. Labour: work time and effort > Quality depends on human capital > skills/knowledge
> income: wages
3. Capital
> income: interest
4. Entrepreneurship
> income: profit
Types of prices: in money, or relative (compared to other products) > basket to compare
Elasticity along a linear demand curve - Demand is unit elastic at the mid-point on the curve -
Demand is elastic at prices above mid-point - Demand is inelastic at prices below mid-point
Total revenue: price x sold quantity
Week 1
Lecture 1: consumer behaviour
Scarcity, cost-benefit analysis, rational choice
Ceteris paribus clause: all other factors in model remain the same
Utility/benefit
Difficult to measure utility
Marginal utility: extra benefit of adding one extra unit of product
Law of diminishing marginal utility
Marginal rate of substitution (MRS): The MRS of energy drinks for bananas represents the
number of bananas which the consumer has to give up for the gain of one additional energy
drink so that his or her level of his or her utility (satisfaction) remains the same
> ∆y ÷ ∆x = −p1 ÷ p2 > law of diminishing MRS: MRS decreases along indifference curve
Budget line: what can you afford to buy
Y = p1q1 + p2q2
Q2 = (y/p2)-(p1/p2) x Q1
Y = budget
P = price, Q = quantity
-p1/p2 = slope (relative price)
> price change: relative price and thus slope changes
> income change: shift of budget line (right with higher and left with lower income)
Best affordable consumption point
Intersection indifference curve and budget line > derive from demand curve
,Lecture 2: demand, elasticities and producer behaviour
Demand curve > high price = low quantity, low price is high quantity
Demand depends on:
1. Price > change will be among curve
2. Substitutions and complements
3. Income (or expected income)
4. Preferences
5. Population (number of consumers)
6. Expected price
Decrease of price:
1. Substitution effect: As prices rise, consumers will replace more expensive items with less
costly alternatives. Conversely, as the relative price of a good falls, consumers will purchase
more of it relative to substitute goods
2. Income effect: increase in real income as result of fall in price > higher indifference curve
> normal goods: income and substitution effect result in demand increase
> inferior goods: negative income and positive substitution effect
The income effect is the change in demand for a good or service caused by a change in a consumer's purchasing
power resulting from a change in real income. This change can be the result of a rise in wages etc., or because
existing income is freed up by a decrease or increase in the price of a good that money is being spent on.
3. An inferior good is a good whose demand decreases when consumer income rises (or
demand increases when consumer income decreases), unlike normal goods, for which the
opposite is observed
The income effect of a rise in the hourly wage rate
Positive income effect: When higher wages cause people to want to work more hours in
order to reach a target / desired income
Negative income effect: When a target income has been reached and people prefer
spending more time on leisure rather than earning more income
The substitution effect of a rise in the hourly wage rate
A rise in the real wage increases the opportunity cost of leisure
Therefore higher wages will always cause people to be incentivised to work longer hours via
the substitution effect
But the income effect may work in the opposite direction
, Price elasticity:
- Percentage change in q / percentage change in p
- Types of EP:
1. Complete inelastic: EP=0
2. Inelastic demand 0<EP>-1
3. Unit elastic EP: EP=-1
4. Elastic EP: EP<-1
Price elasticity Meat (2013-2014)
Price increase in %:
(5.09-4.45)/4.77 x 100 = 13.4
Demand decrease in %
(548-585)/566.5 x 100 = -6.5
Price elasticity: -0.065/0.134 = -0.485
Income elasticity
Percentage change in q / percentage change in income
1. Luxury goods: EP>1
2. Necessary goods: 0<EP<1
3. Inferior goods: EP<0
Law of increasing and diminishing return of labour
A concept in economics that if one factor of production (number of workers, for example) is
increased while other factors (machines and workspace, for example) are held constant, the output
per unit of the variable factor will eventually diminish.
Total costs: total variable costs / total fixed costs
Readings week 1
Factors of production:
1. Land (natural resources)
> income: rent
2. Labour: work time and effort > Quality depends on human capital > skills/knowledge
> income: wages
3. Capital
> income: interest
4. Entrepreneurship
> income: profit
Types of prices: in money, or relative (compared to other products) > basket to compare
Elasticity along a linear demand curve - Demand is unit elastic at the mid-point on the curve -
Demand is elastic at prices above mid-point - Demand is inelastic at prices below mid-point
Total revenue: price x sold quantity
