Microeconomics Essential Notes
The Economic Problem
Types of Economics Statements:
1. Normative Statements – subjective and contains a value judgement
2. Positive Statements – objective statement that can be tested by referring
to the available evidence
Factors of Production
Capital – equipment, factories and schools
Enterprise – this refers to the people (entrepreneurs)
Land – non-renewable energy, renewable, materials water and animals
Labour – the work done by those people who contribute the production process
Production Possibility Frontiers (PPF)
This shows the maximum possible output, and indicates a various combination
of two products when you consider the factors of production of just two types of
products.
Margins
Marginal cost – the additional cost of producing an extra unit
Traditional economic theory assumes that economic agents want to maximise
their utility and behave rationally
Utility – Benefit, happiness, satisfaction
Marginal utility is additional utility gained from an extra unit
Total utility is the total utility gained from consuming all units
As more units are consumed, the marginal utility will decrease and the total
utility will increase.
Diminishing marginal utility says that, as you consume more of a good, the extra
utility from an additional unit will decrease. As quantity increases price-
decreasing tis explain the demand curve
A rational consumer will choose to consume a good at the point where marginal
utility = price.
Free Market Economy vs. Planned Economy
, Free Market economies allocate resources based on supply and demand and the
price mechanism (Anything can be sold at any price). E.g. Hong Kong
Planned/ Command economy is when the government decides how resources
should be allocated. E.g. North Korea
Advantages Disadvantages
Free Market Efficiency- As any product can be Inequalities- Market economies can
bought and sold, only those of the lead to a huge difference in income.
best value will be in demand. So Many people will say it is unfair and
firms have an incentive to try to people who are unable to work would
make goods in as efficient a way as receive no income
possible. Non-profitable good may not be made-
Choice- the incentives for For example drugs to treat rare
innovation can lead to an increase medical conditions may never sell
in choice for consumers. enough for a firm to make any profit
Entrepreneurship- the rewards for Monopolies-Successful businesses can
good ideas can make become the only supplier of a product
entrepreneurs a lot of money.
Planned/ Maximise welfare- the government Poor decision making- A lack of
Command can prevent inequality and information means that governments
redistribute income fairly. They may make poor decisions about needs
can also ensure the production of to be produced
goods that people need and are Restricted choice- Consumers have a
beneficial to society. limited choice in what they can
Low unemployment- The consume and firms will be told hat to
government can try and provide make
everyone will a job and a salary Lack of risk taking and efficiency-
Prevent monopolies- the market Government-owned firms have no
dominance of monopolies can be incentive to increase efficiency, take
prevented by the government. risks or innovate because they don’t
need to make profit.
Behavioural Economics
,Behavioural economies challenged the traditional economic theory.
The traditional economic theory believe that all economic agents:
Are utility maximises
Are rational
Whereas behavioural economists say they are not realistic, as they believe social,
psychological and emotional factors impact decision-making.
Many consumers don’t act rationally due to
1. Bounded rationality refers to our limited mental processing abilities
when making decisions
2. Bounded self-control – our limited ability to control ourselves
3. Altruism – when we are about the utility of other people, motivated by
fairness e.g. donating to charity
Cognitive Biases – Predictable mental errors when decisions making
These include:
1. Social norms – behaviour of their social group e.g. stopping smoking if
their friends don’t smoke
2. Anchoring bias – consumers are influenced too much by the first piece of
information they see
3. Availability bias – influenced too much by the most recent piece of
information they see
4. Rules of thumb – when consumers make mental shortcuts to make a
decision quickly.
Choice architecture is where an individual’s choice is influenced by adapting the
way the choice is presented.
Types of choices:
1. Nudge –does not restrict choices but does try to influence people’s
behaviour. E.g. only smoking in certain areas
2. Framing – how a choice is presented to you. (Same information but
presented in a different way)
3. Default Choice – when someone is automatically enrolled into a certain
choice
4. Restricted Choice – when consumer are still able to choose between
options, but the difficulty of choosing some options is much higher than
others
5. Mandated Choice – When people are legally required to make a decision
Competitive Markets
, Demand
Demand – the quantity of a good/ service that consumers are willing and able to
buy at a given price in a given time period.
Factors affecting demand:
Population
Advertising
Substitute goods (price)
Income
Fashion
Interest rates
Compliments (prices)
PED, IED and XED
Elasticity – is the proportionate responsiveness of a second variable to an initial
change in the first variable
PED IED XED
What it PED measures the IED measures the extent to XED measures the extent to which
measures? responsiveness of which the DEMAND for a good demand for ONE GOOD changes in
DEMAND to a change in changes in response to a response to a change in the PRICE of
PRICE change in INCOME ANOTHER GOOD.
Formula % Change in quantity demand % Change in quantity demand % Change in Quantity demand for Product A
% Change in price % Change in income % Change in price of Product B
< Or > PED is always negative If the figure is positive, If two goods are substitutes
because demand falls as it is called a normal their XED will be positive
price increases for most good. E.g. TV, mobile If they’re complements their
phone.
goods. XED will be negative
If it is positive and > 1,
If PED is: it is a luxury normal The higher the positive figure,
Greater than 1 it is good. E.g. Exotic the more closely substitutable
Elastic demand holidays, fancy the two products are.
Less than 1 it is restaurants, super cars.
inelastic demand If the figure is negative,
Equal it is unit it is called an INFERIOR
good. E.g. bus, own-
elasticity
brand goods, tinned
meats.
Factors influencing PED
The Economic Problem
Types of Economics Statements:
1. Normative Statements – subjective and contains a value judgement
2. Positive Statements – objective statement that can be tested by referring
to the available evidence
Factors of Production
Capital – equipment, factories and schools
Enterprise – this refers to the people (entrepreneurs)
Land – non-renewable energy, renewable, materials water and animals
Labour – the work done by those people who contribute the production process
Production Possibility Frontiers (PPF)
This shows the maximum possible output, and indicates a various combination
of two products when you consider the factors of production of just two types of
products.
Margins
Marginal cost – the additional cost of producing an extra unit
Traditional economic theory assumes that economic agents want to maximise
their utility and behave rationally
Utility – Benefit, happiness, satisfaction
Marginal utility is additional utility gained from an extra unit
Total utility is the total utility gained from consuming all units
As more units are consumed, the marginal utility will decrease and the total
utility will increase.
Diminishing marginal utility says that, as you consume more of a good, the extra
utility from an additional unit will decrease. As quantity increases price-
decreasing tis explain the demand curve
A rational consumer will choose to consume a good at the point where marginal
utility = price.
Free Market Economy vs. Planned Economy
, Free Market economies allocate resources based on supply and demand and the
price mechanism (Anything can be sold at any price). E.g. Hong Kong
Planned/ Command economy is when the government decides how resources
should be allocated. E.g. North Korea
Advantages Disadvantages
Free Market Efficiency- As any product can be Inequalities- Market economies can
bought and sold, only those of the lead to a huge difference in income.
best value will be in demand. So Many people will say it is unfair and
firms have an incentive to try to people who are unable to work would
make goods in as efficient a way as receive no income
possible. Non-profitable good may not be made-
Choice- the incentives for For example drugs to treat rare
innovation can lead to an increase medical conditions may never sell
in choice for consumers. enough for a firm to make any profit
Entrepreneurship- the rewards for Monopolies-Successful businesses can
good ideas can make become the only supplier of a product
entrepreneurs a lot of money.
Planned/ Maximise welfare- the government Poor decision making- A lack of
Command can prevent inequality and information means that governments
redistribute income fairly. They may make poor decisions about needs
can also ensure the production of to be produced
goods that people need and are Restricted choice- Consumers have a
beneficial to society. limited choice in what they can
Low unemployment- The consume and firms will be told hat to
government can try and provide make
everyone will a job and a salary Lack of risk taking and efficiency-
Prevent monopolies- the market Government-owned firms have no
dominance of monopolies can be incentive to increase efficiency, take
prevented by the government. risks or innovate because they don’t
need to make profit.
Behavioural Economics
,Behavioural economies challenged the traditional economic theory.
The traditional economic theory believe that all economic agents:
Are utility maximises
Are rational
Whereas behavioural economists say they are not realistic, as they believe social,
psychological and emotional factors impact decision-making.
Many consumers don’t act rationally due to
1. Bounded rationality refers to our limited mental processing abilities
when making decisions
2. Bounded self-control – our limited ability to control ourselves
3. Altruism – when we are about the utility of other people, motivated by
fairness e.g. donating to charity
Cognitive Biases – Predictable mental errors when decisions making
These include:
1. Social norms – behaviour of their social group e.g. stopping smoking if
their friends don’t smoke
2. Anchoring bias – consumers are influenced too much by the first piece of
information they see
3. Availability bias – influenced too much by the most recent piece of
information they see
4. Rules of thumb – when consumers make mental shortcuts to make a
decision quickly.
Choice architecture is where an individual’s choice is influenced by adapting the
way the choice is presented.
Types of choices:
1. Nudge –does not restrict choices but does try to influence people’s
behaviour. E.g. only smoking in certain areas
2. Framing – how a choice is presented to you. (Same information but
presented in a different way)
3. Default Choice – when someone is automatically enrolled into a certain
choice
4. Restricted Choice – when consumer are still able to choose between
options, but the difficulty of choosing some options is much higher than
others
5. Mandated Choice – When people are legally required to make a decision
Competitive Markets
, Demand
Demand – the quantity of a good/ service that consumers are willing and able to
buy at a given price in a given time period.
Factors affecting demand:
Population
Advertising
Substitute goods (price)
Income
Fashion
Interest rates
Compliments (prices)
PED, IED and XED
Elasticity – is the proportionate responsiveness of a second variable to an initial
change in the first variable
PED IED XED
What it PED measures the IED measures the extent to XED measures the extent to which
measures? responsiveness of which the DEMAND for a good demand for ONE GOOD changes in
DEMAND to a change in changes in response to a response to a change in the PRICE of
PRICE change in INCOME ANOTHER GOOD.
Formula % Change in quantity demand % Change in quantity demand % Change in Quantity demand for Product A
% Change in price % Change in income % Change in price of Product B
< Or > PED is always negative If the figure is positive, If two goods are substitutes
because demand falls as it is called a normal their XED will be positive
price increases for most good. E.g. TV, mobile If they’re complements their
phone.
goods. XED will be negative
If it is positive and > 1,
If PED is: it is a luxury normal The higher the positive figure,
Greater than 1 it is good. E.g. Exotic the more closely substitutable
Elastic demand holidays, fancy the two products are.
Less than 1 it is restaurants, super cars.
inelastic demand If the figure is negative,
Equal it is unit it is called an INFERIOR
good. E.g. bus, own-
elasticity
brand goods, tinned
meats.
Factors influencing PED
