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Final Notes - Microeconomics
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In depth notes for every week of first year Microeconomics. Used these notes in my first year to get a 90+. completely cumulative of the entire course. Covers all basic Microeconomics topics

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  • December 15, 2022
  • 41
  • 2021/2022
  • Class notes
  • Hossain
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Chapter 1 notes - What is Economics?
September 15, 2021 5:05 PM

• Scarcity: our inability to satisfy all of our wants
• Everyone is affected by scarcity, as we all want more than we currently have
• Because of scarcity, we must make choices about how to spend or utilize our limited
resources
• Incentive: a reward that encourages an action and or a penalty that discourages one
• Economics: the social science that studies the choices that individuals, businesses,
governments, and entire societies make as they cope with scarcity and the incentives
that influence and reconcile those choices
○ Microeconomics: the study of the choices that individuals and businesses make,
the way these choices interact in markets, and the influence of governments
○ Macroeconomics: the study of the performance of the national economy and • What we produce varies across countries and
the global economy changes over time, but what determines these
patterns of production?
The 2 big economic questions: • How we produce is described by the technologies
• How do choices end up determining what, how, and for whom goods and services are and resources we use, factors of production
produced? • Who consumes the goods and services depends
• Do choices made in the pursuit of self interest also promote the social interest? on peoples earnings
• Goods and services: objects that people value and produce to satisfy wants
○ Goods: physical objects
• Self interest: the choices that you think are
○ Services: tasks performed for people the best ones available for you
• Factors of production: the productive resources used to produce goods and services, • Social interest: choices that are the best
grouped into 4 categories ones for society as a whole
○ Land: the gifts of nature that we use to produce goods and services, natural
resources
▪ Oil, gas, water, wood, fish, etc.
○ Labour: the work time and work effort that people devote to producing goods
and services
▪ Human capital: affects quality of labour, the knowledge and skill someone
possesses
○ Capital: the tools, equipment, buildings, and other constructions that businesses
use to produce goods and services
▪ Financial capital: money, liquid assets, plays a role in enabling businesses
to buy physical capital
○ Entrepreneurship: The human resource that organizes the other 3 factors of
production
▪ Ideas and leadership fall in this category, entrepreneurs make decisions on
what and how to produce
• People earn incomes by selling the services of the factors of production they own • Globalization: the expansion of international
○ Land earns rent, labour earns wages, capital earns interest, and trade, borrowing and lending, and investment
entrepreneurship earns profit • While this brings expanded production and
• Efficient: a term describing resource use if it is not possible to make someone better job opportunity for some workers, it kills
off without making someone else worse off Canadian jobs, so is it for social interest?
• Fair shares vs social interest are not the same, because someone benefitting less than • Information-age monopolies: like Microsoft, a
someone else is still everyone benefitting, so the situation is still efficient monopoly company in the information/tech
• Here are 4 examples of controversies with relation to self vs social interest industry in the last 40 years
• An absence of competition gave Microsoft
The Economic Way of Thinking the power to sell Windows at prices far
• 6 key ideas that explain the economic way of thinking above the cost of production
• A choice is a trade-off • Though it served my self interest, providing
○ trade-off: an exchange—giving up one thing to get something else me with a cellphone and more, did the
○ When you choose how to spend your Saturday night, you face a trade-off information revolution serve social interest?
between studying and hanging out with your friends • Is burning fossil fuels and advancing global
• Making a rational choice warming for our luxuries in social interest?
○ Rational choice: one that compares costs and benefits and achieves the greatest • Do banks giving out loans and borrowing serve
benefit over cost for the person making the choice social interest or self?
• Benefit and preferences
○ Benefit: the gain or pleasure that it brings and is determined by preferences—by
what a person likes and dislikes and the intensity of those feelings
○ Economists measure benefit as the most that a person is willing to give up to get
something, You are willing to give up a lot to be in school
• Cost
○ opportunity cost: the highest-valued alternative that must be given up to get it
○ the opportunity cost of being in school is all the good things that you can’t afford
and don’t have the spare time to enjoy
• How much? Choosing at the margin
○ Margin: when a choice is made by comparing a little more of something with its • For example, your marginal benefit from
cost, it is made at the margin one more night of study before a test is the
○ The benefit that arises from an increase in an activity is called marginal benefit boost it gives to your grade.
○ The opportunity cost of an increase in an activity is called marginal cost • For you, the marginal cost of studying one
• Choices respond to incentives more night is the cost of not spending that


Microeconomics Page 1

, cost, it is made at the margin one more night of study before a test is the
○ The benefit that arises from an increase in an activity is called marginal benefit boost it gives to your grade.
○ The opportunity cost of an increase in an activity is called marginal cost • For you, the marginal cost of studying one
• Choices respond to incentives more night is the cost of not spending that
○ The central idea of economics is that we can predict the self-interested choices night on your favourite leisure activity.
that people make by looking at the incentives they face
○ People undertake those activities for which marginal benefit exceeds marginal
cost; they reject options for which marginal cost exceeds marginal benefit

Economics as social science and a policy tool
• Economics is both a social science and a toolkit for advising on policy decisions
• As social scientists, economists seek to discover how the economic world works
• In pursuit of this goal, like all scientists, economists distinguish between positive and
normative statements
○ A positive statement is about what is. It says what is currently believed about
the way the world operates • Ex. Are computers getting cheaper because
▪ A central task of economists is to test positive statements about how the people are buying them in greater
economic world works and to weed out those that are wrong quantities? Or are people buying
○ A normative statement is about what ought to be. It depends on values and computers in greater quantities because
cannot be tested. Policy goals are normative statements they are getting cheaper? Or is some third
• Economists are particularly interested in positive statements about cause and effect factor causing both the price of a computer
• Economic model: a description of some aspect of the economic world that includes to fall and the quantity of computers
only those features that are needed for the purpose at hand bought to increase?
○ Ex. an economic model of a cellphone network might include features such as
the prices of calls, the number of cellphone users, and the volume of calls, But
not cellphone colours and ringtones.

Economists in the economy
• The economic way of thinking is a basic tool for running a successful business
• The jobs of economics majors can generally be described as collecting and analyzing
data on the production and use of resources, goods, and services; predicting future
trends; and studying ways of using resources more efficiently
• Examples of economics majors jobs include:
○ Market research analyst: works with data on buying patterns to forecast success
○ Financial analyst: studies trends of interest rates and stock prices, predicting
returns and the cost of borrowing
○ Budget analyst: keeps track of an organizations cash flow to make budgets




Microeconomics Page 2

,Chapter 2 notes - The Economic Problem
September 15, 2021 9:52 PM

Production possibilities and Opportunity Cost
• Production possibilities frontier (PPF): the boundary between those combinations of goods and
services that can be produced and those that cannot
○ Ex. Ppf for cola and pizza shown here, shows limits of production of the goods given technology
and resources available
○ Production is possible at any point inside the orange area or on the frontier, Points outside the
frontier are unattainable
○ Points inside the frontier, such as point Z, are inefficient because resources are wasted or
misallocated
• Production efficiency: a situation where goods and services are produced at the lowest possible cost
○ This occurs at all points on ppf line, and inside this line is inefficient because we are giving up
more than necessary of one good to produce the same amount of the other
• Production inside the PPF is inefficient because resources are either unused or misallocated or both
○ Resources are unused when they are idle but could be working
○ Resources are misallocated when they are assigned to tasks for which they are not the best
match
▪ Ex. assign skilled pizza chefs to work in a cola factory and skilled cola workers to cook pizza
in a pizzeria, We could get more pizzas and more cola if we reassigned these workers to the
tasks that more closely match their skills
• Recall Trade-off: what you face when you make a choice on PPF, since our resources are always limited
○ This limit in what we can produce forces us to pick (make a trade off) along the ppf
○ Ex. When Parliament wants to spend more on education, it faces a trade -off: more education for
less national defence or border security
• The idea of opportunity cost is brought to life by a PPF
○ Along the PPF, there are only two goods, so there is only one alternative forgone: some quantity
of the other good
▪ To produce more pizzas we must produce less cola. The opportunity cost of producing an • if we move from point C to
additional pizza is the cola we must forgo point D, we produce an
• Opportunity cost is the ratio of the decrease in the quantity produced of one good divided by the additional 1 million pizzas
increase of quantity produced in another good but 3 million fewer cans of
○ Because it’s a ratio, the opportunity cost of producing an additional can of cola is the inverse of cola. The additional 1
the opportunity cost of producing an additional pizza million pizzas cost 3 million
• The outward-bowed shape of the PPF reflects increasing opportunity cost cans of cola
○ The PPF is bowed outward because resources are not all equally productive in all activities
▪ Ex. People with many years of experience working for PepsiCo are good at producing cola
but not very good at making pizzas, if we move some of these people from PepsiCo to
Domino’s, we get a small increase in the quantity of pizzas but a large decrease in the
quantity of cola

Using Resources Efficiently
• Allocative efficiency: a situation where goods and services are produced at the lowest possible cost
and in the quantities that provide the greatest possible benefit
○ The point on the PPF that is preferred above all other points
○ Point where marginal benefit equals marginal cost
• Marginal cost: opportunity cost of producing one more unit of a good
○ We calculate marginal cost from the slope of the PPF, As the quantity of pizzas produced
increases, the PPF gets steeper and the marginal cost of a pizza increases
○ Ex. Marginal cost of third million pizzas is 3 million cans of cola
▪ The red dot in part (b) indicates that the marginal cost of a pizza is 3 cans of cola when 2.5
million pizzas are produced. Each black dot in part (b) is interpreted in the same way
• marginal benefit: the benefit received from consuming one more unit of from a good or service
○ This benefit is subjective, and depends on peoples preferences - likes and dislikes
○ Measured by the most people are willing to pay for an additional unit - the quantity of other
goods and services people are willing to forgo
▪ The more we have of a good or service, the smaller its marginal benefit and the less we are
willing to pay - we like variety
• marginal benefit curve: a curve that shows the relationship between the marginal benefit from a good
and the quantity consumed of that good
• Ex. The greater the quantity of pizzas produced, the smaller is the marginal benefit (MB) from pizza—
the less cola people are willing to give up to get an additional pizza
○ But the greater the quantity of pizzas produced, the greater is the marginal cost (MC) of a pizza —
the more cola people must give up to get an additional pizza
○ When marginal benefit equals marginal cost, resources are being used efficiently

Not needed
Gains from Trade
• Specialization: producing only one or a few goods to trade with others
• Comparative advantage: someone possesses this in an activity if they can perform it at a lower
opportunity cost than anyone else
• Absolute advantage: someone who is more productive than others
• Ex. Joe can produce a salad in 2 mins and a smoothie in 10 mins, while Liza can produce a salad in 2
mins and a smoothie in 2 mins
○ So, In an hour, joe can make up to 6 smoothies or 30 salads, or somewhere in between, and Liza
can make up to 30 of either smoothies or salads, or something in between
○ Since the opportunity cost of joe making a salad is only 1/5 a smoothie, while Liza's is one, Joe
has a comparative advantage in making salads
○ Meanwhile, Liza has a comparative advantage in making smoothies, since her opportunity cost of
producing another is 1 salad, while Joe's is 5
• In the example above, both Joe and Liza can benefit from trade
○ If they both only produce the product in which they have a comparative advantage, and trade for
the others product after, both will gain
• They then agree on a price (based on salads per smoothie) to sell to each other, which is 2 salads per
smoothie
○ For Liz, that is a good deal because she can produce a smoothie at a cost of 1 salad and sell it to
Joe for 2 salads. It is also a good deal for Joe because he can produce a salad at a cost of 1/5 of a
smoothie and sell it to Liz for 1/2 a smoothie
▪ This combines marginal cost and benefit with comparative advantages to get gains
• See the chart to see how much they trade to each other and notice they both have more than they
started with
• Although Liza and Joe both initially produce outside their initial PPF, they are actually producing at the
economy's PPF
○ If both Liz and Joe produce only salads, the economy produces 60 salads per hour at point A. Liz
produces the first 30 at a cost of 1 salad per smoothie
○ When Liz is using all her resources to produce smoothies, the economy is at point B. At this point,
both are specializing in the good for which they have a comparative advantage
○ If the economy is to produce more than 30 smoothies, Joe must join Liz in producing some, But
the 31st smoothie, produced by Joe, costs 5 salads. If all its resources are used to produce
smoothies, the economy produces 36 per hour at point C

Economic Growth
• Economic growth: the expansion of production possibilities
○ Increases standard of living but doesn't overcome scarcity
○ Comes from technological change and capital accumulation
• Technological change: development of new goods and better ways of producing
• Capital accumulation: growth of capital resources, including human resources
• Economic growth through these have vastly expanded production possibilities
• To continue to expand production possibilities we must devote resources to technological change and



Microeconomics Page 3

, • To continue to expand production possibilities we must devote resources to technological change and
capital accumulation, leaving fewer resources to produce goods
○ Opportunity cost of pizzas in future is fewer pizzas today
• Economic growth is what determines if a country is advanced or poor, or it is at least a factor
○ Ex. In Ethiopia, producing enough food is priority, and food has high marginal benefit, so
agriculture is a lot of their production
○ As a country invests in Capital, and production possibilities expand, they move away from
agriculture into industry, and in rich countries, services

Not needed
Economic Coordination
• For 7 billion people to specialize and produce millions of different goods and services, individual
choices must somehow be coordinated
○ Two competing coordination systems have been used: central economic planning and markets
▪ Central economic planning doesn't work because economic planners don’t know people’s
production possibilities and preferences
○ Decentralized coordination works best, but to do so it needs four complementary social
institutions. They are: firms, Markets, property rights, and money
• Firm: an economic unit that hires factors of production and organizes them to produce goods and
services
○ Coordinate lots of economic activity like renting, labour buying/selling goods
• Market: an arrangement that enables buyers and sellers to get information do business
○ Ex. World oil market is network of consumers brokers, etc
• Property rights: social arrangements that govern the ownership and use of anything that people value
○ Real property: land, buildings, equipment
○ Financial property: stocks, bonds, cash
○ Intellectual property: creative effort, intangible, books, music, inventions, etc
• Money: commodity or token that is generally acceptable as payment
○ Theoretically, people can exchange goods for goods, but money makes trading efficient
• Trading in markets creates circular flow of expenditures and incomes as seen in picture • The counter clockwise red flows are real flows—
the flow of factors of production from households
○ Households choose the quantities of labour, land, capital, and entrepreneurial services to sell or
to firms and the flow of goods and services from
rent to firms in exchange for wages, rent, interest, and profits firms to households.
○ Firms choose the quantities of factors of production to hire and the quantities of goods and • The clockwise green flows are the payments for
services to produce the red flows. They are the flow of incomes from
• Markets coordinate decisions through price adjustments firms to households and the flow of expenditure
○ Ex. To make buying and selling plans the same, either more hamburgers must be offered for sale on goods and services from households to firms.
or buyers must scale down their appetites
○ A rise in the price of a hamburger produces this outcome as It encourages producers to offer
more hamburgers for sale and encourages some people to change their lunch plans
○ When the price is right, buying plans and selling plans match
○ Or pretend there are too many hamburgers for a limited number of buyers
○ in this case, more hamburgers must be bought or fewer hamburgers must be offered for sale
○ A fall in price achieves this, as it encourages people to buy more burgers and firms to produce
less




Microeconomics Page 4

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