Summary

Microeconomics complete summary

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Course
Introduction To Microeconomics (ECON1000)

Institution
York University (Ebor )

Book
Microeconomics for Life

A complete summary of all the chapters from the microeconomics for life book. Can use it for exams as well, helped me get an A in the course. The perfect set of notes to help you prepare for your econ 1000 exams. Has lots of images graphs and highlights to help you learn.

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Uploaded on January 17, 2021
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Chapter 1 - Scarcity And Choice (What’s in economics for you)
• Scarcity - Arises because of limited time, money, and energy = problem
o Can never gave all wants satisfied = smart choices of what to go after vs. what to
give up

• Economics - How individuals, businesses, and government make the best possible
choices to get what they want, and how those choices interact in markets

• Opportunity Cost - The cost of the best alternative given up
o Because of scarcity every choice involves a trade-off → you have to give
something up to get something else
o The true cost of any choice is an opportunity cost
o Opportunity cost is more important than money cost
▪ Ex. Sleep vs. Studying
▪ Money cost = nothing
▪ Ex. Tuition is same for either choice = doesn’t change
benefit-cost comparison for studying or sleeping
▪ Opportunity cost → sleep and not studying = lower grades = a
lower chance getting into medical school = economics opportunity
cost
▪ Ex. Win a free Cuba vs. hard client with a million dollar contract
▪ Money cost = nothing / free → FREE trip to Cuba
▪ Opportunity cost of going to Cuba is a million dollars

• Smart choice = the value of what you get must be greater than the value of what you
give up = get > give up

• Smart choices change as benefits change
o Ex. Sleep vs. Studying
▪ Well prepared for test = sleep isn’t going to cost much (lower marks)
▪ Not well prepared for test = sleep will lose you many marks
o Ex. Free trip to Cuba
▪ Trip might not be worth it to lose sale but free trip
o Incentives → rewards and penalties
o More likely to choose actions with rewards (positive incentives) and avoid actions
with penalties (negative incentives)

• When the economy slows down, incentives to quit school decrease because it’s harder
to find a job (unemployment) and opportunity costs of going to school decrease

• Gains from trade
o Opportunity cost and comparative advantage are key to understand why
specializing and trading makes us better off

, o With voluntary trade, each person feels that what they get is of greater value than
what they give up
o Absolute Advantage - The ability to produce a product or service at a lower
absolute cost (money cost) than another producer
o Comparative Advantage - The ability to produce a product or service at a lower
opportunity cost than another producer
o Opportunity Cost = Give UpGet
o Comparative advantage = key to mutually beneficial gains from trade
o Trade makes individuals better of when each:
▪ Specializes in producing a product or service with comparative advantage
(lower opportunity cost)
▪ Trades for the other product or service
o Production Possibilities Frontier (PPF) graph shows maximum combinations of
products or services that can be produced with existing inputs
▪ Ex. Jill and Marie’s Production Possibilities

Possibility Bread (Loaves/Month) Wood (Logs/Month)

A 50 0

B 40 20

C 30 40

D 20 60

E 10 80

F 0 100

▪ Mutually Beneficial Gains From Trade → Specialization → Jill can
now consume 80 logs of wood and 20 loaves of bread, a
combination that was impossible before trade
▪ X : Inefficiency
▪ Not using resources at maximum
▪ Poor leadership
▪ Economic recession
▪ Fools
▪ Y : Hope / Impossible Combinations
▪ Need more resources, technology, and education for
economic growth

Marie’s PPF

Possibility Bread (Loaves/Month) Wood (Logs/Month)

A 40 0

, B 30 5

C 20 10

D 10 15

E 0 20

▪ Mutually Beneficial Gains From Trade → Specialization → Marie
can consume 20 logs of wood and 20 loaves of bread, a
combination that was impossible before trade
▪ X : Inefficiency
▪ Not using resources at maximum
▪ Poor leadership
▪ Economic recession
▪ Fools
▪ Y : Hope / Impossible Combinations
▪ Need more resources, technology, and education for
economic growth
▪ Opportunity Costs for Jill and Marie

Opportunity Costs of 1 Additional...

Loaf of bread Log of Wood

Jill Gives up 2 logs of wood Gives up ½ loaf of bread

Marie Gives up ½ logs of wood Gives up 2 loaf of bread

Comparative Marie has comparative advantage Jill has comparative advantage
Advantage (lower opportunity cost) in bread (lower opportunity cost) in wood
making chopping

▪ Specialization in graphs
o Specialization (according to comparative advantage) and trade allows each
trader to consume outside of the PPF, an impossible combination without trade
▪ All arguments for freer trade are based on comparative advantage
o Even if one individual has absolute advantage in producing everything at lower
cost, differences in comparative advantage allow mutually beneficial gains from
specializing in trading
o Specialization allows one to consume more than if they were self-sufficient and,
therefore, an improved standard of living
o Gains from trades → comparative advantage → specialize in what you do best
→ trade for the other product

• Thinking like an economist

,o The circular-flow model, like all economic models, focuses attention on what’s
important for understanding and shows smart choices by households,
businesses, and governments interact in markets
o An economic model - Simplified representation of the real world, focusing
attention on what’s important for understanding
▪ Ex. PPF of Jill and Marie → no exchange rate, politics, transportation
costs, etc. → not essential for understanding
o Circular flow model of economic life reduces complexity of the Canadian
economic to 3 sets of players who interact in the markets : households,
businesses, and governments
o Circular flow model :

o Inputs are productive resources → labour, natural resources, capital equipment,
entrepreneurial ability
o Inputs are used to produce products and services

, o Governments set rules of the game and choose to interact in any aspect of the
economy

• Models for microeconomics and macroeconomics
o The 3 Keys summarize the care of microeconomics, providing smart choices in
all areas of life
o Microeconomics - Analyzes choices that individuals in households, individuals in
businesses, and governments make, and how those choices interact in markets
o Macroeconomics - Analyze performance of the whole Canadian economy and
global economy, the combined outcomes of all individual microeconomic choices
o Differences :
▪ Trees (micro) vs. forest (macro)
▪ Smart choices for you (micro) vs. smart choices for all (macro)
▪ Macro = look at the big picture

• 3 Keys Model For Microeconomics → 3 keys to smart choices
1. Choose only when additional benefits are greater than opportunity costs
2. Count only additional benefits and additional opportunity costs
3. Be sure to count all additional benefits and costs including implicit costs and
externalities
o “Margin” = “Marginal” = “Additional”
o Marginal Benefits - Additional benefits from the next choice
o Marginal Opportunity Costs - Additional opportunity costs from the next choice
o Implicit costs - Opportunity costs of investing your own money and time
o Negative (or Positive) Externalities - Costs (or Benefits) that affect others
externally to a choice or a trade

• Is economics a science?
o Science - Asystematic enterprise that builds and organizes knowledge in the
form of testable explanations and predictions about the universe
o Economics uses quantitative expression in mathematics and concise statements
of its models in axioms and derived “theorems” so it looks a lot like the models of
science from physics

• Economic models assume all other things not in the model do not change
o Mental equivalent of controlled experiments in laboratory

• Positive statements
o About what is
o Can be evaluated as true or false by checking facts
o Ex. ↑ Gas price = ↓ Gas quantity used = ↑ Global warming

• Normative Statements
o About what you believe should be
o Involve value judgements
o Cannot be factually checked

,o Ex. To ↓ global warming, we ought to/should :
▪ ↑ Gas prices
▪ Subsidize clean energy sources

,Chapter 2 - Coordinating Demand And Supply
• Weighing benefits, costs, and substitutes
o Your willingness to buy a product or service depends on your ability to pay,
comparatives benefits and costs, and the availability of substitutes

• Preferences - Your wants and their intensities

• Demand - Consumers’ willingness and ability to pay for a product/service
o For any choice, what you’re willing to pay or give up depends on
▪ Cost
▪ Availability of substitutes

• Smart choices are marginal choices
o Key 2 states “count only additional benefits and additional costs”
o Additional benefits mean marginal benefits - not total benefits - and marginal
benefits change the circumstances

• Marginal Benefit
o Additional benefit from a choice
o Changing with circumstances
▪ Ex. Stuck in a dessert → First drink = life saving, but the 10th drink will be
less satisfying; with each additional unit,the satisfaction (marginal benefit)
diminishes

• Marginal Benefits explained the diamond / water paradox
o Willingness to pay depends on marginal benefit, not total benefit
o Water is abundant, marginal benefit is low
▪ Need for life, but price is low
o Diamonds are scarce, marginal benefit is high
▪ Don’t need it to live
o Value of a product or service is determined at the margin
▪ What you’re willing to pay for water is what the last drink of water is worth
to you
▪ What you’re willing to pay for diamonds is what the last diamond was
worth to you

• The Law Of Demand
o The demand curve combines 2 forces - switch to substitutes, and willingness and
ability to pay - determining quality demand, and can be read as a demand curve
and as a marginal benefit curve

,• Quantity Demanded - The amount you actually plan to buy at a given price

• Market Demanded - The sum of demands of all individuals willing and able to buy a
particular product or service

• Law Of Demand - If the price of a product or service rises, quantity demanded
decreases; other things remain the same
o $ ↑ = Quantity Demanded → other things remain the same

• Demand Curve - Shows relationship between price and quantity demanded; all other
things remain the same
o Ex. Market Demand for Water

Row Price ($/m )
3
Quantity Demanded (000’s of m /month)
3

A $1.00 5

B $1.50 4

C $2.00 3

D $2.50 2

E $3.00 1

, ▪ Demand Curve
▪ Downwards slope from top left to bottom right
▪ At lower prices, the quantity demanded is a larger number; at
higher process, the quantity demanded is a smaller number
▪ 2 ways to read a demand curve
▪ Demand Curve
▪ Read over and down
▪ From any prive go over to the demand curve and down to
the quantity demanded
▪ Marginal Benefit Curve
▪ Read up and over
▪ Rom any quantity on the horizontal axis, go up to the
marginal benefit curve and over to the price

• What can change demand?
o Quantity Demand changes on;y with change in price
o All other influences on consumer choice change demand

• Demand is a catch-all term summarizing all possible influences on consumers’
willingness and ability to pay for a particular product or service
o Increase in demand
▪ Increase in consumers’ willingness and ability to pay
▪ Rightward shift of demand curve
o Decrease in demand
▪ Decreases in consumers’ willingness and ability to pay
▪ Leftward shift of demand curve
o Increase Demand Curve Ex. → More Consumers Increase the Market Demand
for Water

Price Quantity Demanded (000’s Quantity Demanded with more households
($/m )
3
of m /month)
3
(000’s of m /month)
3

$1.00 5 10

$1.50 4 9

$2.00 3 8

$2.50 2 7

$3.00 1 6

, • Demand changes with changes in
o Preferences
▪ Ex. Advertising gets you to buy more at any given price willingly and able
to = ↑ in demand
o Income
▪ ↑ in income = ↑ in normal goods = ↑ in demand
▪ Normal Goods - Goods where demand ↑ when income ↑
▪ ↑ in income = ↓ in inferior goods
▪ Ex. Public transit for driving a car, shoppers drug mart running
shoes for better (now) affordable shoes
▪ If income ↓ = can’t afford anything else ; Inferior product ↑ = income ↓
▪ Ex. Buy Mac & Cheese over (expensive) restaurants
o Number Of Consumers
▪ ↑ number of consumers = sum of all individuals demand curves of all
individual consumers = a bigger number at any given price = ↑ demand
o Expectations Of Future Prices
▪ Ex. Expect gas prices to ↑ on the weekend (in the future) = buy today
before $ ↑ = ↑ demand today
o Price Of Related Goods
▪ Substitutes
▪ Goods to be used in place of each other
▪ Ex. Different apps, wine for beer / alcohol
▪ Ex. $ ↑ for wine = more willing to buy beer at any given
price
▪ ↑ in $ of substitute = ↑ in demand for other product
▪ Complementary
▪ Ex. Hamburgers & hamburger buns, hotdogs & fries
▪ Price of one of those changes = affect the demand for the
other related complementary product
▪ Ex. ↓ in $ of hamburger bun = ↑ demand of hamburger and
hamburger bun

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