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Notes by : Caitlin Amber Snyman
Email: caitlin7snyman@gmail.com
ECONOMICS
A2 LEVEL MICROECONOMICS
Basic Economic Ideas and Resource Allocation
Efficient Resource Allocation;
● Productive efficiency: when a firm is producing at the lowest possible cost.
● productive efficiency in perfect competition:
,● Allocative efficiency: where price is equal to marginal cost; firms are producing those
goods and services most wanted by consumers.
● Dynamic efficiency is a form of productive efficiency that benefits a firm over time.
Resources are reallocated in such a way that output increases relative to the increase in
resources
● Pareto optimality: where it is impossible to make someone better off without making
someone else worse off. The PPC shows that one good has to be given up to produce
more of the other. All the points on the graph are pareto efficient including point Y. A
point outside the curve indicates an increase in resources. Pareto inefficiency is caused
when the resources are not used to the complete potential. Point X on the graph is
pareto inefficient.
,Social Costs & Benefits
● Social cost/benefit: is total cost/benefit to whole society due to an economic activity.
(Social cost = Private cost/benefit + External cost/benefit)
● Private cost/benefit: is internal cost/benefit of an economic activity.
● External cost/benefit: is 3rd party cost/benefit of an economic activity.
Market Failure
● Market failure occurs when there is an oversupply or undersupply of goods. Market
failure occurs when:
○ There are externalities present in the market
○ There is provision of merit and demerit goods
○ There is provision of public and quasi-public goods
○ Information failure exists
○ There is adverse selection or moral hazard
○ There is abuse of monopoly power in the market
Externalities
● Externality: where the actions of producers or consumers give rise to side effects on
third parties who are not involved in the action; sometimes referred to as spillover
effects
● Negative/Positive externality: where the side effects have a negative/positive impact and
impose costs/provide benefits to third parties.
● Negative production externalities: These are spillover effects that occur as a result of
production activity.
● Negative consumption externalities: These are created by consumers as a consequence
of their use of products that result in harm to others who are not involved in the
consumption.
● Positive production externalities: These are benefits to third parties and are created by
producers of goods and services.
, ● Positive consumption externalities: Here, the benefits are the spillover effects of
consumption of a good or service on others
Cost-Benefit Analysis
Cost-benefit analysis (CBA): a method for assessing the desirability of a project taking into
account the costs and benefits involved
Shadow price: one that is applied where there is no recognised market price available
Step Advantages Disadvantages
Identification All cost/benefit considered Identification is tough
Monetary Most will have market Shadow prices
evaluation prices
Forecast Future consequences Uncertainty in
estimation
Interpretation All info. useful Bureaucracy
Decision making Investment projects Public expenditure
CBA adds up the total costs of a program or activity and compares
it against its total benefits. The technique assumes that a monetary
value can be placed on all the costs and benefits of a program,
including tangible and intangible returns to other people and
organizations in addition to those immediately impacted. As such,
a major advantage of cost-benefit analysis lies in forcing people to
explicitly and systematically consider the various factors which
should influence strategic choice.
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