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Summary Economics 214
Complete set of summary from the textbook Microeconomics and behaviour. Includes all important theory, graphs and examples.
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Economics 214:Microeconomics and Behaviour
Chapter 1: Thinking like an economist
Cost benefit approach to decisions
Should I do activity x?
Determine all the costs and benefits
If the benefit obtained from doing the activity outweighs the cost, keep doing the
activity
When the cost becomes greater than the activity, stop
Benefit is a hypothetical magnitude
Cost consists of all resources sacrificed in order to do activity x
Common pitfalls
1. Ignoring implicit costs
An implicit cost, or opportunity cost, is the value of the next best alternative not
chosen
E.g. 1. When choosing between an iPhone or Samsung, the opportunity cost of
the iPhone would be the Samsung, and the opportunity cost of the Samsung
would be the iPhone
E.g. 2. When choosing between studying and relaxing, one must weigh up the
opportunity cost.
The benefit of studying is getting a good mark, the con is the
unpleasantness of studying
The benefit of relaxing is the activity, the con is getting a bad mark
If the benefit of getting a high mark is greater than the benefit of
relaxing, one will have to sacrifice relaxing, making it an opportunity
cost, in order to study
2. Failing to ignore sunk costs
Sunk costs are costs that are beyond recovery at the moment a decision is
made
As the cost is unrecoverable, it should be ignored when making a decision
E.g. Treating all costs as the same, instead of splitting them into fixed and
variable
However, people will often have a ‘get your money’s worth’ mind-set
If a buffet is free for certain people and others have to pay, the ones
that have to pay will generally eat a lot more than the people who didn’t
pay
They should only be motivated by how hungry they are, and eat until
satisfied
, However, unless they ‘get their money’s worth’, they will be unsatisfied
3. Measuring cost and benefit as a proportion, instead as an absolute amount
E.g. If a toaster costs R200 at a store close to you, but costs R160 a bit further
away, would you drive to save the R40?
Many would weigh up the cost as a percentage, stating that a further
journey could save 20%, and then go to the further store
But if a TV costing R8000 at the store close to you, and R7960 further
away, would you still make the journey
While the decrease is only 0.5%, it has the same absolute value as
before
If you were willing to travel further to save R40 on the toaster, you
should also be willing to travel further to save R40 on the TV
Marginal cost vs. marginal benefit
Marginal cost: The increase in total cost that results from carrying out one additional unit of
the activity
Marginal benefit: The increase in total benefit that results from carrying out one additional
unit of an activity
Possible combinations:
1. MB > MC
If the marginal benefit is greater than the marginal cost, more of the activity
should be done
2. MB < MC
If the marginal benefit is less than the marginal cost, the activity should be
stopped
3. MB = MC
When the marginal benefit is equal to the marginal cost, the perfect quantity
of the activity performed has been reached
If less is performed, the person can be made better off by carrying out an
additional unit
If more is performed, they will experience decreasing total benefit
Positive and normative questions
Positive question: A question about the consequences of specific policies or institutional
arrangements
A correct answer can be determined based on relevant data
Positive statement: A factual statement, does to have to be right, but can be tested
to determine a correct answer
E.g. That chair is blue
,Normative question: A question about which policies or institutional arrangements lead to
the best outcomes
A question on what should be done, based on your specific morals and beliefs
Has no right or wrong answer
Normative statement: A statement on how something ought to be
E.g. That chair should be blue
Macro vs. Micro-economics
Macro-economics: The study of broad aggregations of markets
Micro-economics: The study of individual choices, and the study of group behaviour in
individual markets
, Chapter 2: Supply and demand
Supply and demand curves
Market: Any place or situation where buyers and sellers, or their agents, make contact to
negotiate prices and quantities of a good or service to be traded
Real price: The price of a good relative to the prices of other goods and services
Prices on supply and demand curves are shown at the real price
Law of demand: When the price of a product falls, people demand larger quantities of it
(Reasons covered in Chapter 4)
The demand curve is based off this law
It is a graphical explanation of the various cost-benefit calculations buyers make
when considering a good
The negative slope of the demand curve tells us that fewer people will be able to
meet the cost-benefit criterion
Law of supply: When the price of a product rises, firms offer more of it for sale (Covered further
in chapter 7)
The supply curve is based off this law
The upward sloping curve tells us that not only are suppliers more willing to supply
more, more people will become suppliers as well
E.g. If the price of snoek increases, fisherman will fish (Supply) less hake and
will fish more snoek
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