A comprehensive, full set of notes for Microeconomics with definitions, descriptions, graphs, diagrams, tables, questions with answers and more. The notes provide all information from the lectures, seminars and textbook.
Microeconomics
Economics is a social science concerned with understanding how individuals,
firms, governments, and nations make choices on allocating limited
resources trying to satisfy their unlimited wants.
Microeconomics is the study of what is likely to happen (tendencies) when
individuals make choices in response to changes in incentives, prices,
resources, and/or methods of production.
buyers, sellers, and business owners. These groups create the supply
& demand for resources using money & interest rates as a pricing
mechanism for coordination.
Fundamental questions in economics:
Because resources are scarce but there are unlimited wants, what to
produce, how to produce it & who will receive G+S?
In order to answer these questions, societies organise their economies in
systems. An economic system organises the production & exchange of G+S
as well as the allocation of resources. Societies organise their economies in
2 ways:
1. A centrally planned economy (command economy)- the gov controls
2. A market economy in which these questions are answered by the
"market". What to produce - determined by consumer preferences
How to produce - determined by producers seeking profits
Who will receive G+S - determined by purchasing power
i.e. North
Korea
↑ i.
No
country is fully pure
,Adam Smith is considered the father of modern economics. He showed the role &
advantages of a free market system.
The gains from free markets:
- Promote voluntary exchange
- Stimulate competition
- Reward hard work
- Tend to be more efficient
However if a market was truly pure, there would be some sources of inefficiency ie,
inequality, poverty, unemployment, pollution, lack of economic stability, safety
issues.
, 1. First Principles
The principles of individual choice
Principle #1: choices are necessary because resources are scarce
A resource is anything that can be used to produce something else.
- land
- labour
- capital
- enterprise
A resource is scarce when there's not enough of the resource available to satisfy
all the ways a society wants to use it. Eg. Minerals, lumber, petroleum, Human
Resources.
Principle #2: The true cost of something is the opportunity cost
The opportunity cost of an item is what you must give up in order to get it.
↳ Important in either -
or decisions
Principle #3: "how much" is a decision at the margin
Marginal decisions: “How much” decisions require making trade-offs at the margin:
comparing the costs and benefits of doing a little bit more of an activity
versus doing a little bit less. (How much of an activity to do)
Marginal analysis: the study of such decisions. we continue with an activity as
long as the marginal benefit exceeds the marginal cost
Principle #4: people usually respond to incentives, exploiting opportunities to
make themselves better off anything that offers rewards when changes behaviour
one
The principles of the interaction of individual choice
Interaction of choices: how an individual’s choices affect the choices of others.
By dividing tasks and trading, people can each get more of what they want than
they could get by being self-sufficient. This increase in output is due to
Specialisation: each person specialises in the task that they are good at
, performing. Markets are what allow people to specialise in areas.
Principle #5: there are gains from trade
The economy as a whole, can produce more when each person specialises in a task
and trades with others.
Principle #6: markets move toward equilibrium
An economic situation is an equilibrium when no individual would be better off
doing something different. Because people respond to incentives, markets move
toward equilibrium.
Principle #7: resources should be used efficiently to achieve society's goals
An economy is efficient if it takes all opportunities to make some people better
off without making others worse off. An efficient economy is producing the
maximum gains from trade possible given the resources available.
However, efficiency may conflict with other goals such as fairness or equity. There
is typically a trade-off between equity & efficiency: policies that promote equity
often come at a cost of decreased efficiency in the economy & vice versa.
Principle #8: markets usually lead to efficiency
Because people usually exploit gains from trade, markets usually lead to efficiency.
Incentives built into market that
a
economy already ensure *
Principle #9: when markets don't achieve efficiency, government intervention can
improve society's welfare
When markets fail, an appropriately designed gov. policy can help move society
closer to an outcome by changing how resources are used.
markets fail because: individual actions have side effects that aren't properly
taken into account by the market, one party prevents mutually beneficial trades
by trying to capture a greater share of resources for itself, some goods by
nature aren't suited for efficient management by markets.
* resources are put to
good use .
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