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Week 1: Introduction, markets,
prices (CH 1)
Created @October 30, 2022 4:58 PM
Type Study notes
Questions
Reviewed
1.1 The themes of microeconomics
What is Microeconomics?
The branch of economics that concerns itself with the behaviour of individual
economic entities - customers, companies, workers etc - and the markets
comprised of these entities
What is macroeconomics?
The branch of economics concerned with gross domestic variables such as national
growth, interest percentages, unemployment and inflation.
It further describes the trade offs that can be made and how they can be best made.
Micro describes the trade offs that customers, workers and companies make. 3
examples
1. Consumers have limited income. The choices they make can include spending
their money instantly, spending it in the future
2. Workers generally make a choice between studying longer or entering the
workforce earlier. They also make a choice between work and leisure time.
Week 1: Introduction, markets, prices (CH 1) 1
, 3. Companies only have a limited budget at their disposal. Consequently they
have to make decisions about where to spend their money.
Why is price another important aspect of Microeconomics?
Price is the outcome of interactions between consumers, workers and companies.
What is the difference between a theory and a model?
A model is a mathematical projection of an entity based on an economic theory.
Statistics and econometrics can be used to evaluate the accuracy. Whilst a model is
a theoretical construct representing economic processes by a set of variables and a
set of logical and/or quantitative relationships
What is positive analysis?
A positive statement is one in which cause and effect can be evaluated. They are
not always correct but can be proven.
What is normative analysis?
A normative statement is concerned with the question as to what is best. Value
based judgement
What is a market?
A collection of buyers and sellers that, through their potential or actual interactions,
determine the price of a product or set of products
What is an industry?
An industry comprises of a collection of companies that make the same or similar
products
Why is market definition important?
It allows us to clarify which buyers, sellers and products belong to a given market.
Large differences create potential arbitrage
What is arbitrage?
Buying a good at a low rate at one place and selling it a higher rate at another
place.
What constitutes a perfectly competitive market?
Week 1: Introduction, markets, prices (CH 1) 2
, A perfectly competitive market has many sellers and many buyers and neither have
the ability to influence the price → one unique price
How do you figure out market definition?
Determine the extent of a market - it’s boundaries, both geographically and in terms
of the range of products to be included in it
2 reasons why market definition is important?
1. Companies need to know their competition as well as their geographical
constraints and product limitations within the market in order to determine a
price, allocate advertisement budgets and make capital investment
2. Important for political decisions, it is important for the government to know
which market phenomena occur and how large those markets are in order to
make decisions
What is a nominal price?
Absolute price of a good, unadjusted for inflation
What is a real price?
Price of a good relative to an aggregate measure of prices adjusted for inflation
Difference between CPI and PPI?
CPI measures the rate of inflation. It is used if it is a product/service purchased by a
consumer whilst PPI measures the aggregate price level for intermediate products
and wholesale goods. Use this if it is a product/service normally purchased by a
business.
Week 1: Introduction, markets, prices (CH 1) 3
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Week 1: The basics of demand
and supply (CH 2)
Created @November 10, 2022 6:07 PM
Type Study notes
Questions
Reviewed
Supply and Demand
What does the supply curve represent?
The relationship between the quantity of a good that producers want to sell and the
price of that good.
What is the basic equation for supply?
QS = Qs (P)
Why is supply upward sloping?
The higher the price, the larger the number of companies that want and are able to
produce and sell a good.
variables that can affect supply?
Product costs - wages and interest charges
Raw material costs
What does the demand curve represent?
Week 1: The basics of demand and supply (CH 2) 1
, Quantity of a given good that consumers want to buy at a given price, and how
much this demand changes when the price of the good changes
What is the law of demand?
As the price of a good increases, the demand for the good decreases
How does a substitute good affect the demand for another good?
Increasing prices of substitutes
cause an increase in the demand for another good.
How does a complementary good affect the demand for another good?
Increasing prices of compliments
cause a decrease in the demand of another good.
MOST CONTENT IS SKIPPED DUE TO BASIC KNOWLEDGE
When can we use the demand and supply model?
When the market is at least roughly competitive (We assume a competitive market)
Elasticities of Supply and Demand
What does elasticity measure?
The sensitivity of a variable to another variable.
Formula for PED
What is the magnitude of PED?
The absolute size of the elasticity
E > |1|
Week 1: The basics of demand and supply (CH 2) 2
, Elastic demand → the percentage change of the quantity demanded is larger than
the percentage change of the price
Ep < |1|
inelastic demand → the percentage change of the quantity demanded is smaller
than the percentage change of the price
Ep = |1|
unit elastic demand → the percentage change of the quantity demanded equals the
percentage change of the price
Ep = ∞
infinitely elastic demand or perfectly elastic demand → principle that consumers will
buy as much of a good as they can for a certain price, but at a higher price the
quantity demanded will be zero, while the quantity demanded will be infinitely large
if the price decreases. The demand curve moves horizontally.
Ep = 0
perfectly inelastic demand → the percentage change of the quantity demanded is
larger than the percentage change of the price. The demand curve moves vertically.
How does elasticity vary along the demand curve?
Varies along the curve as the price changes. Near the top, because price is high
and quantity is small, the elasticity is large in magnitude. The elasticity becomes
smaller as we move down the curve.
What is the general formula for a linear demand curve?
Q = a- bP
where the change in price/ change in quantity = -b
The steeper the slope of the curve…
the less elastic is demand
What is income elasticity of demand?
The percentage change of the demand as a result of a 1% increase in income.
What is the formula?
Week 1: The basics of demand and supply (CH 2) 3
