Summary Micro-economics
Book KW
Chapter 2:
Model: simplifie riprisintatainnt nf t ritl siaatainnt ahta is asie an biaair
anteirsatnte ritl-lifi siaatainnts.
Simpliciay nf mneils tllnws icnntnmisas an fncas nnt ificas nf nntly nnti chtntgi ta
t aimi. Impnratnta ahint is ahi other things equal assumptions: tll nahir
rilivtnta ftcanrs rimtint antchtntgie. Mnsa ificaivi fnrm nf icnntnmic mneillintg
is cnntsaracainnt nf ahnagha ixpirimintas: simplifie hypnahiaictl virsinnts nf ritl-
lifi siaatainnts.
Firsa: Production possibility frontier: t mneil ahta hilps icnntnmisas ahintk
tbnaa ahi artei-nfs iviry icnntnmy ftcis.
Thint: comparative advantage: mneil ahta cltrifis printcipli nf gtints frnm
artei, biawiint inteivieatls tnte biawiint cnantariis.
Thint ixtminti circaltr-fnw eitgrtm: schimtaic riprisintatainnt ahta hilps as
anteirsatnte hnw fnws nf mnntiy, gnnes tnte sirvicis tri chtntntillie ahrnagh ahi
icnntnmy.
Trtei-nfs: ahi prneacainnt pnssibiliay frnntaiir:
If t prneacainnt pninta liis intsiei nr nnt frnntaiir ia is fitsibli. Prneacainnt pninta ahta
liis naasiei ahi frnntaiir isnt’a fitsibli.
Mneils shnws as snmi tspicas: ificiintcy, nppnraantiay cnsa, tnte icnntnmic
grnwah.
Efficiencyf
Prneacainnt pnssibiliay ftcanr (ppf) is gnne wty an illasartai gintirtl icnntnmic
cnntcipa nf ificiintcy. Ecnntnmy is ificiinta if ahiri tri ntn missie nppnraantiaiis.
If ahi icnntnmy ts t whnli cnale ntna prneaci mnri nf tnty nnti gnne wiahnaa
prneacintg liss nf snmiahintg ilsi ahint wi sty ahta icnntnmy is ificiinta int
prneacainnt.
Eficiintcy int prneacainnt is nntly ptra nf whta’s riuairie fnr ahi icnntnmy ts t
whnli an bi ificiinta. Alsn riuairis ahta ahi icnntnmy tllnctai ias risnarcis sn
ahta cnntsamirs tri ts will nf ts pnssibli: ificiinta int tllnctainnt. Eficiintcy fnr
ahi icnntnmy ts t whnli riuairis bnah ificiintcy int prneacainnt tnte ificiintcy int
tllnctainnt: an bi ificiinta icnntnmy masa prneaci ts mach nf itch gnne ts ia ctnt
givi ahi prneacainnt nf nahir gnnes, tnte ia masa tlsn prneaci ahi mix nf gnnes
ahta pinpli wtnta an cnntsami. Ante ia masa tlsn eilivir ahnsi gnnes an ahi righa
pinpli.
Opportunityf cost
Ppf tlsn asifal ts riminteir nf fantetmintatl pninta ahta ahi arai cnsa nf tnty gnne
isnt’a ahi mnntiy ia cnsas an bay, baa wta masa bi givint ap int nreir an gia ahta
gnne: nppnraantiay cnsa.
Thi slnpi nf t sartigha-linti prneacainnt pnssibiliay frnntaiir is iuatl an ahi
nppnraantiay cnsa fnr ahi gnne mitsarie nnt ahi hnriznntatl txis int airms nf gnne
mitsarie nnt ahi viraictl txis.
Oppnraantiay cnsas tri aypictlly intcritsintg.
Economic growth
Economic growth: grnwintg tbiliay nf ahi icnntnmy an prneaci gnnes tnte
sirvicis. Mitnts ahi ixptntsinnt nf ahi icnntnmy’s prneacainnt pnssibiliaiis.
,Summary Micro-economics
2 snarcis nf icnntnmic grnwah: 1: intcritsi int ahi icnntnmy’s factors of
production : risnarcis asie an prneaci gnnes tnte sirvicis. Mtint ftcanrs nf
prneacainnt tri ahi risnarcis ltnte, ltbnar, physictl ctpiatl, tnte hamtnt ctpiatl.
2: technology : aichntictl mitnts fnr ahi prneacainnt nf gnnes tnte sirvicis.
Cnmptrtaivi tevtntatgi tnte gtints frnm artei
Printcipli nf gtints frnm artei: ahi maaatl gtints ahta inteivieatls ctnt tchiivi by
spicitlizintg int enintg eifirinta ahintgs tnte arteintg wiah nnti tntnahir.
Thiri tri gtints frnm artei.
Comparative advantage int prneacintg snmiahintg: if ahi nppnraantiay cnsa nf
ahta prneacainnt is lnwir fnr ahta cnantary ahtnt fnr nahir cnantariis.
Cnantariis tri nntly willintg an artei if ahi prici nf ahi gnne itch cnantary nbatints
int ahi artei is liss ahtnt ias nwnt nppnraantiay cnsa nf prneacintg ahi gnne
enmisaictlly.
- Thi mneil prnvieis t clitr illasartainnt nf ahi gtints frnm artei: ahrnagh
spicitliztainnt tnte artei, bnah cnantariis prneaci mnri tnte cnntsami mnri
ahtnt if ahiy wiri taatrkic.
- Mneil eimnntsartais ahta ia is nfaint nvirlnnkie int ritl wnrle trgamintas:
itch cnantary hts t cnmptrtaivi tevtntatgi int prneacintg snmiahintg. Ante
ivirynnti ts t cnmptrtaivi eistevtntatgi int snmiahintg.
Absolute advantage: cnantary hts ahta int prneacintg t gnne nr sirvici if ahi
cnantary ctnt prneaci mnri naapaa pir wnrkir ahtnt nahir cnantariis.
Cnmptrtaivi, ntna tbsnlaai, tevtntatgi is ahi btsis fnr maaatl gtint.
Cnmptrtaivi tevtntatgi tnte intairnttainnttl artei, int ritliay
Ecnntnmisas htvi pnsiaivi viiw nf intairnttainnttl artei. Viiw ia int airms nf
cnmptrtaivi tevtntatgi. Intairnttainnttl artei bintifas bnah cnantariis. Etch
cnantary ctnt cnntsami mnri ahtnt if ia eient’a artei tnte rimtintie taatrkic. Maaatl
gtints ennt’a eipinte nnt itch cnantary biintg biaair ahtnt nahir cnantariis ta
prneacintg nnti kinte nf gnne.
Trtntstcainnts: ahi circaltr-fnw eitgrtm
Barter: which nnti ptray eiricaly arteis t gnne nr sirvici fnr tntnahir gnne nr
sirvici wiahnaa asintg mnntiy. Mneirnt icnntnmy ahis is rtri.
Circular-fow diagram: riprisintas artntstcainnts ahta atki pltci int tnt icnntnmy
by awn kintes nf fnws trnante t circli: fnws nf physictl ahintgs sach ts gnnes,
sirvicis, ltbnar, nr rtw mtairitls int nnti eiricainnts, tnte fnws nf mnntiy ahta pty
fnr ahisi ahintgs int ahi nppnsiai eiricainnt.
Simplisa circaltr-fnw illasartais icnntnmy wiah 2 kintes nf inthtbiatntas:
household: pirsnnt nr grnap nf pinpli ahta shtri ahiir intcnmi tnte firms:
nrgtntiztainnt ahta prneacis gnnes tnte sirvicis fnr stli.
2 kintes nf mtrkias int simpli icnntnmy. 1: markets for goods and services:
hnasihnles bay gnnes tnte sirvicis ahiy wtnta frnm frms. 2: factor markets:
frms bay risnarcis ahiy ntiie an prneaci gnnes tnte sirvici.
Ftcanr mtrkias eiairminti tnt icnntnmy’s income distribution: hnw ahi anatl
intcnmi critaie int tnt icnntnmy is tllnctaie biawiint liss skillie wnrkirs, highly
skillie wnrkirs, tnte nwntirs nf ctpiatl tnte ltnte.
Thintgs circaltr fnw igntnris:
- Int ritl wnrle eisaintcainnt biawiint frms tnte hnasihnles isnt’a tlwtys clitr
caa.
- Mtnty nf stlis frms mtki tri ntna hnasihnles baa an nahir frms.
,Summary Micro-economics
- Figari enisnt’a shnw ahi gnvirntminta which int ahi ritl wnrle eiviras uaiai
t lna nf mnntiy naa nf ahi circaltr fnw int ahi fnrm nf atxis baa tlsn intjicas
t lna nf mnntiy btck intan ahi fnw int ahi fnrm nf spinteintg.
Pnsiaivi virsas ntnrmtaivi icnntnmics
positive economics: brtntch nf icnntnmics tnttlysis ahta eiscribis ahi wty ahi
icnntnmy tcaatlly wnrks.
Normative economics: mtkis priscripainnts tbnaa ahi wty ahi icnntnmy shnale
wnrk.
Forecast: simpli prieicainnt nf ahi faaari.
Whint tnte why icnntnmisas eistgrii
Mieit cnvirtgi aintes an ixtggirtai ahi ritl eifirintcis int viiws tmnntg
icnntnmisas. Yna hitr mach mnri tbnaa ahi trits nf eistgriiminta wiahint
icnntnmics ahtnt yna en tbnaa ltrgi trits nf tgriiminta.
Ecnntnmics tlmnsa tlwtys aiie ap int pnliaics. Pnwirfal intairisa grnaps kntnw whta
npintinnts ahiy wtnta an hitr: ahiy htvi intcintaivi an fnte tnte prnmnai icnntnmisas
whn prnfiss ahnsi npintinnts, givintg ahisi icnntnmisas t prnmintintci tnte visibiliay
naa nf prnpnrainnt an ahiir sappnra tmnntg ahiir cnllitgais.
Ritsnnts why icnntnmisas eistgrii: eifirintci int vtlais. Sicnnte snarci frnm
icnntnmic mneillintg. Ecnntnmisas btsi ahiir cnntclasinnts nnt mneils which tri
simplifie. Thiy ctnt trrivi ta eifirinta cnntclasinnts.
Chapter 3
Sapply tnte eimtnte: t mneil nf t cnmpiaiaivi mtrkia
Competitive market: mtrkia int which ahiri tri mtnty bayirs tnte sillirs nf ahi
stmi gnne nr sirvici, ntnnti nf whnm ctnt intfaintci ahi prici ta which ahi gnne
nr sirvici is snle.
Cnmpiaiaivi mtrkia bihtvinar is eiscribie by ahi supply and demand model:
mneil nf hnw t cnmpiaiaivi mtrkia bihtvis.
5 kiy ilimintas int ahis mneil:
1: eimtnte carvi
2: sapply carvi
3: sia nf ftcanrs ahta ctasi ahi eimtnte carvi an shifa tnte ahi sia nf ftcanrs ahta
ctasi ahi sapply carvi an shifa
4: ahi mtrkia iuailibriam + iuailibriam prici tnte iuailibriam uatntaiay
5: ahi wty ahi mtrkia iuailibriam chtntgis whint ahi sapply carvi nr eimtnte
carvi shifas.
Thi eimtnte schieali tnte eimtnte carvi
Demand schedule: shnws hnw mach nf t gnne nr sirvici cnntsamirs will wtnta
an bay ta eifirinta pricis.
This ctnt bi asie an ertw t eimtnte carvi.
As ahi prici risis ahi quantity demanded: tcaatl tmnanta nf t gnne nr sirvici
cnntsamirs tri willintg an bay ta snmi spicifc prici. Ftlls.
Demand curve: t grtphictl riprisintatainnt nf ahi eimtnte schieali. Ia shnws
ahi riltainntship biawiint uatntaiay eimtnteie tnte prici.
A highir prici rieacis ahi uatntaiay eimtnteie, tnte t lnwir pricis intcritsis ahi
uatntaiay eimtnteie. Dimtnte carvis tlmnsa tlwtys en slnpi enwntwtre. Law of
demand: stys ahta t highir prici fnr t gnne nr sirvici, nahir ahintgs iuatl,
lites pinpli an eimtnte t smtllir uatntaiay nf ahta gnne nr sirvici.
Shifas nf ahi eimtnte carvi
,Summary Micro-economics
Shift of the demand curve: shnws ahi chtntgi int ahi uatntaiay eimtnteie ta tnty
givint prici, riprisintaie by ahi shifa nf ahi nriginttl eimtnte carvi an t ntiw
pnsiainnt, eintnaie by t ntiw eimtnte carvi.
movement along the demand curve: chtntgi int ahi uatntaiay eimtnteie nf t
gnne trisintg frnm t chtntgi int ahi gnne’s prici. Qatntaiay eimtnteie ctnt tlsn risi
whint ahi prici is antchtntgie if ahiri is tnt intcritsi int eimtnte. (righawtre shifa
nf ahi eimtnte carvi).
Chtntgis int eimtnte mitnts shifas nf ahi eimtnte carvi
Chtntgis int uatntaiay eimtnteie mitnts mnviminta tlnntg ahi eimtnte carvi.
Unteirsatnteintg shifas nf ahi eimtnte carvi
Intcritsi int eimtnte mitnts t righawtre shifa nf ahi eimtnte carvi: ta tnty givint
prici, cnntsamirs eimtnte t ltrgir uatntaiay nf ahi gnne nr sirvici ahtnt bifnri.
Dicritsi int eimtnte mitnts t lifawtre shifa nf ahi eimtnte carvi: ta tnty givint
prici, cnntsamirs eimtnte t smtllir uatntaiay nf ahi gnne nr sirvici ahtnt bifnri.
5 printciptl ftcanrs ahta shifa ahi eimtnte carvi fnr t gnne nr sirvici:
1: chtntgis int ahi pricis nf riltaie gnnes nr sirvicis
2: chtntgis int intcnmi
3: chtntgis int atsais
4: chtntgis int ixpicatainnts
5: chtntgis int ntambir nf cnntsamirs
Changes in the prices of related goods or services
Substitute: if t risi int ahi prici nf nnti nf ahi gnnes lits an tnt intcritsi int ahi
eimtnte fnr ahi nahir gnne. Usatlly ahi gnnes sirvi t similtr fantcainnt.
Complements: if t risi int ahi prici nf nnti gnne lites an t eicritsi int ahi
eimtnte fnr ahi nahir gnne. Cnmplimintas tri asatlly gnnes ahta int snmi sintsi
tri cnntsamie angiahir.
Changes in income
Mnri intcnmi mtkintg mnri likily an parchtsi mnri nf mnsa gnnes tnte sirvicis
ta tnty givint prici. Mnsa gnnes tri normal goods: eimtnte fnr ahim intcritsis
whint cnntsamir intcnmi risis. Dimtnte fnr snmi prneacas ftlls whint intcnmi
risis tri inferior goods. Intfirinr gnne is nnti ahta is cnntsieirie liss eisirtbli
ahtnt mnri ixpintsivi tlairnttaivis.
Changes in tastes
Chtntgi int atsais hts t prieicatbli imptca nnt eimtnte. Whint atsais chtntgi int
ftvnar nf t gnne mnri pinpli wtnta an bay ia ta tnty givint prici, sn ahi eimtnte
carvi shifas an ahi righa.
Changes in expectations
Carrinta eimtnte fnr gnne is nfaint tficaie by ixpicatainnts tbnaa ias faaari prici.
Expicaie chtntgis int faaari intcnmi ctnt tlsn lite an chtntgis int eimtnte: if yna
ixpica ynar intcnmi an risi int ahi faaari yna will bnrrnw anety tnte intcritsi ynar
eimtnte fnr ciratint gnnes if yna ixpica ynar intcnmi an ftll int ahi faaari yna tri
likily an stvi anety tnte rieaci yna eimtnte fnr snmi gnnes.
Changes in the number of consumers
Pnpaltainnt grnwah lites an highir eimtnte.
Individual demand curve: illasartais ahi riltainntship biawiint uatntaiay
eimtnteie tnte prici fnr tnt inteivieatl cnntsamir.
,Summary Micro-economics
Mtrkia eimtnte carvi shnws hnw ahi cnmbintie uatntaiay eimtnteie by tll
cnntsamirs eipintes nnt ahi mtrkia prici nf ahi gnne.
Mtrkia eimtnte carvi is ahi hnriznntatl sam nf ahi inteivieatl eimtnte carvis nf
tll cnntsamirs int ahta mtrkia.
Thi sapply schieali tnte ahi sapply carvi
Quantity supplied: tcaatl tmnanta nf t gnne nr sirvici pinpli tri willintg an sill
ta snmi spicifc prici.
Supply schedule: shnws hnw mach nf t gnne nr sirvici wnale bi sappliie ta
eifirinta pricis.
Supply curve: shnw ahi riltainntship biawiint uatntaiay sappliie tnte prici.
Sapply carvis ntnrmtlly slnpi apwtre: ahi highir ahi prici biintg nfirie, mnri
nf tnty gnne nr sirvici prneacirs will bi willintg an sill.
Shifas nf ahi sapply carvi:
Shift of the supply curve: chtntgi int ahi uatntaiay sappliie nf t gnne nr sirvici
ta tnty givint prici. Ia is riprisintaie by ahi chtntgi nf ahi nriginttl sapply carvi
an t ntiw pnsiainnt, eintnaie by t ntiw sapply carvi.
Movement along the supply curve: chtntgi int ahi uatntaiay sappliie nf t gnne
trisintg frnm t chtntgi int ahi gnne’s prici.
Intcritsi int sapply is righawtre shifa nf ahi sapply carvi: ta tnty givint prici,
prneacirs sapply t ltrgir uatntaiay nf ahi gnne ahtnt bifnri. A eicritsi is t
lifawtre shifa.
5 ftcanrs fnr shifas.
1: chtntgis int intpaa pricis
2: chtntgis int ahi pricis nf riltaie gnnes nr sirvicis
3: chtntgis int ixpicatainnts
4: chtntgis int aichntnlngy
5: chtntgis int ahi ntambir nf prneacirs
Changes in input prices
Input: t gnne nr sirvici ahta is asie an prneaci tntnahir gnne nr sirvici.
Intcritsi int ahi prici nf tnt intpaa mtkis ahi prneacainnt nf ahi fnttl gnne mnri
cnsaly fnr ahnsi whn prneaci tnte sill ia. Prneacirs tri liss willintg an sapply ahi
fnttl gnne ta tnty givint prici, tnta hi sapply carvi shifas an ahi lifa. Ftll int prici
nf tnt intpaa mtkis prneacainnt nf fnttl gnne liss cnsaly fnr sillirs. Mnri willintg an
sapply ahi gnne ta tnty givint prici, tnte ahi sapply carvi shifas an ahi righa.
Sapply intcritsis.
Changes in the prices of related goods or services
Whint t prneacir sills sivirtl prneacas, ahi uatntaiay nf tnty nnti gnne ia is willintg
an sapply ta tnty givint prici eipintes nnt ahi pricis nf ias nahir cn-prneacie
gnnes.
Changes in technologyf
Chtntgis int aichntnlngy tfica sapply carvi. Imprnvimintas int aichntnlngy inttbli
prneacirs an spinte liss nnt intpaas, yia saill prneaci ahi stmi tmnanta nf naapaa.
Whint biaair aichntnlngy bicnmis tvtiltbli, rieacintg ahi cnsa nf prneacainnt,
sapply intcritsis tnte ahi sapply carvi shifas an ahi righa.
Changes in expectations
Expicatainnts ctnt shifa. Chtntgis int ahi ixpicaie faaari prici nf ahi gnne ctnt
lite t sappliir an sapply liss nr mnri nf ahi gnne anety. Int itch ctsi ahiri’s t
, Summary Micro-economics
eicisinnt an bi mtei biawiint sillintg ahi prneaca ntnw virsas sanrintg ia fnr ltair
stli.
Changes in the number of producers
Individual supply curve: illasartais ahi riltainntship biawiint uatntaiay sappliie
tnte prici nf tnt inteivieatl prneacir. Mtrkia sapply carvi shnws hnw ahi
cnmbintie anatl uatntaiay sappliie by tll inteivieatl prneacirs int ahi mtrkia
eipintes nnt ahi mtrkia prici nf ahta gnne.
Sapply, eimtnte, tnte iuailibriam
Gintirtl printcipli: mtrkias mnvi anwtre iuailibriam, t siaatainnt int which ntn
inteivieatl wnale bi biaair nf atkintg t eifirinta tcainnt. A cnmpiaiaivi mtrkia is
int iuailibriam whint ahi prici hts mnvie an t livil ta which ahi uatntaiay nf t
gnne eimtnteie iuatls ahi uatntaiay nf ahta gnne sappliie. Aa mtrkia iuailibriam
prici hts mnvie an t livil ahta ixtcaly mtachis ahi uatntaiay eimtnteie by
cnntsamirs an ahi uatntaiay sappliie by sillirs.
Prici ahta mtachis ahi uatntaiay sappliie tnte ahi uatntaiay eimtnteie:
equilibrium price.
Qatntaiay bnagha tnte snle ta ahta prici is ahi equilibrium quantity. Market
clearing price is ahi stmi ahintg.
Etsiisa wty an eiairminti iuailibriam prici tnte uatntaiay int mtrkia is by paaaintg
ahi sapply carvi tnte eimtnte carvi nnt stmi eitgrtm. Sapply carvi shnws ahi
uatntaiay sappliie ta tnty givint prici tnte eimtnte carvi shnws uatntaiay
eimtnteie ta tnty givint prici. Prici ta which ahi awn crnss is EQ: prici ta which
uatntaiay sappliie iuatls uatntaiay eimtnteie.
Why en tll stlis tnte parchtsis int t mtrkia atki pltci ta ahi stmi prici?
Int mtrkia whiri bayirs tnte sillirs htvi bnah biint trnante fnr snmi aimi, stlis
tnte parchtsis ainte an cnntvirgi ta stmi prici. : mtrkia prici.
Why enis ahi mtrkia prici ftll if ia is tbnvi ahi EQ prici?
Surplus: nf t gnne nr sirvici whint uatntaiay sappliie ixciies ahi uatntaiay
eimtnteie. Sarplasis nccar whint prici is tbnvi ias EQ.
Snmi sillirs ctntntna fnte cnntsamirs fnr t highir prici ahtnt EQ. ahiy nfir t
lnwir prici. Risala nf ahis is an pash ahi prici enwnt antail ia ritchis EQ prici
tgtint.
Why enis ahi mtrkia prici risi if ia is bilnw ahi EQ prici?
Shortage: nf t gnne nr sirvici whint ahi uatntaiay eimtnteie ixciies ahi
uatntaiay sappliie. Shnratgis nccar whint ahi prici is bilnw ias iuailibriam.
Thiri is t shnratgi sn snmi bayirs tri willintg an pty t highir prici nr sillir
ctnt tsk t highir prici. Thi prici will ahint risi tgtint aill EQ prici.
Whta htppints whint ahi eimtnte carvi shifas
Ant intcritsi int eimtnte is inteictaie by t righawtre shifa nf ahi eimtnte carvi.
mtrkia is ntn lnntgir int EQ shnratgi bictasi uatntaiay eimtnteie ixciies
uatntaiay sappliie. Prici risis tnte gintirtais tnt intcritsi int ahi uatntaiay
sappliie, tnt apwtre mnviminta tlnntg ahi sapply carvi. = ntiw EQ. : whint
eimtnte fnr t gnne nr sirvici intcritsis ahi EQ prici tnte EQ uatntaiay nf gnne nr
sirvici bnah risi.
Whta htppints whint ahi sapply carvi shifas
Whint sapply nf t gnne nr sirvici intcritsis, ahi EQ prici nf ahi gnne nr sirvici
ftlls tnte ahi EQ uatntaiay nf ahi gnne nr sirvici risis.
