This is a guide to greatly help you understand economic topics that you do not understand. You shouldn't use these notes as a substitute from your lecture notes. These can be used as a last resort if you do not understand any topics just before a final exam
Introduction to Business Economics
Microeconomics
Microeconomics is the study of how individuals, firms, governments and economies
deal with the problem of infinite wants and finite resources
Production Probability frontier
The production possibility frontier that
shows all the possible combinations of
two goods when all resources are used.
The opportunity cost is the benefits
foregone from the next best alternative.
In this example, the opportunity cost of
moving production from C1 to C2 would
increase capital goods from K1 to K2.
Demand and Supply
Demand
The law of demand states that other factors being constant (ceteris parabus), price
and quantity demanded of any good and service are inversely related.
This means if the price of Pepsi increases, the quantity demanded of Pepsi would
fall.
The demand curve is sloping downwards due to this law stated above
The determinants of supply include:
o Consumers preferences/ tastes
o Price of substitutes goods
o Price of complementary goods
o Consumers income
o Population
o Price expectation
o Market size
Movement/ Shifts in the demand curve
o A change in the price of the good causes a movement along the demand
curve
o A change in the determinants of Demand (listed above), will shift in the
demand curve
o A rightward shift denotes an increase in the Demand
o A leftward shift denotes a decrease in the Demand
Supply
Supply = the quantity of a good that a producer is willing and able to supply onto the
market at a given time
The law of supply states that as the price of the product rises, businesses would
expand supply to the market
, o Profit motive – when there is an increase in the demand for the good and the
price of the product increases, it would become more profitable for
businesses to increase their output
o Production and costs – as a company increases its production, production
costs tend to increase; therefore, a higher price is needed to cover these
increases in production costs. Maybe due to diminishing returns as more
factor inputs are added to the production
o Higher prices will cause a signal/incentive for new entrants to join the market,
leading to an increase in the supply of the good
The supply curve shows the relationship between the market price and how much a
firm is willing and able to sell its goods or services.
As mentioned before, a change in the price of the good would cause a movement
along the supply curve
While any change to a determinant of supply will cause a shift of the supply curve
where a rightward and leftward shift would cause an increase and decrease of supply
respectively
Determinants of supply
o Costs of production
o The profitability of alternative products – if the price of good rises, the
producers increase the quantity of the good therefore the amount of the
substitute good is likely to increase.
o The profitability of goods in joint supply – e.g. when the price of petrol
increases, the quantity of petrol would increase, but as crude oil can make
other fuels, the supply of the different fuels would also increase.
o Random shocks
o Aims of producers – if the producers anticipate a price increase, it would
cause them to either produce more of the good or withhold the good, to
benefit from the higher price.
o Price expectation
o Number of sellers – if the market is heavily concentrated, the quantity of the
product supplied will be high
o Changes in tax and subsidies – subsidies reduce production costs, therefore
allowing the producers to gain more profit. This would consequently increase/
decrease the supply if there is an increase or decrease in subsidy payments
respectively
Market equilibrium – when the price of which the quantity demanded equals the
quantity supplied.
The point of equilibrium would be P1 and Q1
When the price
This would mean that the quantity demanded of
the good/service is higher than the supply,
therefore, meaning that the firm would need to
increase the price towards the equilibrium
When the price
the quantity supplied is greater than the quantity
demanded. As a result, the response to the
increase in supply would be that the price falls.
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