Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Chapter 1:
-
Economics revolves around the scarcity principle; wants are unlimited but
resources are not.
Economic decisions are concerned with maximising consumer surplus.
They involve opportunity costs (trade-offs)
o In determining the trade-offs, one must take into account the costbenefit principle; only undertake an action if the marginal benefit
equals or exceeds the marginal cost
Economic surplus: difference between benefit arising from an action and
the cost of its undertaking
Opportunity cost: what was given up/what was received
Ceteris paribus: all other things being equal (important in economic
decisions)
Incentive principle: an individual is more likely to undertake an action if its
benefit rises and its cost falls
Positive economics: analysis that explains what will happen and why, but
not what should happen (i.e. what will happen because of human
behaviour)
Normative economics: analysis that states what should happen
(economically optimal)
Pitfalls:
o Failing to account for all opportunity costs
o Failing to account for all benefits
o Failing to consider time as a resource
o Failing to ignore sunk costs
o Failing to know when to use marginal benefits/costs vs average
benefits/costs
o Failing to measure costs/benefits in absolute terms rather than
proportions
Chapter 2:
-
Chapter 3:
-
Market: a market is the collective of all buyers and sellers for a good or
service
Demand curve: slopes down due to law of demand as price increases,
demand for a product falls (i.e. consumer surplus falls). Relationship
between price and quantity demanded
Supply curve: slopes up due to law of supply as price increases, suppliers
are willing to provide more (i.e. producer surplus increases). Relationship
between price and quantity supplied
Substitution effect: change in demand for a good/service due to the
change in price of another good/service, causing said good to become
cheaper/more expensive relatively
Income effect: change in demand for a product due to a change in price,
causing the PPP of the consumer to change
Vertical interpretations:
o demand consumers reservation price (highest price willing to pay)
o supply suppliers reservation price (lowest price willing to sell)
Market equilibrium: occurs at a price where quantity demanded and
supplied is the same
Excess supply (surplus): price is too high, usually occurs due to price floor
Excess demand (shortage): price is too low, usually occurs due to price
ceiling
Difference between demand/supply and quantity demanded/supplied
BLAH SOME STUFF GOES HERE
Cash on the table: unexploited gains from exchange, occurs when market
is in disequilibrium
Socially optimum quantity: quantity whereby the difference in total benefit
and total cost of producing+consuming a good is maximised. (the point at
which marginal cost and benefit are the same).
Efficiency: where all goods are produced at their socially optimal quantity
Equilibrium principle (no cash on the table): market is at equilibrium; there
are no unexploited opportunities
Chapter 4:
-
Determinants of elasticity:
o Substitution: goods with substitutes will be more elastic than those
that dont
o Budget share: goods comprising a lower proportion of budget share
(salt) are likely to be less elastic than those of higher proportion
(plane tickets)
o Time: in the short term, products are less elastic than in the long
term as it takes time to seek out alternatives
o Luxury or necessity: necessities are less elastic than luxury items
Calculating demand elasticity:
o Percentage change quantity/percentage change price
o Point elasticity: P/Q x 1/slope
o Midpoint elasticity:
-
Q
P
(Q1+Q2)/2 (P1+P2)/2
Special cases:
o Perfectly elastic: demand is infinite at one price, but is zero at any
price above it
o Perfectly inelastic: demand is infinite regardless of price
Elasticity and total expenditure: total expenditure/revenue varies with
elasticity of a product. Total revenue = price x quantity. Price and quantity
always move in opposite directions (law of demand). Increase in price does
not always result in increased revenue
o For a product with a straight line demand curve, the total revenue
curve is a parabola (there is a maximum revenue point)
For a product with elasticity > 1, price and total revenue changes move in
different directions
For a product with elasticity < 1, price and total revenue changes move in
the same direction
Income elasticity of demand: percentage change of quantity demanded in
relation to a 1 percent change in income
o Negative elasticity: good is inferior
o Positive elasticity: good is normal
Cross-elasticity: percentage change of quantity demanded in relation to a
1 percent change in the price of another good
o Negative elasticity: goods are complements
o Positive elasticity: goods are substitutes
Price elasticity of supply: percentage change in quantity supplied in
relation to a 1% change in price.
o Calculated same way as elasticity of demand
Determinants of price elasticity of supply:
o Flexibility of inputs: more flexible = more elastic
o Mobility of inputs: more mobile = more elastic
o Ability to produce substitute inputs: more easily = more elastic
o Time: less elastic in short term than in long term
Chapter 5:
-
Marginal utility: extra utility that results from taking an extra action.
To maximise utility, consume until marginal utility is as close to 0 as
possible.
Law of diminishing marginal utility: tendency for marginal utility to
decrease as consumption of a good or service increases
MU1/P1 = MU2/P2. Want MU to be equal; buy more of the one that yields
higher MU until optimal combination of goods (yielding highest total utility)
is reached
Rational spending rule: spending should be allocated so that MU1/P1 =
MU2/P2
Individual and market demand curves: market demand curve is the sum of
all individual demand curves
Consumer surplus: difference between reservation price and price actually
paid.
o Calculated as the area under the demand curve, upwards from the
price paid.
o
Chapter 6:
-
Firm assumes FC, but would not lose as much as it would if it stayed
open (VC)
Firms profit = total revenue total cost (PQ ATCxQ). Profitable if P > ATC
o Maximum profit where P = MC. Profit = (P-ATC)xQ
o
Chapter 7:
-
Pareto efficiency: situation in which trade is not possible such that one
person is made better off without making another worse off.
Pareto-improving transaction: transaction that betters one without
harming another
Whenever market is not in equilibrium, there is forgone economic surplus
Subsidies: reduce economic surplus since subsidy is not free (represents
an opportunity cost)
Compensation policy is more efficient than the first come first served
policy
Event organisers underprice to maintain image of event or to garner
goodwill from patrons
o Leaves cash on the table ticket scalping
Tax: for a product with perfectly elastic supply, tax is completely borne by
consumer. For a product with perfectly inelastic supply, tax is borne by
producer.
Deadweight loss: reduction in total economic surplus that results market
operates at a point where marginal cost does not equal marginal
revenue/benefit. (surplus lost to the market)
o Deadweight loss is smaller if elasticity of demand/supply is low
Chapter 8:
-