Topic 1 Economic problems and thought
MICROECONOMICS
MACROECONOMICS
Examines the functioning of individual
interests and the behavior of individual
decision-making units
Inflation
Unemployment
ECONOMICS
The study of how individuals,
organizations, societies choose to use
scarce resources.
SCARCITY
Is likely to increase if a persons wants
increase by a greater proportion than
their income increases.
OPPORTUNITY COST
The value of next-best use of the
resources devoted into the activity.
TRADE-OFFS
Would become irrelevant if:
Scarcity was eliminated.
BASIC COMPETITIVE MODEL
Households and firms interact in the
LABOUR, PRODUCT and CAPITAL
markets.
COMPETITIVE MARKET
ONE OF THE KEY CHARACTERISTICS:
LARGE number of buyers and sellers
PPC
Constant slope indicates that:
The country faces fixed opportunity
cost.
COMPETITIVE MARKET = EFFICIENT
It is not possible to produce more of
one good w/o producing less of some
other good.
Topic 2a Consumer Choice
HOUSEHOLD income falls by 10%
Budget constraint will shift IN parallel
to the old one.
PRICE DECREASE
Will increase a households choice set
INDIVIDUAL CONSUMERS CHOICE
SET
Defined by budget constraint
A price increase of a particular good
may cause an individual to purchase
fewer units of that good because..
The consumer now has less money to
spend
Bottle beer = $2
Pizza = $8
The person trade off is 4 beers per
pizza.
INCOME EFFECT
LIZ buys only food and clothes.
When price of clothes increases, it is as
LIZ has less money to spend on BOTH
clothes and food.
TIM buys only X and Y.
Px less than Py
TIMs budget constraint would not
shift when
The prices of both goods and his
income increase by the same
proportion.
Buys X n Y.
Fixed income, no borrowing
If the combination of X and Y that the
person buys lies ON the budget
constraint, the person IS SPENDING all
of his income.
DIMINISHING MARGINAL UTILITY
Individuals bundle of goods includes
more of a particular good, the
individuals willingness to pay for an
additional unit declines.
Jean buys only books and magazines.
Fixed income.
IF her BC is drawn with mag. on the
vertical axis, the slope of BC
measures
How many mag. Jean must give up to
get another book.
Topic 2b labour leisure choice / labour supply
Assume : leisure = normal good
A HIGHER demand for leisure and
LOWER labour supply.
The substitution effect of a wage
decrease implies
Assume: leisure inferior
The income effect of a wage increase
will lead to a
SUBSTITUTION EFFECT outweighs
INCOME EFFECT, of a wage change
LOWER demand for leisure and a
HIGHER labour supply.
The labour supply curve is upward
sloping.
Assuming the properties of normal
indifference curves, a consumer will
max his utility where
His indifference curve is just tangent to
his BC
Decision to work less =
Increase leisure time
The price of an extra hours leisure is
The hourly wage rate
Factors that are likely to have led to
greater labour force participation on
the past women between 1970s and
today.
The rising opp.cost of not
participating
A rightward shift of womens
labour supply
Improved attitudes toward
women working.
WAGE RATE INCREASES
The price of an hours leisure
INCREASES
Price level increases by 5%
Income increases by 4%
The persons real wage has decreased
and her stand of living has fallen.
Labour Force Participation may fall
IF
1. The daily cost of commuting
rises
2. The real wage falls
Topic 3A Producer Choice
The optimal method of production is
the one that
Minimizes cost for a given level of
output
One worker = 20 customers per hour
2 workers = 50 customers per hour
Marginal product of 2nd worker is 30
MP1= 20 customers served
MP2= 17
MP3= 11
MARGINAL COST
Total product of first two sales asst. is
37
Ceteris paribus;
Firms have an incentive to substitute
labour for capital
As the price of capital increases
MPL = 10
MPC = 20
In the long run, the firm minimizes its
cost IF the wage rate is half the rental
rate.
is a good measure of what society gives
up by using resources to produce more
of a good or service.
MARGINAL COST
Wage / MPL
Increasing economies of scale
All inputs are increased in proportion
to each other, output
increases by a greater proportion
than the increase in inputs.
Topic 3b The competitive market
FIRMS engage in the activity of
production
To acquire profits
DIMINISHING RETURNS TO LABOUR
Labour increases;
MPL falls
PRODUCTION FUNCTION
The combinations of output that can be
produced using different level of
labour given fixed levels of any other
input.
TOTAL COST
TOTAL VC + TOTAL FC
ECONOMIC PROFIT
TR TC
In the long run, a firm in a competitive
industry will earn an economic profit
such that
LONG RUN
TR exceeds TC
PERFECTLY COMPETITIVE MODELS
Firms act as price takers
SHORT RUN:
Price below competitive firms
minimum AVC
The price is also below its ATC
SHORT RUN:
Price above competitive firms
minimum AVC and below its minimum
ATC
Continue to operate and produce
output up to where MR = MC, despite
making an economic loss.
All inputs are variable
Topic 4 demand, supply and equilibrium
PERFECT COMPETITION
When firms are maximizing profis &
households are maximizing utility, the
outcome is PARETO OPTIMAL.
Rate of return less than necessary for
the bus to continue,
COMPETITIVE MARKET,
VC differ between some firms
Market price falls;
The effect of this change in the short
run
LAW OF SUPPLY
Economic costs exceed TR
Fewer firms produce output, and those
that continue producing, each make
less.
Positive rship between P & QS
Increase price of a complement for
good X
Demand curve of X shifts to the LEFT
MR greater than MC
The revenue gained by producing one
more unit of output exceeds the cost
incurred by doing so.
Garlic in perfectly comp market
Reduction in the price of garlic
Effect of mix warm weather and good
rain fall
CORN perf comp. market
Drought. Indicated by
UPWARD sloping SUPPLY curve
implies
MARKET DEMAND CURVE
Increase of price of corn
QS rises; P rises
Horizontally summing the individual
demand curves at each price.
Topic 5 Trade
Specialisation and trade
Arguments for restricting international
trade
Allow a country to produce on it ppf
and consume outside it
The trades are unfair to one
party
Trade causes job losses
The stronger country in the
trade can exploit the weaker
country
TARIFF
A tax on foreign goods that are
imported
INDIVIDUALS / COUNTRIES TRADE
Expect a gain as a result of the trade
COMMON OBJECTION to economists
claim that trade between countries is
mutually benefit.
ABSOLUTE ADVANTAGE
Exports the goods in which it has a
comparative advantage
JAPAN can produce
30 cars / 40 computers
US has an absolute advantage in the
production of both goods.
The ability of one country to produce a
larger amount of a good than another
country using the same amount of
resource.
US
40 cars or 50 computers
(using the same resources)
product
CHINA
NZ
cheese
10 hrs
8 hrs
steel
10hrs
12 hrs
China has a comparative advantage in
producing steel
When a country spealises in
They maximize combined output, and
producing those goods in which they allocate their resources more
have a comparative advantage,
efficiently.
Topic 6 Government
INCOME AND WEALTH
The amount of output that any
household gets depends on.
LAISSEZ FAIRE ECONOMY
Pursue their own self-interest without
any central direction or regulation.
CONSUMPTION of a good has positive
external benefits
The gov has reason to consider
intervening in a market to encourage
additional consumption of the good.
ARGUMENTS to justify gov
intervention
Marginal tax rate for income of $30
000 = 25%
MTR income over $30k = 50%
Average tax rate
The improvement of economic
effiency
The provision of social merit
goods
The pursuit of social equity
Individual $60 000; will face a tax bill
of $22 500 (7500 + 15 000)
22 500 /60 000 = 37.5%
Tertiary education as a merit good
Potential sources of Gov. inefficiency
Then this indicates that an individual
who gets tertiary education has
positive impact on others in society.
Budgeting and spending
constraints
Incentive problems
Unintended consequences of
gov. action
