adrien 3/17/2025

PMIC5111
Economics summaries
Consumer and producer surplus
Customer surplus: the difference
between what consumers pay and the
value that they receive, indicated by the
maximum amount they are willing to pay
Producer surplus: the difference between
how much a producer is willing to accept for a
given quantity of a good and how much they
receive by selling the good at the market price.
Market price: equilibrium or market-
clearing price is determined by the Diagram showing consumer and producer
interaction between demand and supply surplus

Market equilibrium
Market equilibrium: quantity demanded
is equal to the quantity supplied
price at which equilibrium occurs
is called the equilibrium price
Qd>Qs -> excess demand
(market shortage)
Qd<Qs -> excess
supply (market surplus)
Functions of prices in a market economy: Diagram showing market deficit and surplus
Rationing: ration the scarce resources
to those who place the highest value
on them and can afford to pay for them.
Allocative: signals which direct the
factors of production between
different uses in the economy.

Supply
Law of supply: •the higher the price of a
good, the higher the quantity supplied
(positive/direct relationship), ceteris paribus.
Determinants of individual supply:
price of the product [Px]
prices of alternative products [Pg]
prices of the factors of production [Pf]
expected future prices [Pe]
state of technology [Py]
etc.
Qs=f[Px, Pg, Pf, Pe, Py, etc.] Example of a supply curve
ΔPx -> movement along supply curve (ΔQs)
ΔPg, Pf, Pe, Py, etc. ->
shift of supply curve (ΔS)

Substitutes: a good that can be used in place

of another good to satisfy a certain want
(butter and margarine). Increase Pg ->
rightward shift (increase in demand for subs.)
Complements: goods that are jointly used
to satisfy a want. Increase Pg -> leftward
shift (decrease in demand for comps.)

Demand
Law of demand: the higher the price of a
good, the lower the quantity demanded
(inverse relationship), ceteris paribus.
Determinants of individual demand:
price of the product [Px]
prices of related products
(complements or substitutes) [Pg]
income of households [Y]
taste or preference of consumers [T]
number of people in
household concerned [N]
etc.
Qd=f[Px, Pg, Y, T, N, etc.] Example of a demand curve
ΔPx -> movement along demand curve (ΔQd)
ΔPg, Y, T, N, etc. -> shift of demand curve (ΔD)

Circular flow of income

The circular flow of income and spending is
usually a monetary flow and its direction is
opposite to the flow of goods and services.

Factor market: households offer

their factors of production for sale
on the factor market where these
factors are purchased by the firms.
Goods market: firms combine the
factors of production and produce
consumer goods and services which
are offered for sale to households
Closed economy: no foreign trade

Stocks and flows

Stocks change as a result of flows.
Stocks are measured at
a particular point in time.
wealth
assets
liabilities
capital
population
balance in savings account
unemployment
Flows are measured over a period.
income
profit
loss
investments
number of births and deaths
saving (difference between
income and spending)
demand for labour
Three main economic activities:
production
consumption
exchange (trade)
Production creates income; then this
income is spent to purchase the products.

Participants in the economy:

individual households
firms
public sector (government)
financial sector
foreign sector.

Specialisation: a tendency of
people, businesses and countries to
concentrate on different activities
to which they are best suited.

Division of labour: the act of assigning

individual workers to different tasks which
form part of the production process.

Capital intensive production: when the

production process is dominated by machines.

Labour intensive production:

when the production process
is dominated by human labour.

Factors of production
Land (natural resources):
remuneration via rent
Labour (human resources):
remuneration via salaries and wages
Capital (man-made resources):
remuneration via interest
Entrepreneurship:
remuneration via profit
Technology: no remuneration

Command system
Centrally planned and
state controlled system.
Tend to be socialist,
although can be communist.
A pure socialist system is
completely owned by the state.
A pure communist system is
completely owned by everyone.

Market system
A market is any contact or
communication between
potential buyers and potential
sellers of a good or service.
Conditions for a market to exist:
1. one potential buyer
and one potential seller
 2. seller must have something to sell
3. buyer must have the means to
purchase it (purchasing power)
4. an exchange ratio (market
price) must be determined
5. agreement guaranteed
by law or tradition
Market prices act as a signalling
system, indicating scarcity, driving
consumer choices and producer activity.
Often capitalist systems that are
characterised by individualism, private
freedom, private property, property
rights, decentralised decision making
and limited government intervention.
Based on self-interest
and maximising profits.
Competition between sellers
protects customers and
promotes efficiency and growth.
Negotiation happens
between buyer and seller.
Market mechanism: works like an
invisible hand which coordinates selfish
actions of individuals to ensure that
everyone is better off (Adam Smith).
Pure market capitalism is
when all factors of production
are in private hands.

Traditional system
Goods are produced and distributed
in the same way through generations.
Prescribed by custom and
long-established traditions.
A rigid system that is slow to
adapt and resists innovation.
Typically subsistence economies.
Economic activity is not prioritised.

Opportunity cost
The opportunity cost of a choice is the value to
the decision maker of the best alternative that
could have been chosen but was not chosen. In
other words, the opportunity cost of a choice
is the value of the best forgone opportunity.

Mixed economy
All economies are typically
mixed, with one dominant system
Appropriate "mix" highly debated
South Africa:
mixed economy with large
private sector and substantial
government intervention
Privatisation: selling state-owned
assets to the private sector
("restructuring of state assets")
 Nationalisation: acquiring privately
owned assets by the state
government's economic
share has grown rapidly
government intervention via price fixing
Perfect competition: no buyer
or seller can influence the price
Imperfect competition: buyers
and sellers can influence the price

End of LU 2

The 3 economic questions

What goods and services
should be produced and in what
quantities? (output question)
How should each of the goods and
services be produced? (input question)
For whom are the various
goods and services produced?
(distribution question)

End of LU 1
What is economics all about?
Economics is a social science and the study
of how societies use scarce resources to
produce valuable commodities and
distribute them among different people.
Needs: essential for survival
 Wants: unlimited human desires
Demand: must be backed
by purchasing power
Scarcity: limited resources
Choice: necessary due to scarcity

Production possibilities curve (PPC)

Indicates the combinations that
are attainable when resources
are fully and efficiently employed
Points to the right of the curve
are unattainable (scarcity)
Points to the left of the
curve are obtainable but
inefficient (unemployment)
Swivel caused by improved techniques
Outward shift-> economic growth
Inward shift -> recession

Normative statement:
opinion-based and biased
Positive statement: objective fact
Ceteris paribus condition:
all things being equal
Macro economics: Focus on the
bigger picture of the entire economy
with topics such as economic
growth, unemployment, inflation, etc.
Micro economics: Individual elements
of the economy focusing on the
decisions of individuals, households,
firms, and other organisations.

Goods and Services

Goods are tangible while
services are intangible.

Capital goods: These are used in the

production of other goods (e.g.
machinery, plant, equipment, land, roads
etc.) and depreciate (lose value) over time.

Consumer goods: These are used by

individuals or households (i.e. consumers)
Non-durable: single-use (e.g. food)
Semi-durable: lasts a limited period
(e.g. clothing, blankets, motorcar tyres)
Durable: lasts a number of
years (e.g. furniture, motorcars)
Final: consumed by individuals,
households, and firms
Intermediate: purchased
to be used as inputs
Private: consumed by individuals or
households (typical consumer goods)
Public: used by the community
(e.g. traffic lights, defence force)
 Economic/Scarce: produced at a
cost from scarce resources (e.g. coal)
Free: not scarce, therefore no price
Homogenous: exactly alike
(e.g. fine ounce of gold)
Heterogenous: differentiated
goods available in different varieties

Economic fallacies
Blinkered approach (biased
thinking): Oversimplified solutions
shaped by personal experience and
situations, making it difficult to be
completely objective.
Fallacy of composition: "The whole is
always equal to the sum of the parts."
Something that is true for a single case
is not necessarily true for the whole.
Post hoc ergo propter hoc: Latin
phrase meaning "after this,
because of this". A specific example
of correlation vs causation where
the first event is regarded as the
cause for the second event.
Correlation vs causation: Events
occurring together are not
necessarily related or the cause of
each other. Statistical correlation
does not confirm causation.
Levels and rate of change: Levels
are actual amounts whereas rates
of change indicate how fast levels
are changing or by how much (%).