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Chapter 1

Chapter 1. 1.1 Scarcity, Choice, Opportunity Cost Definition of Economics: Resources versus Wants (Box 1.1) Wants : more and better → unlimited Versus Needs: essential → limited (calculate) Versus Demand: want + ability to pay Resources : Natural/ Human/ Man – Made → limited

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Chapter 1

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  1. Chapter 1 1.1 Scarcity, Choice, Opportunity Cost • Definition of Economics: ResourcesversusWants(Box 1.1) • Wants: more and better → unlimited Versus • Needs: essential → limited (calculate) Versus • Demand: want + ability to pay • Resources: Natural/ Human/ Man – Made → limited • Scarcity: Because resources are (1)scares, has to (2)choose. Example: Time • Definition of Opportunity Cost: (3)Forgone opportunity • Production possibility Curve(concave): levels of output + given limited resources + given fixed production techniques(figure 1.1) Illustrate: choice, scarcity and opportunity cost (trade – off) 1.2 Economics as a science • As a social science: behaviour of human beings in changing environment versus Natural science controlled environment, example chemistry • Ceteris paribus: “all other remain the same” to explain unpredictable outcomes. • Also Empirical science: measured economic performance • Microeconomics: individual parts of Economy, example: consumers, households. Box 1.2 • Macroeconomics: Economy as a whole, example: Total production, income and expenditure. Box 1.2 • Mesoeconomics: “In between” • Positive statement: Facts • Normative statement: Debated 1.3 Levels and Rates of Change • Levels: example, wages and income versus Rates: example, inflation and growth • Example: Box 1.3 http://johan008.bizhat.com ECS1501

  2. Chapter 2 2.1 What should be produced? • Goods versus Services: Tangible versus Non Tangible • Consumer versus Capital Goods: Individuals versus Production • Non- versus Semi-versus Durable: Times used • Final versus Intermediate Goods: When used • Private versus Public goods: Who used • Economic versus Free Goods: Cost + Price • Homogeneous (exactly the same) versus Heterogeneous Goods (different varieties) • Production possibilities Curve: Figure 2.1 • Shifts in the production possibility curves: Figure 2.2-4 2.2 How should it be produced? • Factors of production: (5) • Primary versus secondary versus tertiary, Box 2.2 • Human versus non-Human resources • Natural Resources: non-renewable • Labour: Specialisation\ Division of labour (split in subunits) Box 2.1 • Capital: Depreciation • Entrepreneurship • Technology • Capital- intensive versus Labour- intensive 2.3 For Whom should it be produced? • Income for factors of production 2.4 Solutions to the central Questions: Economic systems • What, How, For Whom • Traditional\ Command\ Market\ Mixed • Property Rights • Coordinating mechanism, Box 2.3 http://johan008.bizhat.com ECS1501

  3. Chapter 3 3.1 Production, Income and Spending • Production generates → Income (for various factors of production) → use for Spending on Production (fig.3.1) • Stock versus Flow variable → Time dimension difference • Once versus Continues (box 3.1) 3.2 The interdependence between Households and Firms • Figure 3.2 (goods and services) + Figure 3.3 (income and spending) • Households: people who make economic decisions and sells factors of production on the factor market • Firms: employs factors of production and produce goods and services for the goods market http://johan008.bizhat.com ECS1501

  4. Chapter 7 7.1 Demand and Supply: an introductory overview • Functioning of a specific market with household (intended demand) and firms (intended supply). Figure 7.1 7.2 Demand • Definition: Quantities of a good or service that the potential buyers are willing and able to buy. (flow) • Quantity demand(Qd) depends on: price of the good(Px), the price of related goods(Pg), income of the individual(Y), taste(T), number of people(N) → Qd = f (Px, Pg, Y, T, N) • Qd = f (Px) ceteris paribus for (Pq, Y, T, N) • Example: Table 7.1 → Figure 7.2 (also words, schedules, equations) • Law of demand: higher prices, lower quantity demand → negative, inverse relationship • Market Demand: adding individual demand curves horizontally (Figure 7.3) • Movement Along a demand curve(fig7.4) → ⌂ (change) P versusShift of the demand curve → ⌂ P of related good (Substitutes (fig 7.5)/Complements(fig 7.6)) Pg / ⌂ consumer tastes or preferences, T / ⌂ population, N / ⌂ expected future price / ⌂ Income / Etc. • Demand: a summary, Table 7.3 7.3 Supply • Definition: q of a good or service that the producers plan to sell at each possible price • Quantity supply(Qs) depends on: price of the good(Px), price of alternative products(Pg), price of factors of production and other inputs(Pf), expected future price(Pe), state of technology(Ty) → Qs = f (Px, Pg, Pf, Pe, Ty) • Qs = f (Px) ceteris paribus for (Pg, Pf, Pe, Ty) • Example: Table 7.4 → figure 7.8(also words, schedules, equations) • Law of supply: higher prices, higher quantity supplied → positive, direct relationship • Market Supply: adding individual supply curves • Movement Along a supply curve ⌂ P→ versusShift of the supply curve → Pg, Pf, Pe, Ty, etc. • Supply: a summary: Table 7.5 and Figure 7.10 + 7.9 7.3 Market Equilibrium • Table 7.6 → Figure 7.11 • Excess Demand: Qd > Qs, Excess Supply: Qd < Qs, Equilibrium: Qd = Qs • Function of prices in a market economy: Rationing goods + services to who can afford them Allocating factors of production where it is needed (cost) the most. http://johan008.bizhat.com ECS1501

  5. Chapter 8 8.1 Changes in Demand • Increase in demand (any determinants except price) equilibrium ↑P ↑Q → figure 8.1(a) and Decrease in demand ↓P↓Q →figure 8.1(b) 8.2 Changes in Supply • figure 8.3 & 8.4 8.3 Simultaneous change in Demand and Supply • Precise outcome cannot be predicted; change may work in opposite direction. Example: Increase in Demand + Decrease in supply = 3 different Q → figure 8.5 8.4 Interaction between related markets • Substitutes figure 8.6 and figure 5.1 in study guide • Complements figure 8.7 8.5 Government Intervention • Maximum prices (price ceiling) → figure 8.9 • Consequences: shortage (excess demand)/ prevent market mechanism from allocating/ black market activity • Example rent control 8.6 Agricultural prices • Minimum prices (price floor) Figure 8.12 • Consequences: surplus (excess supply)/ artificially high prices/ farms owned by big companies benefit/ inefficient producers are protected/ disposal of surplus – further cost. http://johan008.bizhat.com ECS1501

  6. Chapter 9 Introduction • A general definition of elasticity: Responsiveness of dependent variable (Q) to change in independent (p) 9.1 Price elasticity of demand (ep) • Definition: 1%⌂P →? %⌂Q • Meaning of ep 1.5 = 1%⌂P → 1.5%⌂Q • various point ep along a linear demand curve → figure 9.1 (a) point elasticity = (⌂Q/⌂P) x P/Q and figure 9.1(b) • Calculate price arc elasticity of demand Box 9.1(Q2-Q1)/(Q2+Q1) ep = --------------------- (P2-P1)/(P2+P1) • ep versus TR → figure 9.3 and box 9.2 • Five categories of ep Table 9.2 and Figure 9.4 • Impact of a change in supply Figure 9.5 and elasticity and slope are not the same Box 9.3 • Determinants of ep: substitutes >; complements <; Types of wants satisfied ⌂; Time >; proportion of income>. 9.2 Other demand elasticity's • Income elasticity Definition: ey: %⌂Y →%⌂Q %⌂Q • Calculate: ey =-------- %⌂Y • + ey = normal goods /- ey = inferior goods / ey>1 = luxury goods / 1> ey>0 = essential goods • Example Table 9.3 • Cross elasticity eC): %⌂Pa →%⌂Qb %⌂Qb • Calculate: ey =-------- %⌂Pa • +substitutes, -complements http://johan008.bizhat.com ECS1501

  7. Chapter 10 10.6 Introduction to the indifference approach • Cardinal Utility: can be measure versus Ordinal Utility: can be ranked(place in order of preference) • Three basic assumptions • Completeness (rank all possible combinations) A prefer to B, B prefer to C etc. • Consistency (preference stay the same) prefer X to Y, Y to Z then X to Z • Non-satiation ( prefer always more to less as never fully satisfy) A = 3kg and C = 4kg, prefer C to A 10.7 Indifference curves • Definition: combination/ 2products/ equal levels of satisfaction or utility • Law of substitution : the scarcer a good (bread), the greater the substitution value (meat Figure 10.3 + table 10.6 (A →B 3 bread for 1 meat, B→C 1 bread for 1 meat, C→D ½ bread for 1 meat)) = less bread for same meat • Marginal rate of substitution (MRS): Slope of tangent line indicate exchange ratio (⌂Qy/⌂Qx) or substitution ratio at that point. • Properties: slope downwards from left to right, indifference map, never intersect or touch • Complements(fixed proportions-only one value/piontis true) and substitutes(same satisfaction- anywhere on straight line) box 10.4 10.8 The budget line (expenditure line, budget constraint, consumption possibility curve) • Definition: combination/ 2products/ can afford with income. • Slope = exchange ratio = opportunity cost = Px/Py Figure 10.6 10.9 Consumer equilibrium • Figure 10.7 slope of budget line = slope of indifference curve. MRS(= ⌂Qy/⌂Qx = MUx/ Muy) = Px/Py 10.10 Change is equilibrium • Change in income (figure 10.9) →income-consumption curve → normal or inferior good • Change in price (figure 10.10 a) →price-consumption curve → demand curve (figure 10.10 b) http://johan008.bizhat.com ECS1501

  8. Chapter 11 11.1 Introduction • Types of firms (individual proprietorships, partnerships, companies, close corporations, cooperative, trusts, public corporations) • The goal of the firm (maximize profit but principal-agent problem) • Profit, revenue and cost (profit is surplus of revenue over cost, TR=PxQ, AR=TR/Q, MR=⌂TR/⌂Q : Box 11.2) • short run (fixed capital equipment, variable labor) and the long run (variable labor and capital) in production and cost theory 11.2 Basic cost and profit concepts • TC=cost of production, AC = TC/Q, MC = ⌂TC/⌂Q • Opportunity Cost = Alternative sacrificed • Explicit cost = monetary payment versus Implicit cost = opportunity cost not reflected in monetary payment • Economic cost: Explicit + Implicit cost • Profit (Figure 11.1) : Accounting profit = TR – Explicit cost • Economic profit = TR - economic cost (Explicit + Implicit) • Normal profit = TR equal to economic cost • Economic loss = TR < economic cost 11.3 Production in the short run • Definition: Physical transformation of inputs into output • Fixed input: cannot be altered in the short run versus Variable input can be altered in the short run • Production function: relationship between inputs and outputs • Law of diminishing returns: more inputs/ production process/ point is reached/ MP↓, AP↓, TP↓ • Table 11.2 → Figure 11.2 MP & AP relationships in figure 11.3 11.4 Cost • Economic cost include Opportunity cost = Implied cost • Fixed Cost: remains constant irrespective of Q versus Variable cost: change when total product changes • AFC = TFC/TP, AVC = TVC/TP, AC = TC/TP, MC = ⌂TC/⌂TP • Table 11-4 → Figure 11.5 and 11.6 • Relationship between production and cost: (Fig 11.7) Maximum MP → Minimum MC, Maximum AP → Minimum AVC http://johan008.bizhat.com ECS1501

  9. Chapter 12 12.1 Perfect Competition • Definition: No market participant → influence → price →”Price Taker” • Requirements: large number of buyers and sellers/ no collusion/ identical products/ freedom of entry and exit/ perfect knowledge/ no government intervention/ mobile factors of productions • Relevance: Analysis of various markets 12.2 The Demand for the product of the firm • Demand Curve = Sales Curve → horizontal at market price (figure 12.1) Higher → another supplier, lower → not optimum “Price Taker” • Receive same price for any number of units therefore MR = AR = P (Box 12.1 – Numerical proof) 12.3 Equilibrium of the firm under perfect competition • Shut down rule:(figure 12.7) TR = TVC (AR = AVC) → TR just sufficient to cover TVC, continue in order to retain employees and clients • Profit maximizing rule:(figure 12.5) MR = MC → revenue earned from the last additional unit (MR) is equal to the cost of producing the last unit (MC). • MR < MC → profit decreasing • MR > MC → expanding production increase profit • Different equilibrium positions: figure 12.6 • AR > AC → Economic Profit • AR = AC → Normal Profit • AR < AC → Economic Loss (if AR = AVC → shut down point) 12.4 The supply curve of the firm and the market supply curve • Figure 12.7 → various quantities at different prices. Not below (b) → close down point (does not cover variable cost) • Supply curve slope = MC curve slope → because MC↑ as output(supply)↑ • Market Supply = ∑ individual supply curve 12.5 Long-run equilibrium of the firm and the industry under perfect competition • Study Guide Only http://johan008.bizhat.com ECS1501

  10. Chapter 13 (Study Guide Only) 13.1 Market Structure • Perfect Competition vs. Monopoly vs. Monopolistic Competition vs. Oligopoly → Table 13.1 • Number of firms/ Nature of product/ Entry/ Information/ Collusion/ Control over price/ Demand curve/ Economic Profit • Equilibrium : MR = MC 13.2 Monopoly • Main features: one seller/ no substitutes/ entry to market is blocked/ downward sloping demand curve • Economic profit → short + long run (as entry is block)versus Perfect competition: economic profit → short run and normal → long run (no barriers). • Equilibrium : MR = MC figure 10.1-3 13.3 Monopolistic Competition (mini-monopoly) • Conditions: Differentiated product, downward sloping demand curve, large number of firms, no barriers to entry. • Economic profit → short run and normal → long run (no barriers). 13.4 Oligopoly • A few large firms dominate the market, high degree of interdependent → rival reaction to its own action is uncertain → collude e.g. OPEC http://johan008.bizhat.com ECS1501

  11. Chapter 14 14.1 The labour market versus the goods market • Box 14.1 – money (nominal) wages: amount of actual money received versus real wages: purchasing power of money received • Versus goods market p.278 14.2 Perfect competitive market • Requirements for perfect competition p.279 • Equilibrium in the labour market figure 14.1 • The market supply of labour: figure 14.3 shift due to non-wages determinants p.281 • The market demand of labour: figure 14.5 shift due to non-wages determinants p.284 • Study Guide: Employ more workers (profit) when labour (wages) MRP (MPP x P) until Wage = MRP 14.3 Imperfect labour markets • Reasons for imperfect p.288 • Trade unions: craft versus industrial p.288/9 figure14.8 • Government intervention in the labour market: employer- versus employees-friendly p.294 • Minimum wages: Figure 14.10 http://johan008.bizhat.com ECS1501

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