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Summary Economics 1A study notes
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ECS101 – DEC 2009MICROECONOMICS AND MACROECONOMICS –
MICROECONOMICS MACROECONOMICS
The price of a single product The consumer price index
Changes in the price of a single product Inflation
The production of a product The total output of all goods n services
The decisions of individual consumers The combined outcome of the decisions of all consumers in
the country
The decisions of individual firms or The combined decisions of all firms in S.A
businesses
Microeconomics – the focus is on individual parts of the economy. Decisions or functioning of
decision makers such as individuals, households, firms or other orgs. Are considered are
considered in isolation from the rest of the economy.
Macroeconomics – is concerned with the economy as a whole. An overall view of the economy
and aggregate economic behavior is studied. Emphasis on topic such as total production, income
and expenditure, economic growth, aggregate unemployment, inflation etc is studied.
The problem of economizing is essentially one of deciding how to make the best use of limited
resources to satisfy unlimited want
Opportunity cost is best defined as the value of the best alternative sacrificed when a choice is
made
An unskilled labourer would be viewed by economists as a factor of production.
A technological improvement in the production of a good or service will cause a
rightward/outward shift of the PPC
Interest is income from capital
A capital intensive production system is dominated by capital goods
Capital, wealth and natural resources are stock variables, whereas investment, profit and losses are
flows.
Firms are the purchasers of capital goods in a simple circular flow
The bars above symbols in formula for law of demand implies that the ceteris paribus rule applies
Under perfect competition the maximum loss a firm will make in the short run is equal to the total
fixed cost.
Under perfect competition information is complete and collusion is impossible
Monopoly – the ability to influence the market price and the market output
Oligopoly – the market is dominated by few large firms with market power ,the strategy can be to
join forces and it is called cartel forming
A change in the price of the other factors of production will shift labour demand curve
A trade union that bargains only for an increase in wages will cause unemployment
Minimum wages are propagated as a way to avoid exploitation of workers.
An important similarity between the monopolistic competitor and oligopolist is that both have
incomplete information about market condition
Monopoly – has thorough knowledge of market conditions
Law of demand implies that as prices fall quantity demanded increases
Demand curve will shift right if there is an increase in the price of the substitute product
Supply curve will shift left when there is an increase in the price of inputs
An increase in supply and a decrease in demand will always cause a decrease in the equilibrium
price.
An increase in both demand and supply will increase an equilibrium price
Under perfect competition market the participants(firms is a price taker
,If a firm under in a perfectly competitive market raises its price above the market price sales will
drop to zero
Demand curve under PC – the demand curve is indicated by a horizontal line at the given market
price
A firm can expand production in the short run by employing more units of the variable factor of
production.
Price elasticity measure the responsiveness or sensitivity of consumers to price changes
Producers are interested in the price elasticity of demand for their product because it indicates
what will happen to their total revenue when the price of the product changes
The price elasticity of demand is different at each point along a linear demand curve
Marginal utility is the extra or additional utility that a consumer derives from the consumption of
one additional unit of good
Marginal utility will decline if identical units of a good are consumed one after the other
Nominal wage is the amount of money actually received by a worker per hour, week, day, month,
or year
A real wage is the quantity of goods n services that can be purchased with the nominal wage
Equilibrium condition for the individual firms demand for labour - MRP=W or MPP x P=W
Labour is a derived demand because labour is not demanded for its own sake, but rather for the
value of the goods n services that can be produced when labour is combined with other factors of
production.
Excess supply – when the quantity supplied is greater than the quantity demanded
When there is a market shortage the quantity produced will increase
The price of a product will decrease when there is a market surplus
Equilibrium in the market – Qd=Qs
Consumer to be in equilibrium – the weighted marginal utilities of the condition of goods are
equal of equal utility from the last rand spent on each product
Primary sector – raw materials are produced
Secondary sector – manufacturing part of the economy
When all firms earn normal profit = industry in equilibrium in the long run
The economic problem arises from the coexistence of unlimited wants and limited resources
Normative statement – factual , unemployment is the most important economic problem
worldwide
Factor of production – a national road, labour of households, arable land used for sowing
Economic systems are based on any or a combination of 3 coordinating systems, tradition,
command and market
Market capitalism most of the factors of production are privately owned with limited government
intervention.
The demand for labour is a flow variable
Capital is s stock variable
A decrease in demand together with an increase in supply = fall in equilibrium price
Fixing a minimum price above the equilibrium price will result in an excess supply
If producers are faced with a unit elastic demand curve , they cannot raise their total revenue by
increasing or decreasing the price of product
When the percentage change in quantity demanded is relatively small compared to the percentage
change in price it can it can be said that the demand is relatively inelastic
If the income elasticity of demand is negative the product is an inferior good
The larger the number of substitutes and the closer the substitutes are and in the case of luxury
goods and services the more elastic the price elasticity is
In the analysis of consumer behaviour the aim of the consumer is to obtain the highest attainable
level of total utility
Perfect competition exists if all the buyers and sellers have perfect knowledge of market
conditions and all the factors of production must be perfectly mobile
Monopoly – have the ability to control market output and the firm is a price taker
Demand refers to quantity of a product that potential buyers are willing and able to buy
,Demand is a flow variable
A fall in the price of a product will not shift the demand curve for a product
A market supply curve is a horizontal summation of the individual supply curves
An increase in the price of the a substitute product will increase the demand for a product
A decrease in the price of flour used to make bread is most likely to increase the supply of bread
When the quantity demanded is greater than the quantity supplied the price will rise to the
equilibrium price
A change in the price of a product will not shift the supply curve ceteris paribus
A decrease in demand together with an increase in supply will definitely result in an increase in
equilibrium price
Equilibrium occurs when quantity demanded equals quantity supplied
When there is excess supply in the market the price will decrease
Fixing the minimum price below the equilibrium price will not disturb the market
Simultaneous increase in supply and demand will lead to a uncertain change in equilibrium price
and equilibrium quantity will increase
Price elasticity of demand is a proportionate change in quantity demanded divided by a
proportionate change in price
Demand is inelastic when the proportionate change in quantity demanded is les than a
proportionate change in price
If the price elasticity of demand coefficient is greater than one then an increase in price will cause
a decrease in total revenue
Total utility decreases when marginal utility is negative
The aim of rational consumers is to maximize their utility given the available means and
alternatives at their disposal
A consumer is in equilibrium if the combination of goods are affordable
According to the law of diminishing returns total product is reaching a maximum when MP=0
The U shape of the marginal cost curve reflects the law of diminishing returns
Marginal product reaches a maximum when a corresponding marginal cist is at a minimum
Perfect competition occurs when none of the individual market participants can influence the price
of a product
No collusion means each seller must act independently
Characteristic of perfect competition – identical goods are sold in the market, there is no
government intervention, factors of production are perfectly mobile
Shut down rule and the profit maximizing rule are the rules for profit maximization of any firm in
the short run
Monopolistic competitive market – firms produce similar but slightly different products
Market participants under PC are price takers
Monopolistic competition is characterized by incomplete information
The demand curve of a monopolist equals the market demand curve
Under oligopoly there are only a few firms
Uncertainty is one of the features of an oligopoly
Monopolistic competition can exist when firms have some control over the price of the product
Labour is rented and not homogeneous
The functioning of the labour market is affected by non-economic considerations
An increase in the market supply of labour is caused by an increase in population
A decrease in the market demand for labour is caused by a decrease in the price of a substitute
factor of production
Opportunity cost is caused by limited resources
Ceteris paribus means all other things equal
Unskilled labour = factor of production
Macroeconomics deals with total production of all goods and services
A command economy is characterized by central planning
, A distinction between socialism and capitalism is to be found in the predominant type of resource
ownership
In market capitalism most of the factors of production are privately owned with limited
government intervention
Tertiary sector = trade between SA and the USA
Market – must be at least one potential buyer and seller , seller must have something to sell, buyer
must have the means to buy, market price must be determined
Competition occurs on each side of the market
Negotiation occurs between buyers and sellers
The 3 major flows in an economy as a whole is total production, total income and total spending
Final goods and services is an aspect of the goods market
Annual gold production is a flow variable
The prices and quantities traded in the goods market are determined by the interaction of demand
and supply
The law of demand states the lower the price the higher the quantity demanded
An increase in the income of a consumer will lead to rightward shift of the demand curve
A change in demand is the same as a shift of the demand curve
An increase in the price of a product will lead to a decrease in quantity demanded and an increase
in quantity supplied
If the demand for a product increases ceteris paribus both equilibrium price and quantity will
increase.
An increase in productivity of workers will shift supply curve right
Government set maximum prices to combat inflation
Fixing a maximum price below equilibrium price will result in excess demand
Black markets occur in any situation where market forces of demand and supply cannot eliminate
excess demand
In order for government price fixing to have an effect on the market the minimum price should be
set above the equilibrium price , minimum price and maximum price should be set at the same
level as the equilibrium price
Increase in supply of a product will lead to the supply curve shifting to the right and equilibrium
quantity will fall , the supply curve will shift right and demand curve will not shift
Price elasticity of demand varies from point to point along a linear demand curve
A perfectly elastic demand curve is horizontal
The aim of any consumer o to maximize utility
The cardinal utility involves the idea that values can be assigned to the amount of satisfaction ,
utility can be measured or quantified
The law of diminishing marginal utility states that the total utility increases at a decreasing rate as
the consumer consumes more units of a good
The marginal utilities of different goods must be equal and combination of goods must be
affordable for a consumer to be in equilibrium
The marginal utility approach can be used to derive the individual demand curve for a good
Negative utility is called disutility
Total revenue is at maximum when marginal revenue is zero, if the firm sells all units of its
product at the same price then its AR=P
Economic cost is the difference between total revenue and economic profit and the difference
between explicit costs and implicit costs
The concept of economic costs of production is based on the principle of opportunity cost
The law of diminishing return applies to a situation where at least one input is fixed
Production and cost in the short run – the shape of the unit cost curves give rise to the unit product
curves
A perfectly competitive firm faces horizontal demand curve because the market price is given
In PC – the firms marginal revenue and average cost are equal to the price in the market
Equilibrium condition – in the long run all costs of production are variable
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