Economics

Module One (1):

Production Possibility Frontier/Curve

This is a graph depicting all maximum output possibilities for two goods given a set of inputs (resources, labor, etc.). 

Assumptions made by the PPF:

Only two (2) goods can be used in this graphical trade off; e.g. the number of rabbits vs. the number of berries.

The resources are fully and efficiently employed. The level of technology is assumed to remain constant

Definitions:

Oppurtunity Cost: The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action.

Scarcity: The basic economic problem that arises because people have unlimited wants but resources are limited.

Shortage: A shortage occurs whenever quantity demanded is greater than quantity supply at the market price. 

Choice: What someone must make when faced with two or more alternative uses of a resource (also called economic choice).

Factors of Production:

Land (rent) Labour (wages/salaries) Entrepreneurship (profit) Capital (Interest)

UtilityThis is an economic term referring to the total satisfaction received from consuming a good or service.

Cardinal Approach to measuring utility

Cardinal utility states that the satisfaction the consumer derives by consuming goods and

services can be measured with numbers. Cardinal utility is measured in terms of utils (the units

on a scale of utility or satisfaction). According to cardinal utility the goods and services that are

able to derive a higher level of satisfaction to the customer will be assigned higher utils and

goods that result in a lower level of satisfaction will be assigned lower utils. Cardinal utility is a

quantitative method that is used to measure consumption satisfaction.

Ordinal Approach to measuring utility

Ordinal utility states that the satisfaction the consumer derives from the consumption of goods

and services cannot be measured in numbers. Rather, ordinal utility uses a ranking system in

which a ranking is provided to the satisfaction that is derived from consumption. According to

ordinal utility, the goods and services that offer the customer a higher level of satisfaction will be

assigned higher ranks and the opposite for goods and services that offer a lower level of

satisfaction. The goods that offer the highest level of satisfaction in consumption will be

provided the highest rank. Ordinal utility is a qualitative method that is used to measure

consumption satisfaction.

Demand

Demand: This refers to the entire relationship between prices and the quantity of this product or service that people want at each of these prices; should be thought of as "the demand curve." 

Quantity demanded:  Refers to one particular point on the demand curve (not the entire curve); how much of the product is demanded at one particular price, the horizontal distance between the vertical axis and the demand curve.

The law of demand

P Qd

P Qd

Factors affecting demand:

Products Own Price Consumer Income Price of Related Goods Tastes and Preferences inn consumers Consumer expectations

Number of consumers in the market

Supply

Supply is the quantity of a product that a producer is willing and able to supply onto the market at a given price in a given time period.

The law of supply: As the price of a product rises, so businesses expand supply to the market. A supply curve shows a relationship between price and how much a firm is willing and able to sell

P Qs

P Qs

Factors Affecting Supply:

Input Prices Technology Competitors in the Market Producer’s Expectations

Elasticity

Es/d < 1 Inelastic or relatively inelastic

Es/d = 1 Unitary Elasticity

Es/d > 1 Elastic

Inferior Good-  An inferior good means an increase in income causes a fall in demand. It has a negative YED. An example, of an inferior good is Tesco value bread. When your income rises you buy less Tesco value bread and more high quality, organic bread.

Normal Good- This means an increase in income causes an increase in demand. It has a positive YED. Note a normal good can be income elastic or income inelastic.

Luxury Good- A luxury good means an increase in income causes a bigger % increase in demand. It means that the YED is greater than one. For example, high definition TV’s would be luxury. When income rises, people spend a higher % of their income on the

luxury good. (Note: a luxury good is also a normal good, but a normal good isn’t necessarily a luxury good)

Market Equilibrium

Market equilibrium in this case refers to a condition where a market price is established through competition such that the amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers.

Consumer Surplus

The difference between total benefit of consuming a given quantity of output and the total expenditures consumers pay to obtain that quantity. (Above the equilibrium price)

Producer Surplus

This is the difference between the amount that a producer of a good receives and the minimum amount that he or she would be willing to accept for the good. (Below the equilibrium price)

Dead Weight Loss

The costs to society created by market inefficiency caused by an inefficient allocation of resources. Price ceilings (such as price controls and rent controls), price floors (such as minimum wage and living wage laws) and taxation are all said to create deadweight losses. Deadweight loss occurs when supply and demand are not in equilibrium. 

Module Two (2):Market Structure

Market structure is defined by economists as the characteristics of the market. It can be organizational characteristics or competitive characteristics or any other features that can best describe a goods and services market.

Characteristics:

The number of firm operating in a market. The concentration ratio of company. The amount and nature of costs in the market; It will show how the different costs affect

the contestability in the market. It will include the economies of scale and the presence of sunk costs.

Pricing Power. The levels of product differentiation. Profit (normal, supernormal, economic).

Types: Monopoly

Monopolistic Competition Perfect Competition Oligopoly.

Formula Sheet Average Total Cost (ATC) = Total Cost / Q (Output is quantity produced or ‘Q’)

Average Variable Cost (AVC) = Total Variable Cost / Q Average Fixed Cost (AFC) = ATC – AVC

Total Cost (TC) = VC + FC Total Variable Cost (TVC) = AVC X Output Total Fixed Cost (TFC) = TC – TVC Marginal Cost (MC) = Change in Total Costs / Change in Output Marginal Product (MP) = Change in Total Product / Change in Variable Factor Marginal Revenue (MR) = Change in Total Revenue / Change in Q Average Product (AP) = TP / Variable Factor Total Revenue (TR) = Price X Quantity Average Revenue (AR) = TR / Output Total Product (TP) = AP X Variable Factor Economic Profit = TR – TC > 0 A Loss = TR – TC < 0 Break Even Point = AR = ATC Profit Maximizing Condition = MR = MC

Explicit Costs = Payments to non-owners of the firm for the resources they supply.

Perfect competition : the efficient market where goods are produced using the most efficient techniques and the least amount of factors. This market is considered to be unrealistic but it is nevertheless of special interest for hypothetical and theoretical reasons.

Monopoly : it represents the opposite of perfect competition. This market is composed of a sole seller who will therefore have full power to set prices.

Oligopoly : in this case, products are offered by a series of firms. However, the number of sellers is not large enough to guarantee perfect competition prices.

Monopolistic competition : this market is formed by a high number of firms which produce a similar good that can be seen as unique due to differentiation that will allow prices to be held up higher than marginal costs.  In other words, each producer will be considered as a monopoly

thanks to differentiation, but the whole market s considered as competitive because the degree of

differentiation is not enough to undermine the possibility of substitution effects.

Market Failure

A market failure is a situation where free markets fail to allocate resources efficiently; productive and allocative inefficiency.

Causes:

Lack of public goods Environmental concerns Positive and negative externalities Underproduction of merit goods Overprovision of demerit goods Abuse of monopoly power

Definitions:

Public Goods- Goods with characteristics of non-rivalry and non-excludability. E.g. national defense.

Merit Goods- Goods which people may underestimate benefits of. Also often have positive externalities. E.g. education.

Demerit Goods- Goods where people may underestimate costs of consuming it. Often have negative externalities. E.g. smoking, drugs.

Private goods- Goods which do have rivalry and excludability. Free Goods- A good with no opportunity cost. E.g. breathing air.

Negative Externalities

Negative externalities occur when the consumption or production of a good causes a harmful effect to a third party.

Examples of Negative Externalities

If you play loud music at night your neighbour may not be able to sleep. If you produce chemicals and cause pollution as a side effect, then local fishermen will not be

able to catch fish. This loss of income will be the negative externality.

Social cost With a negative externality the Social Cost > Private Cost

Positive Externalities

This occurs when the consumption or production of a good causes a benefit to a third party.

Examples of Positive Externalities

When you consume education you get a private benefit. But there are also benefits to the rest of society. E.g. you are able to educate other people and therefore they benefit as a result of your education.

A farmer who grows apple trees provides a benefit to a beekeeper. The beekeeper gets a good source of nectar to help make more honey.

If you walk to work, it will reduce congestion and pollution, benefiting everyone else in the city.

Social Benefit

With positive externalities the benefit to society is greater than your personal benefit. Therefore with a positive externality the Social Benefit > Private Benefit

COSTS

Private Costs

Direct (private) monetary costs

External costs

Monetary, e.g. a new road may mean less money for train companies Non- monetary e.g. poll, spoiling landscape, noise

Module Three (3):

The demand for; Supply of Theory

The rewards

Factor Owner Reward Nature of FactorLand Landlord Rent PrimaryLabour Labourer Wages Human ResourceCapital Monetary Lender Interest Man MadeEnterprise Entrepreneur Profit Man Made

Derived Demand

Demand for a basic good (wanted not for its own sake but for the goods derived from it) such as textiles, that is due to its use in the production of another good such as apparels.

Marginal Productivity Theory

A theory used to analyze the profit-maximizing quantity of inputs (that is, the services of factor of productions) purchased by a firm in the production of output.

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Wage Differentials

This is the difference in wages between workers with different skills in the same industry or between those with comparable skills in different industries or localities.

Causes:

Supply and Demand Positive and negative discrimination Specialties Labour Nobilities Ethic discrimination

Labour Mobility

Mobility of labour means the capacity and ability of labour to move from one place to another or from one occupation to another or from one job to another or from one industry to another.

Geographical Occupational Industrial Horizontal Vertical

Poverty

Poverty may be defined as the condition in which people do not have enough income to provide for their basic needs such as food, clothing and shelter. But, it is difficult to settle on a universal definition of poverty.

Absolute poverty: This is where person cannot afford the basic necessities of life. Such a person is unable to sustain himself.

Relative poverty: This is where a person is considered poor in relation to someone else.

Measurements of poverty

The poverty line: This is an amount of income below which a family is considered poor. To determine the poverty line the government first figures the cost of a year’s nutritious low cost diet. This is then adjusted for family size and composition. Different poverty lines are determined for different areas based on varying food prices.

Basic Needs: These are determined by the government along with international financial institutions.

Causes

Unemployment Restriction to job entries Low Productivity

Effects

Unemployment Lower Output Inefficient Spending by the Govt. Social and Environmental Costs