Notesale: Turn your study into money

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Microeconomics
Theme 1
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(Theories in social sciences can be modified contrasted to natural sciences)
Economics = The study of choices and decision making in a world with limited resources
Microeconomics = Examines individuals, consumer, firms and markets within the economy
(Micro = small)
Economy = A system for the production of goods and services to satisfy people's needs and
wants
...

Need = must have (essential)
Want = would like (not essential)
Economic activity aim is to improve economic welfare ( Well being within society
Happiness,QOL,Real income,Education) = also known as utility or satisfaction
Economics uses theories/models based on observed behaviour
...
If it survives the tests then it will be
known as a theory but this isn't true in all circumstances it may fail later as the test gets
tougher meaning it can be disproved,amended and rejected
...
This is due to
factors such as observational bias (the fact that they're being observed while making
choices) and selection bias (As people volunteer and aren't selected)
...
This is due to the complexity of human nature and the significant number of
social interactions that are taking place in any economy at any given point in time
...

Economics makes predictions in a complex world
...

Economic Model = A simplified representation of reality used to provide insights into
economic decisions and events
...
= Change in 1 variable when all others
are the same and isolates the impact of that 1 variable has == Allows economists to simplify
and explain causes and effects
Positive Statement = A statement that is favoured by economists due to their factual and
objective nature in which it can be tested or rejected by referring to the available evidence
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= Positive statements aren't linked to political viewpoint = they are objective and are based
on empirical evidence = Proven true or false =
Normative Statements = Statements that express a value judgement about what ought to
be,value judgments make normative statements very subjective and they cant be tested or
verified
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The redirection of resources leaves some consumers better off and others worse off
...
Which results in an opportunity cost
Productive Possibility Frontier (PPF) = Shows the maximum combination of goods and
services that can be produced in a given time with the available resources being used
efficiency
PPF = Economic Model = Shows the maximum productive potential within an economy
Below PPF = Resources are economically inefficient and or unemployed resources
...
Better usage
due to the underside shifts the point from below the PPF
...
Need more FoPs to increase production
...

Above PPF = Currently Unobtainable or not feasible however in the long run it can be
achieved if more capital goods are produced sacrificing consumer goods now (opp cost)
...
Therefore this will make resources more obtainable in the
long run boosting standards of living and economic welfare
...
This can be explained by the Law of Diminishing Returns once the optimal
level of capacity has been reached, adding extra factor inputs will result in smaller increases
of output
...
And increasing marginal opportunity costs because some fops are specialised
and can't be adapted for other uses the opp costs increase
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Outward Shift (PPF):
More Consumer good and capital goods can now be produced
- The PPF shifts outwards due to an increase of FoPs which leads to a rise in
productivity and efficiency
...

- Higher productivity increases output per unit of input used in production
- Better management of FoPs reduced waste and improves quality
- Increases in capital and labour supply from inward labour migration or capital
investment = training and education of labour = more productive
- Innovation and Invention of new products and resources leads to improved
production process
- Discovery/Extraction of natural resources = viable land inputs derived from
extraction boosts quantity of resources
Inward Shifts (PPF):
- Resources in an economy is depleted so a reduction in the quality/quantity of
FoPs leads to Economic Decline
- Natural Disasters
- Destruction and loss of factor inputs caused by civil war
- Large scale Outwards labour migration
- Trend declines such as recessions
- Negative Investment (costs more to hold than returns = sell offs)
Asymmetric Shift = Increase in the ‘demand’ for 1 good, So each combination will include
more of the desired good
...

Specialisation = Labour used effectively this increases productivity and increases overall
production which increases profits and revenue
...
Higher productivity lowers the unit cost of
supply which in turn leads to higher profits
...
Some nations
specialise to the point where its their goal to produce more of that one good i
...

bangladesh and textiles
lower net prices for consumers gives them higher purchasing power and higher
productivity allows businesses to pay increased wages
...
For example if
BMW Cars go they're doomed because that's all the BMW produce
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Division of Labour = The process by which the production process is broken down into
sequences of stages with workers assigned at particular stages in the process and it was
created by Adam Smith “Grandfather of Economics”
Advantages:
- Division of Labour can raise output per person as people become more proficient
at tasks due to constant repetition
...
This is because less labour is needed to
produce the same output saving wage costs or the labour produces more
which means labour is spread over more units
...
Less time
wastage as labour does their one specialised task and not bother switching from
one job to another in the production process
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Time and money saved as workers only needed to be trained for one job and less
likey to leave for better jobs as the skills are transferable so the firm doesn't lose
human capital
...
Workers end up taking less pride in their work and this leads
to a drop in overall quality as workers don't have the incentive to work well so they
cut corners and lower overall standards
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- Low wages in doing only one job
- Increase staff turnover
- Good are massed produced and lack variety
- If labour lose their job they only have the one skill therefore its harder for them to get
employed
Functions of Money:
Overcome a double coincidence of wants = Both parties sufficiently need the others goods in
order to fulfil their demand
A Medium of Exchange = The most important function of money is to buy and sell
goods/services to overcome a double coincidence of wants found in a bartering economy
A Store of Value = The value of money is stored and can be worth roughly the same the next
day (but subject to inflation overtime)
...
= The transferring of purchasing power tull later

A Measure of Value = Easy to understand and compare that £20 is 2x more than £10
A Method of Deferred Payment = Money must link different time periods when it is saved
and borrowed (people will only lend money if it will be able to purchase roughly the same
amount of goods when it is paid back
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Short Run Economics = at least 1 factor input is fixed
Long Run Economics = all factor inputs are variable
Productivity = Output per person and can measure the factors of production's efficiency
...

Productivity depends on how many factor inputs have been employed to supply the extra
output and the efficient usage of them
...
= DP Inflation
A fall in labour productivity leads to a rise in a firm's unit costs of production
Factors That Affect Labour Productivity:
● Competition
● Tech
● Specialisation
● New Capital Inputs
● Training
● High Demand
● Management
● Better infrastructure
Resources Depreciation: = Reduction in the value of resources overtime
● Machinery - dmg overtime
● Skills atrophy
● Buildings and property
● Basic Infrastructure
Resource Depletion: = Reduction in the quantity of resources
● Human Capital/labour flight
● Capital Scrapping

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Natural disasters
Deforestation

Unlimited wants/desires - Limited Resources = Scarcity - Choices have to be made =
Opportunity costs - Who allocates the scarce resources?
Political systems = Are often associated with different economic systems
Capitalism = The factors of production are privately owned and is commonly associated with
free market economies
Socialism = The factors of production are socially owned
Communism = The factors of production are socially owned
Sectors of production in the economy:
Primary Sector = Natural Resources, Agriculture, Fishing, Mining
Secondary Sector = This involves the production of goods in the economy such as
processing raw materials from the primary sector
Tertiary Sector = The service sector selling skills and services such as selling goods from the
primary and secondary sectors, entertainment, finance, education
Quaternary Sector = Industries providing information services such as computing ICT
consultancy and RandD

Free Market Economy = The private sector (Consumers and Businesses) own factors of
production and allocate scarce resources through the price mechanism (Consumer/producer
through supply and demand which determines the market clearing price) = [None actually
exist but closest is like Hong Kong or Switzerland]
Advantages:
- Emphasis of consumer choice, firms have to match what consumers need and
demand
...

So there's no state provision and this puts those on low income at a disadvantage
and may result in poverty
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- Competition leads to the rise of Monopolies and dominant firms as rivals are
taken out of business
- Public and merit goods won't be supplied or will be but at insufficient
quantities
- Competition forces small businesses out = monopolies = quality suffers to
increase supernormal profits
- Monopolies explicit consumers and the supply chain
Command Economy = Scarce resources are allocated by the government, Factors of
Production are allocated on the people's behalf as well as what to produce and who gets it
...

- Often in command economies there are low qualities of goods/services as well as
shortages
- Lower economic growth than free market economies as there is less incentive to
be efficient due a lack of competition and profit motive
...
The
central planets suffer from info gaps
Monopoly power is transferred from firms to government who are inefficient
Excess demand and supply because the market can't clear as the price mechanism
is unable to operate causing a misallocation of resources
Sames washes = disincentives to work harder and become a doctor which takes 8
yrs of study
Less competition = less innovation and product development
Lack of competition between firms causing inefficiency and low productivity

Mixed Economy = Scarce resources are allocated partly by the government (public sector)
and partly by the private sector = [Almost Every Nation]
States Role:
● State Owned Businesses (Royal Bank of Scotland)
● Welfare State = reduce income equality via taxation and redistribution
● Government spending on public goods such education and defence
● Tackle and rectify market failures such as negative externalities
Key Economic Thinkers:
Adam Smith (1723 - 1790)
Of the idea that the free market is the best way to allocate scarce resources with limited
state interference
Author of the “Wealth of Nations” (1776) which discussed free markets to argue against
protectionism and legal barriers in the economy at the time
...
This benefits society by ensuring resources are used
efficiently
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Competition between firms would lead to smaller business being forced into liquidation
resulting in monopoly power to exploit workers and consumers, those who become bankrupt
due to this end up joining the proletariat

Marx believed that capitalism would be replaced by communism and that capitalism was 1
stage in the economic process and would self-destruct due to its flaws and weaknesses
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The proletariat revolution was inevitable as well as an abolition of private property replaced
by common ownership of land
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Fredrick Hayek (1899 - 1992)
In favour of the free market and a critic of state planning (socialism)
Author of "The road to serfdom" (1944), influenced Margaret Thatcher in the 70s and 80s
which states that state control is a loss of individual freedom
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Markets should aggregate individual decisions so ultimately the market will reflect the
information available to society as a whole
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Theme 1
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Neoclassical Rational = Means that economic agents can rank the order of different
outcomes from an action in terms of net benefits for them
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According to neoclassical economists when choices have to be made, they always choose
what the best alternative is at that time
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Changes in
factors such as demand or price alters the incentives for a consumer and they behave
differently
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People and firms have limited resources due to Scarcity and allocate their resources in a
way in which they get the highest level of satisfaction
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People don't always act rationally
and pursue alternative objectives that does not necessarily maximise their utility/profits
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Bounded rationality = most consumers don't have sufficient information to make a fully
formed judgment when making decisions
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Or they'll use rule of thumb approximations that aren't
scientific and usually don't take into account all the potential variables
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Misleading advertising
Consumer Computational Weakness:
Consumers struggle to understand, struggle to make choices, it's too difficult and too much
effort because of the difficulty
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Firms exploit this by giving
disjointed information
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Consumers may be
loss averse and are afraid of making themselves worse off and take no risks
...
They could also be addicted so they may not stop consuming
even though it negatively affects their welfare
...
= Therefore consumers are willing and able to spend
more on some goods than others
Basic Law of Demand = Demand varies inversely with price = Low Price = High Demand =
High Price = Low Demand
Total Utility = The total satisfaction form a given level of consumption
Marginal Utility = The amount of utility an individual gains from consuming an additional unit
of a good/service
Diminishing Marginal Utility = A decline in the additional satisfaction a person derives from
consuming an additional unit of that good
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As price for 1 good increases, alternatives become more
price competitive so they switch their consumption to the cheaper alternative leading to a
contraction in demand for that product
...
= Marginal utility falls = Consumers are willing and able to pay
lower
A CHANGE IN PRICE CREATES A MOVEMENT ALONG THE CURVE
Changes in Condition of Demand (Shifts) [Factors that influence demand other than price]:
Population - Increase = Outward - Decrease = Inward
Advertising - Successful = Outward - Unsuccessful = Inward
Substitutes - Price of Sub increases = Outward cuz urs is cheaper, Price of sub Decreases =
Inward (For ur good, cuz theres is cheaper )
Income - Increases = Ouward - Decreases = Inward
Fashion and Preference - In fashion = Outward - Ageing = Inward
Interest Rates - rise - less rdi - fall more rdi
Compliments - complement increases so does the other good
Seansonal Boons and Trends -

Supply = How many goods/services firms are willing and able to put onto the market at any
given price at any given time
...
This is due to the profit motive/incentive business price rises so
businesses expand supply to capitalise off the rise
...
) Also new market Entrants
can help explain why there's a positive relationship, high prices lead to an incentive for
businesses in long run economics to enter the market leading to an increase in total supply
...
Free Market Forces eventually will put downwards
pressure to return to Pe where there is an expansion in demand due to there being lots of
supply and a contraction in supply and it becomes less profitable because the price drops
...
Price will return back to Pe as producers
expand supply to capitalise off the demand which results in a contraction in demand as price
rises
...

NOT ALL PRICES ARE SET BY THE FREE MARKET FORCES OF SUPPLY AND
DEMAND = PRICES CAN BE AFFECTED BY REGULATORS WHICH MAY IMPOSE A
PRICING FORMULA ON SUPPLIERS = Rail Fares/Water Bills
The Price Mechanism = Is where the free market allocates resources through the interaction
of demand and supply
The price mechanism helps free markets solve the economic problem and allocate scarce
resources and resolves the issues that come with opportunity costs in the form of price
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Rationing Demand = When demand increases there will be a shortage of a good/service and
only those willing and able to pay a higher price will get the good/service as they are able to
afford it
...

Rationing Supply = Prices can help ration the supply of a good, if a resource is running out of
supply prices will rise causing demand to contract and those who have effective demand will
pay the higher price to obtain the scarce resources
...
Changes in what goods are preferred changes in demand and price are
all signals to producers and consumers as they oversee the price
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Signalling Consumer Demand = Prices rise due to high demand from consumers which
signals to producers to expand output to meet the higher demand
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Signalling Availability to Consumer = Prices fall due to a tech advancement which leads to a
higher supply and can be signalled to consumers to increase demand because of the lower
price signal
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Incentives For Producers = Suppliers have the incentive to producer more following an
increase in demand and a higher price to maximise profits
Incentives For Consumers = Consumers have an incentive to consume goods following and
increase in supply due to a lower price
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Measures consumer welfare as they often get the good they want for less than the price they
were willing and able to pay for it
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Producer Surplus = The difference between the market price which firms receive and the
price at which they are willing and able to supply
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Indirect Taxation = A charge levied by the government on goods and services which
increases the producers cost of production and shifts the supply curve to the left (inward)
Specific/Unit Tax = A tax set by the government on goods/services that is set at a constant
amount per item (Alcohol Tax) (Fixed Tax) = Parallel Shift because tax per unit Is the same
no matter the price
Ad Valorem (In Order of Value) = A tax set by the government on goods/services set as a
percentage of the price of the good (VAT) (%Tax) = Pivotal Shift because as price rises so
does the tax per unit rise which means there's a large gap between curves
IT = Increases a firm CoPs which increases supply cost so that less is supplied at each and
every price level shown via the vertical distance between the curves in the diagram
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Indirect Tax can be used to
alter consumers behaviour for example stop smoking or raise revenue to the
government/education = Usually levied on a demerit good
Firms wish to pass as much of the tax burden onto the consumer so they do not have to pay
for it and max profits
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(Assuming Rationality) = Depends on Elasticity
EV
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Reduction in QD to QD2 = May be significant enough lay of workers
Tax = Effectiveness depends on Elasticity
Difficult to set the right level of tax
Unintended consequences
Depends on the revenue generated and how its used
Loss of jobs, competitiveness
More losers than winners and has a regressive effect on low incomes

A = Consumer Incidence
B = Producer incidence
All of it = Total tax revenue raised by the government
Subsidy = A sum of money or financial support paid by the government to producers and
sometimes consumers in order to reduce the costs of production and encourage production
= Usually given to a merit good
Total Spending = Subsidy per Unit × Level of Output
Subsidies = Reduce prices in the market due to reducing the costs of production = Shifts the
supply curve to the right (Outward) = Parallel shifts as Subsidies are paid in per unit
produced = The subsidy per unit is constant even if there is an increase in price
Benefits of Subsidies:
- Subsidies often encourage output and investment into new and upcoming
sectors
...
Subsidies stop and
prevent massive Job loss and unemployment during recessions
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- Subsidies leads to investment which has Positive spillover effects
- Subsidies csn be self financing and create more tax revenue
EV:

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Subsidies opp cost and are funded by the government which is financed through tax
or borrowing and debt
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Subsidies lead to the risk of complacency a
as habitual consumption goods
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Price ceilings can distort the market by creating excess demand
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- Also if max prices are set too high it may not have any impact at all
- Leads to secondary markets and shadow markets where people will pay above
the max price to guarantee the receiving of the good undermining the entire
system imposed by the government
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Minimum Legal Prices can distort markets by creating excess supply
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Min
prices used on alcohol to reduce alcohol consumption and their external costs by increasing
the price of cheap alcohol which leads to people being less antisocial and pissed
...
For example
alcohol prices rise due to a min price which contracts demand as less people can afford it
and expands supply as there is more profit incentive to supply and max profits
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But this leaves a surplus due to the reduction in demand
...
This means the impact of excess supply and Government spending
is reduced as PED and PES become more Inelastic
...
Also stabilised producers' incomes for
commodities
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- There can be issues with the government buying up the excess with min prices
as this leads to opportunity costs and raises issues about stock and storage,
as well as perishable goods or dumping surplus abroad which hurts LIC
farmers
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- Consumers can buy abroad to avoid min prices or buy illegally
- Punishes moderate drinkers/CONSUMERS
- Penalises poor consumers
- No additional revenue is guaranteed to counteract Negative externalities of
production
- Harmful for me = Value Judgement = very interventionist
Tradable permits Scheme = A scheme where a limit is placed on firms' carbon emissions
through the issuing of permits
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ETS Scheme = Overtime it reduces the volume of permits available and gradually reduces
net pollution emissions and encourage firms to invest into emissions reducing tech
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Governments can attempt to contain pollution by putting a cap on it
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Firms can actively trade their permits between other firms by keeping its
pollution levels low and selling them which will allow other firms to pollute more
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": and makes use of market mechanisms
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Examples of unintended consequences:
● Bank bailouts = Moral Hazard
● Biofuel subsidies = Food price inflation
● Import tariffs on steel = Blow to domestic car and construction companies
● Targets for treating patients = reduction in the quality of care (Staffordshire general
scandal)
Evaluating the Effectiveness of Government Intervention:
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1 = Value Judgements = Many people want particular intervention because it serves
their own vested interests

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2 = Changing prices to change incentives and behaviours = PED has a big effect on
the effectiveness of policies

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3 = Social Science = The effects of Intervention can not be accurately forecasted as
people's behaviour is subject to change

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4 = Combination of Policies = A single intervention is unlikely to solve deep rooted
problems = multiple policies on market demand and market supply

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5 = Power of Markets = Free market forces can be a powerful solution to finding
profitable solutions to problems = increase costs for the firms instead of distorting
supply and demand

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6 = The law of Unintended Consequences = Intervention doesn't always work they
way it should or how models and theories predict == The government intervenes and
then innovation and dynamic efficiency Stops, prices increase, Customer service
deteriorates, Quality cuts

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GOVERNMENTS INTERVENING AND USURPING OUR FREEDOM AND LIBERTY,
IT'S A SMALL FAILURE



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