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Microeconomics notes



The reasons for individuals, organizations and societies having to make
choices

The Economic Problem

The main economic problem is scarcity
...


• Scarcity requires careful allocation of resources – a choice has to be made
...
However
modern marketing often means that the producers
influence the decisions of consumers
...

• When a choice is made, there is an opportunity cost
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Factors of production

• Capital – man-made assets that aid the production process e
...
g oil, coal
• Labour – the work done by the workforce contributing to the production
process
...

When resources are scarce, by specialising, a country can improve its efficiency
in producing a part, whether good or service
...
Without their products you
become more efficient resulting in:
would be unable to create your own
An increase in productivity

Production Possibility Curve (PPC)

• If production is on the line (A,B,C),
maximum productivity is being
achieved
...

• Point X shows when production isn’t
efficient, operating inside the PPC
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• Point Y cannot be achieved due to lack of
provision and factors of production
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• The PPC shows the “opportunity cost”
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•














Moez Abdu


A business cannot produce beyond the PPC
...
This can be achieved by increasing the
quantity/quality of factors of production:
o Improved machinery " increased efficiency
o Larger work force
o More land (e
...

• There are competitive markets because there is more than one producer
o The price system/invisible hand allocates scarce resources in
the best way:
! If there is a shortage of one product, its price goes up
because demand exceeds supply
...

! In a competitive market, other firms would be attracted into
the market, which increases supply of the product and
pushes the price back down to normal
...


Determinants of demand include:
• Real Disposable Income (money left over after inflation, taxes
and any other necessities have been accounted for)
o An increase would mean that the demand curve shifts
to the right (if it is a normal good)
...

• Advertisement (advertising campaign/marketing)
o An increase would cause the demand curve to shift to the right
because more people would desire the product/service
...

• Taste/Preference
o If tastes move in favour of the product, demand shifts to the right
...

• Prices of Other Goods:
o Substitutes – If they have higher prices, demand for your product
shifts to the right
...
An increase in price
causes a decrease in demand, and vice versa
...

• Quality of Factors of Production
o If quality improves, supply shifts to the right (more efficient so less
cost)
...

• Indirect Taxes
o An increase in indirect taxes will cause supply to shift to the left
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• Technological Advancements
o An increase in this will make the production more efficient, so will
shift supply to the right
• Price of substitutes
o IF the price of substitutes increases, supply will shift to the left
...


Movements along the supply curve are only caused by a change in the market
price of the good
...


Producer and Consumer Surplus

Consumer surplus is the difference between the price
consumers are willing to pay for a good, and the market
price of the good
...





Moez Abdu

Market Equilibrium

• Prices are determined by the equilibrium price – this is where demand and
supply meet on the Price axis
...
It is where demand and supply meet on the quantity
axis
...
E
...

• P
...
D = %change in quantity demand/%change in price
...
E
...
(1=unitarily
elastic)
• If P
...
D <1, good is inelastic – less responsive to a change in price
...

o The Proportion of Income Taken up by Good
! If good takes up large proportion of income (e
...

o Time
! Initially most consumers find it difficult to alter spending
habits, so inelastic in short term
...


o Luxury or necessary good
! The more of a necessity the good is, the more inelastic it
will be
...
E
...

o To predict the price volatility in a market following changes in
supply – this is important for commodity producers who suffer big
price and revenue shifts from one time period to another
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o Information on the PED can be used by a business as part of a
policy of price discrimination
...
g
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Income Elasticity of Demand (Y
...
D):

• Income elasticity of demand measures the responsiveness of the quantity
demand of a good to a change in the real income of a consumer
...
E
...

• Relevance of income elasticity:
o It enables the government and business organisations to predict
how much the demand curve will shift for a given change in
income
...
If YED of the product is positive (normal or luxury), sales
are likely to expand rapidly as national income rises
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• X
...
D = %change in quantity
demanded of A divided by %change
in price of B
• There are different types of good,
depending on the cross elasticities
o When XED >0, goods are
substitutes
o When XED <0, goods are
complements (when one
product
is
consumed
alongside the other because
it is needed)
o When XED =0, goods are unrelated
• Uses of XED:
o Planning changes in output, employment levels and stocks
• Determinants of XED:
o Closeness of the relationship between the two goods

Moez Abdu


Price Elasticity of Supply:

• P
...
S measures the responsiveness of quantity supplied of a good to a change
in price
• P
...
S = %change in quantity supplied/%change in price

Determinants/Influences of P
...
S:
• Level of Spare Capacity (unused factors of production)
o If there is a lot of spare capacity, P
...
S is more elastic
...

• Level of Stock and Work in Progress
o The more stock and work in progress, the more you will be able to
produce, so the more elastic supply is
...

• The good is elastic when PES >1, inelastic when PES<1 and perfectly
inelastic when PES=0





Allocative efficiency is where firms produce to meet consumer satisfaction
...


Productive efficiency is where production takes place using the least amount of
scarce resources
...

MSB DOES NOT EQUAL MSC
...
Can be positive or negative
...
g
...
g
...
g
...

Indirect Taxation- a tax levied on goods and services, such as VAT, excise duties,
council tax and business rates
Subsidy – a payment, usually from government, to encourage production or
consumption
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Taxation
Evaluation Points 1)PED of good and
whether its elastic
or inelastic
2)Type of tax e
...

indirect or direct
3)How much to tax
or how little

Moez Abdu

Subsidies
Regulations
1)Could be used for wrong
1)Standards could be set
purpose
too high or low
2)Some sectors cannot be
2)Accurate information
subsidised
not always available
3)Opportunity cost to
3)Don’t always encourage
government
firms to work
4)How much or little to subsidise environmentally



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