BUSI 1106 Economic Principles
SEMESTER 1
1. Economics:
- The study of how society manage scarce resources, Decision making
- Scarcity: resources are scarce, people have unlimited wants – causes opportunity costs
- in a nutshell, people respond to incentives.
2. Marginal analysis:
- Decision making: Comparing the marginal benefits and marginal cost, we assume that people are rational
- Opportunity costs: the value of next-best-forgone alternative
3. Law of demand:
- Other things being equal, when the prices of good rises, the quantity demanded of the good falls
- Downward sloping: Substitution effect and Income effect
- DEMAND shows the relationship between the price and the QUANTITY DEMANDED.
- DEMAND: quantity desired by buyers
- QUANTITY DEMANDED: quantity people are willing to buy at certain price
- Shift in demand curve:
• Determinant other than own price changes
o Consumer taste
o Consumer incomes
▪ Normal goods: positive
▪ Inferior goods: negative
o Prices of related goods
▪ Substitutes: Negative
▪ Compliments: Positive
4. Law of Supply:
- Other things being equal, when the price of a good rises, the quantity supplied of the good increases
- Shift in supply curve:
o Input prices
o Technological change
o Expected future price
5. Elasticity:
- Measure of the responsiveness of quantity to a change in a determinant
% Δ in quantity demanded/supplied
- Elasticity = | % Δ in determinant
|
- Determinants:
o Own price: price elasticity of demand/supply
o Price of other goods: cross-price elasticity of demand
▪ PED > 0 – Substitutes
▪ PED < 0 - Complements
o Income: income elasticity of demand
▪ IED > 0 – normal good
▪ IED < 0 – Inferior good
6. Equilibrium:
- The law of demand and supply: the price of any good adjusts to bring the quantity supplied and quantity
demanded for that good into balance
,7. Welfare Analysis:
- Consumer surplus: amount buyers willing to pay – amount they actually pay
- Producer surplus: amount sellers actually received – amount they willing to sell
- Total Surplus = CS + PS
8. Efficiency of Market Equilibrium:
- The invisible hand:
o Competitive markets send resources to their highest valued use in society
- Efficiency: property of society getting the most it can from scarce resource
- Equity: property of distributing economic prosperity fairly among the members of
society
- Applications:
o Price Floor
▪ A regulation that illegalises trade at a price lower than a specified
level
▪ “minimum wage” in labour markets
o Price ceilings
▪ A regulation that illegalises trade at a price higher than a specified level
▪ “rent ceiling” in housing markets
o Tax
9. Consumer theory
- Budget Constraint 预算线
o Shows possible combinations of goods that can be afforded
o Have $1,000. Pizza $10, Pepsi $2.
o Can get 100 pizza or 500 pepsi
- Indifference curves 无异曲线
o Represent maximum preferences
o Downward sloping, do not cross, bowed inward
- Optimisation
o Highest indifference curve tangent to budget constraint
o Marginal Rate of Substitution (MRS) = relative price
10. Decision time frames:
- Firm’s objective: profit maximisation
- Short run:
o Quantity of at least one resources used in production is fixed - capital
o Other resources – labour can be changed, so to increase output in short
run, a firm increases labour
, - Long run:
o All quantity of resources can be varied
11. Product Schedules
- Total Product (TP) – total output in a period
- Marginal Product of labour (MP) – increase in
output that arises from employing additional unit of
𝛥𝑄
labour
𝛥𝐿
o Law of diminishing returns
TP
- Average Product (AP) = amount of labour
12. The cost curves
- Total cost
- Total fixed cost
- Total variable cost
- Average total cost
- Average fixed cost
- Average variable cost
- Marginal Cost
13. Long run costs
14. Returns on scale
- Economies of scale: features of a firm’s technology that
lead to falling long-run average cost as output increases
- Diseconomies of scale: features of a firm’s technology that
lead to rising long-run average cost as output increases
- Constant returns to scale: features of a firm’s technology
that lead to constant long-run average cost as output
increases
SEMESTER 1
1. Economics:
- The study of how society manage scarce resources, Decision making
- Scarcity: resources are scarce, people have unlimited wants – causes opportunity costs
- in a nutshell, people respond to incentives.
2. Marginal analysis:
- Decision making: Comparing the marginal benefits and marginal cost, we assume that people are rational
- Opportunity costs: the value of next-best-forgone alternative
3. Law of demand:
- Other things being equal, when the prices of good rises, the quantity demanded of the good falls
- Downward sloping: Substitution effect and Income effect
- DEMAND shows the relationship between the price and the QUANTITY DEMANDED.
- DEMAND: quantity desired by buyers
- QUANTITY DEMANDED: quantity people are willing to buy at certain price
- Shift in demand curve:
• Determinant other than own price changes
o Consumer taste
o Consumer incomes
▪ Normal goods: positive
▪ Inferior goods: negative
o Prices of related goods
▪ Substitutes: Negative
▪ Compliments: Positive
4. Law of Supply:
- Other things being equal, when the price of a good rises, the quantity supplied of the good increases
- Shift in supply curve:
o Input prices
o Technological change
o Expected future price
5. Elasticity:
- Measure of the responsiveness of quantity to a change in a determinant
% Δ in quantity demanded/supplied
- Elasticity = | % Δ in determinant
|
- Determinants:
o Own price: price elasticity of demand/supply
o Price of other goods: cross-price elasticity of demand
▪ PED > 0 – Substitutes
▪ PED < 0 - Complements
o Income: income elasticity of demand
▪ IED > 0 – normal good
▪ IED < 0 – Inferior good
6. Equilibrium:
- The law of demand and supply: the price of any good adjusts to bring the quantity supplied and quantity
demanded for that good into balance
,7. Welfare Analysis:
- Consumer surplus: amount buyers willing to pay – amount they actually pay
- Producer surplus: amount sellers actually received – amount they willing to sell
- Total Surplus = CS + PS
8. Efficiency of Market Equilibrium:
- The invisible hand:
o Competitive markets send resources to their highest valued use in society
- Efficiency: property of society getting the most it can from scarce resource
- Equity: property of distributing economic prosperity fairly among the members of
society
- Applications:
o Price Floor
▪ A regulation that illegalises trade at a price lower than a specified
level
▪ “minimum wage” in labour markets
o Price ceilings
▪ A regulation that illegalises trade at a price higher than a specified level
▪ “rent ceiling” in housing markets
o Tax
9. Consumer theory
- Budget Constraint 预算线
o Shows possible combinations of goods that can be afforded
o Have $1,000. Pizza $10, Pepsi $2.
o Can get 100 pizza or 500 pepsi
- Indifference curves 无异曲线
o Represent maximum preferences
o Downward sloping, do not cross, bowed inward
- Optimisation
o Highest indifference curve tangent to budget constraint
o Marginal Rate of Substitution (MRS) = relative price
10. Decision time frames:
- Firm’s objective: profit maximisation
- Short run:
o Quantity of at least one resources used in production is fixed - capital
o Other resources – labour can be changed, so to increase output in short
run, a firm increases labour
, - Long run:
o All quantity of resources can be varied
11. Product Schedules
- Total Product (TP) – total output in a period
- Marginal Product of labour (MP) – increase in
output that arises from employing additional unit of
𝛥𝑄
labour
𝛥𝐿
o Law of diminishing returns
TP
- Average Product (AP) = amount of labour
12. The cost curves
- Total cost
- Total fixed cost
- Total variable cost
- Average total cost
- Average fixed cost
- Average variable cost
- Marginal Cost
13. Long run costs
14. Returns on scale
- Economies of scale: features of a firm’s technology that
lead to falling long-run average cost as output increases
- Diseconomies of scale: features of a firm’s technology that
lead to rising long-run average cost as output increases
- Constant returns to scale: features of a firm’s technology
that lead to constant long-run average cost as output
increases
