1
Microeconomics Notes
1. Opportunity Cost and Production Possibility Frontier- Page 1
2. Supply and Demand- Page 4
3. Equilibrium and Surplus/Shortage- Page 10
4. Economic Surplus (Consumer and Producer Surplus, Deadweight Loss)- Page 12
5. Elasticity- Page 17
6. Consumer Equilibrium- Page 20
7. Short and Long Run Costs- Page 26
8. Isoquants, Isocosts and Firm Equilibrium- Page 29
9. Market Structure, Revenue Curves and Perfect Competition- Page 31
10. Monopoly Market Structure- Page 33
11. MonoPOLISTIC Competition Market Structure- Page 35
12. Oligopoly Market Structure- Page 36
Market Structures Summary Table- Page 38
13. Price Discrimination- Page 39
14. International Trade- Page 40
1) Opportunity Cost and PPF
Opportunity Cost
The basic economic problem is the fact that human wants and needs are infinite whereas resources are
scarce/limited. Economics is the study of the allocation of these resources in order to make choices.
When a choice is made, something else has to be given up. That is an opportunity cost. For example if
Person X likes both pizzas and burritos but has a budget of $10 and chooses to buy a pizza, they can no
longer use that money to buy a burrito. The burrito (not the money) is the opportunity cost (OC), or the
next best alternative.
Sometimes OCs are add-ons
– Suppose you have a choice between two courses – History of Rock Music and Economics
– However there is an extra cost of $1,000 for History of Rock
– Then the OC of taking History of Rock Music is giving up economics PLUS what you could have
done with the extra $1000
The factors of production- CELL (Capital, Entrepreneurship, Land and Labor)
Production Possibilities Frontier/Curve (PPF/PPC)
A PPF is a graphical model that shows opportunity costs between two products/services.
4 Key assumptions are made;
• Only two goods can be produced
• Full employment of resources
• Fixed Resources (Ceteris Paribus), everything else stays the same
• Fixed Technology at that point in time
, 2
Example of a PPF:
Each point in the table represents a specific combination of goods that can be produced given full
employment of resources.
The opportunity cost of moving from B to D is 7 bikes
The opportunity cost of moving from F to C is 0 since point f was inefficient
The opportunity cost of moving from D to B is 4 computers
What can you say about point G? It is unattainable given the current resources
The Law of Increasing Opportunity Cost-
• As you produce more of one good, the opportunity cost for the other good will increase.
• Why? Resources are NOT easily adaptable to producing both goods.
• The result is a bowed out (Concave) PPC/PPF
, 3
Some products can have constant opportunity costs if the resources are easily adaptable from one to
the other for example a corn farm and a wheat farm which both use similar resources and conditions to
grow
But usually the PPC is concave.
Taking the example of the Bicycles and Computers PPF, it can be shown that the marginal opportunity
cost to produce computers is ever increasing;
Marginal Opportunity Cost = (Opportunity Cost)/(Units Gained)
The PER UNIT opportunity cost of moving from A to B is 1 (2/2) bike
The PER UNIT opportunity cost of moving from B to C is 1.5 (3/2) bikes
The PER UNIT opportunity cost of moving from C to D is 2 (4/2) bikes
The PER UNIT opportunity cost of moving from D to E is 2.5 (5/2) bikes
Productive Efficiency- All points A through to E are productively efficient, meaning all the resources are
utilized and products are being produced in the least costly way.
What can shift the Production Possibility Frontier?
There are 3 key factors;
1) Change in resource quantity or quality – more or better quality resources means more
production
2) Change in technology- better technology means more production with less resources
3) Changes in trade- trade allows countries to specialize in producing the goods in which they
have a comparative advantage, leading to a more efficient use of resources, outward shift.
, 4
2) Supply and Demand
a) Demand
Demand is classified as the DESIRE, WILLINGNESS and ABILITY to buy a good or service. A demand table
can list this in the following way;
As shown above, the cheaper something gets, the more the quantity demanded from the consumers.
This results in a downward sloping demand curve with Price on the Y-axis and Quantity on the X-axis.
We buy products for their utility- the pleasure, usefulness, or satisfaction they give us.
Why is the demand curve downward sloping?
Mainly three reasons;
1) Law of diminishing returns- The marginal utility of consuming an additional unit of a product is
always diminishing. To make a buying decision, we consider whether the satisfaction we expect
to gain is worth the money we must give up.
2) Income effect- If money income is fixed, as the price of a good falls, consumers’ REAL income –
what consumers can buy with their income rises and therefore demand increases
3) Substitution effect- As price of a good or service falls, it becomes relatively less expensive. If
prices of alternative substitute products remains the same, the lower price appears cheaper and
consumers shift from relatively expensive alternatives to the now cheaper one.
Microeconomics Notes
1. Opportunity Cost and Production Possibility Frontier- Page 1
2. Supply and Demand- Page 4
3. Equilibrium and Surplus/Shortage- Page 10
4. Economic Surplus (Consumer and Producer Surplus, Deadweight Loss)- Page 12
5. Elasticity- Page 17
6. Consumer Equilibrium- Page 20
7. Short and Long Run Costs- Page 26
8. Isoquants, Isocosts and Firm Equilibrium- Page 29
9. Market Structure, Revenue Curves and Perfect Competition- Page 31
10. Monopoly Market Structure- Page 33
11. MonoPOLISTIC Competition Market Structure- Page 35
12. Oligopoly Market Structure- Page 36
Market Structures Summary Table- Page 38
13. Price Discrimination- Page 39
14. International Trade- Page 40
1) Opportunity Cost and PPF
Opportunity Cost
The basic economic problem is the fact that human wants and needs are infinite whereas resources are
scarce/limited. Economics is the study of the allocation of these resources in order to make choices.
When a choice is made, something else has to be given up. That is an opportunity cost. For example if
Person X likes both pizzas and burritos but has a budget of $10 and chooses to buy a pizza, they can no
longer use that money to buy a burrito. The burrito (not the money) is the opportunity cost (OC), or the
next best alternative.
Sometimes OCs are add-ons
– Suppose you have a choice between two courses – History of Rock Music and Economics
– However there is an extra cost of $1,000 for History of Rock
– Then the OC of taking History of Rock Music is giving up economics PLUS what you could have
done with the extra $1000
The factors of production- CELL (Capital, Entrepreneurship, Land and Labor)
Production Possibilities Frontier/Curve (PPF/PPC)
A PPF is a graphical model that shows opportunity costs between two products/services.
4 Key assumptions are made;
• Only two goods can be produced
• Full employment of resources
• Fixed Resources (Ceteris Paribus), everything else stays the same
• Fixed Technology at that point in time
, 2
Example of a PPF:
Each point in the table represents a specific combination of goods that can be produced given full
employment of resources.
The opportunity cost of moving from B to D is 7 bikes
The opportunity cost of moving from F to C is 0 since point f was inefficient
The opportunity cost of moving from D to B is 4 computers
What can you say about point G? It is unattainable given the current resources
The Law of Increasing Opportunity Cost-
• As you produce more of one good, the opportunity cost for the other good will increase.
• Why? Resources are NOT easily adaptable to producing both goods.
• The result is a bowed out (Concave) PPC/PPF
, 3
Some products can have constant opportunity costs if the resources are easily adaptable from one to
the other for example a corn farm and a wheat farm which both use similar resources and conditions to
grow
But usually the PPC is concave.
Taking the example of the Bicycles and Computers PPF, it can be shown that the marginal opportunity
cost to produce computers is ever increasing;
Marginal Opportunity Cost = (Opportunity Cost)/(Units Gained)
The PER UNIT opportunity cost of moving from A to B is 1 (2/2) bike
The PER UNIT opportunity cost of moving from B to C is 1.5 (3/2) bikes
The PER UNIT opportunity cost of moving from C to D is 2 (4/2) bikes
The PER UNIT opportunity cost of moving from D to E is 2.5 (5/2) bikes
Productive Efficiency- All points A through to E are productively efficient, meaning all the resources are
utilized and products are being produced in the least costly way.
What can shift the Production Possibility Frontier?
There are 3 key factors;
1) Change in resource quantity or quality – more or better quality resources means more
production
2) Change in technology- better technology means more production with less resources
3) Changes in trade- trade allows countries to specialize in producing the goods in which they
have a comparative advantage, leading to a more efficient use of resources, outward shift.
, 4
2) Supply and Demand
a) Demand
Demand is classified as the DESIRE, WILLINGNESS and ABILITY to buy a good or service. A demand table
can list this in the following way;
As shown above, the cheaper something gets, the more the quantity demanded from the consumers.
This results in a downward sloping demand curve with Price on the Y-axis and Quantity on the X-axis.
We buy products for their utility- the pleasure, usefulness, or satisfaction they give us.
Why is the demand curve downward sloping?
Mainly three reasons;
1) Law of diminishing returns- The marginal utility of consuming an additional unit of a product is
always diminishing. To make a buying decision, we consider whether the satisfaction we expect
to gain is worth the money we must give up.
2) Income effect- If money income is fixed, as the price of a good falls, consumers’ REAL income –
what consumers can buy with their income rises and therefore demand increases
3) Substitution effect- As price of a good or service falls, it becomes relatively less expensive. If
prices of alternative substitute products remains the same, the lower price appears cheaper and
consumers shift from relatively expensive alternatives to the now cheaper one.
