MICROECONOMICS
1. WHAT IS ECONOMICS?
● Social science that examines the way that people behave and interact with each
other to overcome the problems that arise as a result of the basic economic
problem of scarcity
○ Conflict between finite resources available and the infinite material needs
and wants
● Opportunity cost: the next best alternative foregone when an economic
decision is made (what is given up when a choice is made)
FACTORS OF PRODUCTION
● Land - all resources provided by nature / natural resources
○ Soil, anything grown on land, oil, minerals
● Labour - human resources used in producing goods and services
○ Physical and mental contribution to production
● Capital - buildings, factories, machines, tools, infrastructures and technologies
used to produce goods and services
○ When firms spend money on capital → investment
● Entrepreneurship (management) - the organising and risk-taking factor of
production
CIRCULAR FLOW OF INCOME MODEL
➢ HH → factors of production → FIRMS → goods/services → HH
➢ HH → expenditure on goods/services → FIRMS → wages, rent, interests, profits → HH
● Equilibrium reached when leakages = injections
● Leakage: income leaving the sector
○ Taxes: goes to govt sector
○ Savings: financial institutions (banks, stock markets)
○ Imports: foreign sector
● Injection: income coming into the circular flow
○ Govt spending: education, healthcare, infrastructure
○ Investment: spending by firms on capital
○ Exports: bought by foreign households
,THE MARKET
- where buyers and sellers come together to carry out an economic transaction
DEMAND: the quantity of a good or service that consumers are willing and able to
purchase at different prices in a given time period
- Law of demand: as the price of a product falls, the quantity demanded of the
product will rise
NON-PRICE DETERMINANTS
- Income
- Normal goods (income increase → demand increase)
- Inferior goods (income increase → demand decrease)
- Price of related goods
- Substitutes
- The change in price for one product → change in demand for
another
- Ex. fall in the price of chicken will result in the fall in demand for
beef
- Complements
- Products that are often purchased together
- Ex. fall in the price of printers will result in the increase in demand
for ink
- Unrelated goods: no effect
- Tastes and preferences
- Future price expectations
- Price of a product increase in the future → higher demand in the present,
as consumers want to take advantage of current lower prices
- Ex. future taxes on cigarettes → bulk buying in the present
- Number of consumers
- Relates to the size of a population
- Increase in number of consumers of a product → demand curve shift
right
SUPPLY: the quantity of a good/service that producers are willing and able to supply
at different prices in a given time period
- Law of supply: as the price of a product rises, the quantity supplied of the
product will increase
- Rising prices → higher profits → increase supply to take advantage of
higher potential profits
NON-PRICE DETERMINANTS
- Cost of factors of production
, - Increase in cost of factors of production will increase firm’s costs →
decrease in supply
- Price of related goods
- Competitive supply: factors of production can produce more than 1
product
- Ex. skateboards and roller skates are competing for the factors of
production
- Rise in price of skateboards → increase of quantity supplied → fall
in supply of roller skates
- Joint supply: goods produced at the same time
- Ex. if the demand for petrol increases, the supply for diesel
increases
- Government intervention
- Indirect taxes - shift supply curve left (decrease) by the amount of the
tax
- Subsidies - shift supply curve right (increase) by the amount of subsidy
- Future price expectations
- Expecting higher demand in future (higher price) → supply more in the
future
- Changes in technology
- Improvements → increase in supply
- Weathers & natural disasters
- Poor weather and droughts → cuts in supply
1. WHAT IS ECONOMICS?
● Social science that examines the way that people behave and interact with each
other to overcome the problems that arise as a result of the basic economic
problem of scarcity
○ Conflict between finite resources available and the infinite material needs
and wants
● Opportunity cost: the next best alternative foregone when an economic
decision is made (what is given up when a choice is made)
FACTORS OF PRODUCTION
● Land - all resources provided by nature / natural resources
○ Soil, anything grown on land, oil, minerals
● Labour - human resources used in producing goods and services
○ Physical and mental contribution to production
● Capital - buildings, factories, machines, tools, infrastructures and technologies
used to produce goods and services
○ When firms spend money on capital → investment
● Entrepreneurship (management) - the organising and risk-taking factor of
production
CIRCULAR FLOW OF INCOME MODEL
➢ HH → factors of production → FIRMS → goods/services → HH
➢ HH → expenditure on goods/services → FIRMS → wages, rent, interests, profits → HH
● Equilibrium reached when leakages = injections
● Leakage: income leaving the sector
○ Taxes: goes to govt sector
○ Savings: financial institutions (banks, stock markets)
○ Imports: foreign sector
● Injection: income coming into the circular flow
○ Govt spending: education, healthcare, infrastructure
○ Investment: spending by firms on capital
○ Exports: bought by foreign households
,THE MARKET
- where buyers and sellers come together to carry out an economic transaction
DEMAND: the quantity of a good or service that consumers are willing and able to
purchase at different prices in a given time period
- Law of demand: as the price of a product falls, the quantity demanded of the
product will rise
NON-PRICE DETERMINANTS
- Income
- Normal goods (income increase → demand increase)
- Inferior goods (income increase → demand decrease)
- Price of related goods
- Substitutes
- The change in price for one product → change in demand for
another
- Ex. fall in the price of chicken will result in the fall in demand for
beef
- Complements
- Products that are often purchased together
- Ex. fall in the price of printers will result in the increase in demand
for ink
- Unrelated goods: no effect
- Tastes and preferences
- Future price expectations
- Price of a product increase in the future → higher demand in the present,
as consumers want to take advantage of current lower prices
- Ex. future taxes on cigarettes → bulk buying in the present
- Number of consumers
- Relates to the size of a population
- Increase in number of consumers of a product → demand curve shift
right
SUPPLY: the quantity of a good/service that producers are willing and able to supply
at different prices in a given time period
- Law of supply: as the price of a product rises, the quantity supplied of the
product will increase
- Rising prices → higher profits → increase supply to take advantage of
higher potential profits
NON-PRICE DETERMINANTS
- Cost of factors of production
, - Increase in cost of factors of production will increase firm’s costs →
decrease in supply
- Price of related goods
- Competitive supply: factors of production can produce more than 1
product
- Ex. skateboards and roller skates are competing for the factors of
production
- Rise in price of skateboards → increase of quantity supplied → fall
in supply of roller skates
- Joint supply: goods produced at the same time
- Ex. if the demand for petrol increases, the supply for diesel
increases
- Government intervention
- Indirect taxes - shift supply curve left (decrease) by the amount of the
tax
- Subsidies - shift supply curve right (increase) by the amount of subsidy
- Future price expectations
- Expecting higher demand in future (higher price) → supply more in the
future
- Changes in technology
- Improvements → increase in supply
- Weathers & natural disasters
- Poor weather and droughts → cuts in supply
