What does economics study?
studies decision-making and the effect of decision-making on a wide range of topic areas, but central to the study is human beings.
What are the three main questions Economics must answer
- what goods and services need to be produced?
- how goods & services need to be produced
- who should benefit from these?
What do indifference curves and budget lines explain?
consumer behaviour
Why do economists disagree on policy initiatives? (2)
- disagreement on the validity of positive theories about how the world works
- different normative views on what policies should be implemented
What is marginal thinking?
based on the “1 more” where progressive actions decide the outcome
- marginal benefit decreases
- marginal cost increases
look for equilibrium
Effectiveness
accomplishing tasks with precision and quality
Efficiency
accomplishing tasks without wasting time, resources or energy
Law of demand
is the inverse relationship between the price of goods and the quantity demanded
Shifts in demand (5)
(pepin)
- change in consumer income
- change in consumer preferences
- change in price
- change in the number of consumers
- changes in expectations
a change in the quantity influences the demand
5 assumptions of Microeconomics
- individuals act rationally
- completeness of alternatives
- transitivity of alternatives
- individuals pursue self-interest
- ceteris paribus (constant & partial reasoning)
- marginal decision making
- decreasing abstraction (increased complexity)
what is Completeness of Alternatives?
individuals rank their choices
a>b, b>c, a=b
what is Transitivity of Alternatives?
despite changes, individuals’ choices remain the same
a>d
Law of Supply
the direct relationship between the price and the quantity supplied
Differences in supply between low and high prices
low prices: do not provide enough profit, unable to provide the product
high prices: provide enough profit
Relationship between prices and quantity demanded
- the lower the price, the more demand
- the higher the price, the less demand
Relationship between prices and supply
- the lower the price, the less supply
- the higher the price, the more supply
Shifts in supply (6)
- technology
- taxes
- prices of related goods
- resources available
- number of sellers
- natural causes
What is an indifference curve?
the type of curve showing the different possibilities consumers have to buy certain products given the same level of utility
consumers will always look for the maximum utility
MRS
Marginal Rate of Substitution
the rate in which consumers are willing to trade one good for another
What is the Consumer Choice Theory? (+ 3 assumptions)
is assumes that consumers are constrained due to budget limitations, thus, their actions are based on availability
- rational actions
- consistent actions
- utility maximisation
what is the slope?
how is it calculated?
it measures the relationship between two goods
slope = vertical axis / horizonal axis
What is equilibrium price?
quantity demanded is equal to the quantity supplied
within equilibrium price:
1. Surplus
2. Shortage
- Surplus: there is more supply than quantity demanded
(price fall) - Shortage: there is more demand than supply
(price rise)
what is Price Elasticity of Demand?
the quantity demanded responding to a change in price
