Microeconomics – All of theme 1

 Different types of Economy

 PPF
 Demand and Supply curves
 Substitutes
 Elasticities
 Consumer surplus
 Taxation and Subsidies
 Government intervention on market failure
Macroeconomics – Theme 2 content covered up to Feb Half term
 Inflation
 AD and its components
o Consumption
o Investment
o Gov spending
o Net trade – including understanding effects of exchange rates
 Index numbers
 Multiplier
 National Happiness

unemployment
B.O.P.
MICRO-ECONOMICS:
-Studies behaviour of individuals and firms in making decisions on how to allocate scarce resources
-studies impact of interactions between micro agents
-studies individual markets
MACRO-ECONOMICS:
-studies impact of government and macro-agents (e.g. Central Banks) based on their decision makings.
-study the economy as a whole- inflation, unemployment levels
Hypothesis: can be proved/ disproved.
DIFFICULTS WITH EXPERIMENTING:
- Observation bias: people acting different as they’re aware they’re in an experiment
- Ethics: Experiemts may require depriving a group from certain resources
- Difficult for having a control: cant compare one economy to another directly as they are not the same/
no parallel economy as a control- can’t clearly see experiment effects etc.
-economics is a social science as: can’t set up expiremnts form hypothesis, varied data intepretations,
studies human behaviour, can’t establish control groups as varied groups=no control group
MODEL: simplified representation of economic reality. `
Ceteris paribus: ‘all things being equal’
Positive statements Normative statements
-objective or scientific explanatuins of economy. - attempts to descirbe what ‘ought to be’
- value- free facts -contains a valued judgement
e.g. will, lead to, will reduce -can be proved and disproved
e.g. ought, should, fair, better
ECONOMIC AGENTS:
Government
- sets regulations that are to be followed
- MONEY/TAX REVENUE/ POLITICAL LEVERAGE/ LOOKING AFTER PEOPLE
Firms
- sell products and supply the demand- PROFIT
Consumer
- buy produce
- SATISFACTION
FACTOR/PRODUCTION- things REWARDS
needed to make goods

LAND -natural resources, sustainable, Rent, investments, storage,

renewables resources
LABOUR -Workforce wages
ENTERPRISE -Profit motive, business opportunities profit
CAPITAL -Man made aid to production- Interest, renting
machinery, factories

The Basic economic problem: limited resources but infinite wants

Opportunity costs: the benefit lost from the next best alternative forgone
- Every society has to answer: what to produce, how to produce, who it is for

economy advantages disadvantages

TRADITIONAL -Traditions and customs govern -little competition- less -doesn’t allow for
economic decisions friction among members growth development
-econ activities centred around -individual roles are clearly -no social mobility
family, tribe, ethnic group defined - no advantages taken
-resources allocated on from tech
inheritance
-bartering, no technology use

COMMAND -government/ central -stability- doesn’t coincide -Insufficient resource

authorities makes all decisions with business cycles distribution
-resources owned by -serves collectively, not -corruption among
government individually state planners
-no competition-provide goods -distributes wealth, products -can’t adjust to change
no profits, concerned with made to fulfil needs easily
quota
-government sets prices of
goods

MARKET -economic decisions made by -prices determined by -people can make

individuals competing to earn market- supply and demand decisions that are
profits based on supply and -competition brings down harmful to others
demand prices -doesn’t always
-individual freedom to make -easily adjusts to change provide basic needs of
economic decisions -little gov. intervention everyone in society-
-competition determines price+ -great variety of goods people slip into
increases quality of products poverty-higher
unemployment
-unequally distributed
wealth
MIXED -Government guides and -can focus on social welfare, -government
regulates and protects political freedom, individual interventions can
consumers and producers from liberties hinder progress
harm - wider range of goods -inequality
-resources owned by -private companies can make -taxes
individuals and government individual decisions
-combines elements of pure -monopolies can be made
market and command with gov. supervision-
economies cheaper goods and
-individuals and gov. chare the encourages new ventures
process of making economic
decisions.

Demand: the quantity of a good or service that consumers are willing and able to buy.
Effective demand: the ability of consumers to buy quantity of a good service at a given price.
-demand is a function linking price and quantity demanded- PRICE AFFECTS QUANTITY DEMANDED
As price increases, quantity demanded decreases
DEMAND CURVE: how much of a good would be bought at any price
DOWNWARD SLOPING DUE TO:
- Diminishing marginal utility: as the consumption of a product increases, the satisfaction gained from
each additional unit decreases.
- Substitution effect: all goods have substitutes. As the price of a good increases, ceteris parabis, the
substitute becomes more preferable.
- Income effect: as the price a good decreases, ceteris parabis, the consumers total income increases.
They buy more as each purchase of the good takes up less of a portion of their original income
Increase/ decrease in price doesn’t increase/ decrease demand.
Changes in price only cause contractions/ extensions
SHIFT in D curve: increase or decrease
MOVEMENT along D curve: extension or contraction

Change in demand are only caused by factors that affect demand

Reservation price: maximum price a consumer is willing to pay for a good or service
When reservation price changes, so does demand
FACTORS THAT AFFECT DEMAND
Fashion
Legislation- banning, age restrictions
Advertisement
Population changes
Substitutes
Complements (derived demand) - products that go together- pasta and pasta sauce
Income changes

D CURVE SHIFTS TO THE RIGHT- INCREASE IN DEMAND:

- Increase in advertisement
- Substitutions become more expensive
- Complements prices cheap
- Increase in consumer income
- Positive change in fashion tastes
- Increase population
D CURVE SHIFTS TO THE LEFT- DECREASE IN DEMAND:
- Decrease in advertisement
- Consumer income decreases
- Negative changes in fashion tastes
- Increase in legislation
- Substitutes have become cheaper
- Complement prices increase
- decrease population
inferior good demand diagram: a good whose demand decreases as income increases
As income increases- LUXURY goods demand increase, INFERIOR goods demand decrease

SUPPLY: quantity of a good or service that firms are willing and able to sell at a given price over a time period.
- UPWARDS SLOPING: as price rises it encourages firms to produce more- MORE PROFIT
FACTORS AFFECTING SUPPLY:
- Productivity
- Indirect tax
- No. o firms in market
- Subsidy
- Weather
- Costs of prodcutuon
PRICE MECHANISM: allocates resources between competing uses. How the interaction of demand and supply
determine the price and quantities of the goods that get produced.
SIGNALLING: change in prices signal to those in market who have and impact on S and D
INCENTIVISING: prices act as an incentive- firms incentivised to change supply to increase profit
RATIONING: allows price mechanism to allocate scarce resources to only those whole are willing and able to
purchase or reverse- gets rid of excess supply or demand

ELASTICITIES:

PED:
-Measures how a change in price brings about a more/ less than proportionate change in quantity demanded.
0 < PED < -1= INELASTIC=necessities
-1< PED = ELASTIC=luxuries
PED=0= perfectly inelastic
PED= -infinity= perfectly elastic
PED=-1= unitary elastic
- PED allows businesses to maximise profits to prepare for recessions and booms
Factors of ped:
- Time: elastic in the long run – can find more subs in longer time
- Luxury/ necessities
- Proportion of income spent on good- (ceteris paribus income stays the same)-increase- more elastic
- Availability of substitutes- more – more elastic

PED=. %change in Qd / %change in P