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Define economics

A social science that studies the choices that individuals, businesses, governments and entire societies make as they cope with scarcity.


What is microeconomics?

The study of the choices that individuals and businesses make and the way these choices interact and are influenced by governments. Essentially, with microeconomics we study the behaviour of individuals eg why buy a hp laptop over a apple laptop? And businesses/firms eg should firm hire a new employee


What is macroeconomics?

Study if the aggregate or total effects on the national economy and the global economy of the choices that individuals, businesses and governments make. Some example questions of macroeconomics: why did production and jobs expand slowly in the global economy during 2012-13?


Define scarcity?

th condition that arises because wants exceed the ability of resources to satisfy them. The link between wanting everything and having limited resources is known as scarcity. Time and money are too resources that cause scarcity as they affect what choices we make about what we want and what we pick from what we want.


What are two big questions that define the scope of economics?

How do choices end up determining what, how and for whom goods and services get produced?

When do choices made in the pursuit of self interest also promote social interest?


These questions explained through microeconomics

In microeconomics: study of human behaviour by looking at individuals decisions to buy and sell G&S. G&S is caused by our wants essentially eg I want shoes this someone will make them for me to buy.


Define self and social interest

Self interest can be seen as selfishness - buying someone that isn't good for others or the environment for example just because you want it

Social- choices that are best for the society as a whole. If you cared about society meow than yourself you wouldn't buy a product that harms it


What is the working of the invisible hand

Adam smith - 1700s: means when self interest accidentally created social interest. Thus individuals only thinking of themselves and buying what they want but society benefiting from the buying as a whole


What is the key to opportunity cost?

The OC of doing activity X is the next best alternative foregone - not all alternatives forgone.


What is the formula for OC?

Explicit cost + implicit cost


Example of OC

Jane decided to go swimming at a public pool for one hour. The entry fee is $5 and if she didn't go for a swim she would have gone to work and earned $20 instead. What is janes OC of going swimming? Her explicit cost is the obvious one - the money she hands over to allowed in to swim ($5). Her implicit cost is not something observable - in this case it is the cost of her missing out on the next best alt which is the foregoing of $20 at work. OC = $5 + $20 = $25


What is marginal cost?

The opportunity cost of a one unit increase in an activity is called marginal cost. The marginal cost of something is what you must give up to get one additional unit of it. Eg if you go to the movies for the third time this week - your MC is not the cost of all three movies but the cost of the third additional one. You've already given up something for two movies so you don't count that cost as resulting from the decision of seeing the third movie. The marginal cost increases the more you do something. If you give up 5% of your study percentage to see the second movie, you are giving up more when you see the third movie. This is somewhat different from purchasing goods at a constant cost. When buying an extra unit of a product that always cost $2, our MC is constant at $2 irrespective of how many units we by. This is as our OC is really just the $&$ in our wallet.


Explain marginal benefit

The benefit of a one unit increase in an activity is called marginal benefit. What you gain from having one more unit of something. Measured by what you are willing to give up to get that one additional unit of it. A fundamental feature of MB is that it diminishes. If you see 8 movies this week your marginal benefit from the next movie is low whereas if you haven't seen any this week the MB is large. As MB diminishes you are less willing to give up stuff.


Why are marginal cost and marginal benefit important

Help us in the decision making process. If marginal benefit is higher than or equal to the marginal you are likely to purchase the goods or service but if marginal cost is higher than marginal benefit you are less likely to purchase G&S. If it is equal - you are generally indifferent or it doesn't matter if you do or don't.


What are normative and positive statements?

Normative statements: statements about what ought to be (your beliefs essentially). Depend on values and cannot be tested. We ought to cut back on coal - normative statement. Says I think or believe thus you may agree or disagree but it can't be tested.

Positive statements - disagreements that can be settled by facts. Statements about what is. Positive statement might be wrong or right and we can discover which by careful observation of facts.


What do we assume w analyse the PPF model?

Factors of production eg inputs and resources: are fixed. To produce g and s assume you need works and machinery this is factors of production. Labour is L; machinery is K (capital).

Level of technology is fixed. Be inventions cannot improve out output as we do not allow for new technology.

If any of these factors change then the PPF boundaries can shift.


Explain PPF

PPF (production possibilities frontier) - the boundary between those combinations of two goods and services that can be produced (attainable) and those that cannot be produced (unattainable). Outputs on X and Y axis. Different possibilities labelled A-Z.


How do we achieve production efficiency?

We achieve it when we produce G&S at the lowest possible cost. This occurs in all points on the PPF. Moving from different efficient points involves a trade off and that is calculated by looking at our opportunity costs. Example: if we want to produce more phones we have to take some L + K from DVDs thus we lose some dad production and that is OC. If we gain 1m phones but lose 1m DVDs our OC is (1m/1m) (what you gain/what you give up).


More on PPF

Every point on the PPF line is production efficient. If we produce inside the PPF then we are in a situation where we are production inefficient. Thus we are not using our L and K properly.


What happens when we move from an inefficient product level to an efficient production level?

It is called a free lunch. When we move between two efficient points we have a trade off because we lose something to gain something else. With a free lunch we are increasing the production of one good without decreasing the production of the other good there is no trade off or OC. If H point we produce 5m DVDs and 3m phones and we move to D point we produce 9m DVDs and 3m phones thus OC is (what you give up = 0phones // what you gain = 5m DVDs) thus free lunch and no OC loss.


Are all efficient and inefficient points attainable?

Any production efficient and production inefficient points is attainable. We can produce that combination with out current set of L, K and technology. Any point to the right of the PPF line is unattainable.


What if we gain more technology or L + K on the PPF?

If any L, K and technology increase then the PPF boundary can shift. For example if we improve technology the PPF can shift upwards and we can produce more products. Thus all points on the first PPF line will be inefficient and previous unattainable points may become attainable. This outward shift is an example of economic growth.


What is absolute and competitive advantage

Competitive advantage is all about the benefits of specialisation. The basic idea is that even if someone is better than you at everything (absolute advantage), you can still specialise in something (CA) and so should that other person and then trade w each other so we can produce more of everything and be better off.


Example of benefits of specialisation.

Thousands of years ago everyone did everything themselves eg grow own food and fix our house and no one had time to specialise in something. Over time people specialised and traded their skills to help everyone and do the best job


What is the difference between absolute advantage and competitive advantage?

AA occurs if a persons can produce more of a good eg pens compared to another person while using the same resources as the other persons or can produce as many quantities of the goods as the other person w less resources. Example: Paul can make 5 pens and Rachel 3 pens an hour. Resource here is time. Paul has AA. Or both make same amount of pens but Paul does it in less time eg less resources.

CA occurs if a person can produce a given quantity of a good at a lower opportunity cost compared to another person. Example: Paul can produce 5 pens or 10 jars in 1 hr and Rachel can produce 3 pens or 8 jars in a hours. Paul has AA in both pens and jars. To find specialisation: we look at OC. Paul takes 1 hour to make 5 pens he gives up making 10 jars thus for every pen he makes he gives up on making 2 jars. (10 jars/5 pen) OC = 2. Or (5 pens: 10 jars) = 0.5. When Rachel take 1 hour to make 3 pens she gives up 8 jars. Every pen she makes she gives up 2.67 jars. (8 jars/ 3 pens = 2.67) or (3 pens / 8 jars) = 0.375. Paul has lower OC in production of pens than Rachael thus his CA should be pens. And Rachel's OC for jars is lower than Paul so she should focus on jars. CA comes from who has the Lower OC.