ECO1IMI

Because it analyses how people and firms make consumption and production decisions and the consequences of those decisions.

To buy goods and services in markets and supplies the inputs that are used by firms.

The opportunity cost of an item is what you give up to get that item.

The extra cost involved in increasing production by one unit from any current level

Because it is getting progressively more expensive to produce.

Because it's getting progressively less expensive to produce.

Popper argued tha twhen we test theories in science and ecnomics we do not try to show that they are true. We try to show that tey are wrong by confronting them with evidence. If we can;t show they are wrong we tentatively accept the theories- they arent inconsistent with evidence. Thus, science consists of propositions set out so they can be falsified but which have not yet been falsified.

Firms produce and sells goods and services. They also hire and use factors of production.

Households buy and consume goods and services. They also own and sell gfactors of production.

• Inputs used to produce goods and services (land labour and capital)
• They are paid for in land rents, wages and rental returns on capital.

• Efficiency: the max amount of each output given levels of other output. Points on PPF.
• Tradeoffs: of PPF we can only get more of one output by fiving up some of the other.
• Opportunity cost: the rate at which tradeoffs are made
• Economic growth: a shift in PPF.

Claims that describe the world as it is. This is called descriptive analysis.

Claims that attempt to describe how the world SHOULD be. This is called prescriptive analysis.

The PPF or production possibilities frontier curve is a graph showing the combinations of output that the economy can possibly produce given available factors of prodyction and the available production technology.

Each are better off specialising in the product with lower opportunity cost and then trading with each other.

The producer who has the smaller opportunity cost has a comparative adavantage in producing that good.

The producer requiring less inputs to produce a good is said to have an absolute afvantage in producing that good.

Whenever potential trading parties have differences in opportunity costs, they can each benefit from trade.

If the slope of the two PPF curves is the same, trade is pointless.

• Products are the same
• Buyers and sellers are so numerous that no single buyer or seller can influence market price.
• Buyers and sellers are price takers

• One seller
• The seller is a price maker - they set the price

• Few sellers
• Not always aggressive competition.
• Sometimes collusion or cooperation

• Many sellers
• Slightly differentiated products (eg. retailing)
• Each seller may set the price for their own product

All other things equal, the quantitiy demanded of a good falls when its price rises

A table showing the relation between price of a good and quantity supplied or demanded.

A graph of the relationship between the price and quantity supplied or demanded

NEGATIVELY

POSITIVELY

It will increase. Examples are going to the movies, or travel.

It will decrease. Examples include second hand clothing

All other things being equal, the quantity supplied of a good rises when its prices rises.

SUBSTITUTES

COMPLEMENTS

When market price > equilibrium price, and thus quantity supplied > quantity demanded.

When market price < equilibrium price, then quantity demanded > the quantity supplied

• 1. Decide whether the event shifts the supply or demand curve (or both)
• 2. Decide whether the curve(s) shift(s) to the left or right.
• 3. Use the supply and demand diagram to see how the shift affects equilibrium price and quantity.

A measure of how quantity demand of a good respons to a change in the price of that good. It has the formula:

PEofD = % change in quantity demanded / % change in price

• PEofD (midpoint method) =
• (Q2-Q1)/[(Q2+Q1)/2]
• (P2-P1)/[(P2+P1)/2]

PEofD between 0 and -1

PEofD of less than -1

PEofD of exactly 0

PEofD of exactly -1

• PEofD is equal to negative infinity.
• This is the case where the good has a perfect substitute.

% change in demand / % change in income

% change in quantity supplied / % change in price

If the goods are substitutes

If the goods are complements

It falls.

It rises.

In the LR

The maximum amount a buyer will pay for a good or service. It measures how much the buyer values the good or service.

Consumer surplus + producer surplus

Economic welfare in dollars from the buyers side. It is equal to the buyers WTP for a good minus the amount the buyer actually pays for it

Economic welfare in dollars from the sellers side. It is equal to the amount a seller is paid for a good minus the sellers cost.

The area below the price and above the supply curve

When it is impossible to make somebody better off without making someone else worse off

A legal maximum on the price a good can be sold at

A legal minimum on the price a good can be sold at

The tax falls most heavily on the party whose behaviour is most inelastic (steeper curve)