ECON1101 Lecture Notes - Lecture 4: Variable Cost, Normal Good, Fixed Cost
MICROECONOMICS: The study of individual firms within the market opposed to the entire
economy
NORMATIVE ANALYSIS: An analysis that makes recommendations about economic policies
POSITIVE ANALYSIS: An analysis that explains what and why things happen within the
economy, without making recommendations.
SCARCITY: Resources are finite, but wants are unlimited, therefore people must compromise
and make decisions.
●RATIONAL DECISION MAKING: It it rational to pursue an action if benefits>costs
MARGINAL COST: The additional cost of producing one more unit of a good/service.
MARGINAL BENEFIT: The additional benefit of consuming one more unit of a good/service.
● THINKING ON THE MARGIN: If MB>MC, it is rational to take an action
OPPORTUNITY COST: The value of the next best alternative forgone.
GAINS FROM TRADE
● BETTER ALLOCATION: A reallocation of goods in a way that is better off for all parties
involved (voluntary exchange).
● GREATER PRODUCTION: In the instance where greater production is available, each
party specializes in the activity in which they have the comparative advantage (lower
OC), then trade their goods/services within the market.
● ABSOLUTE ADVANTAGE: When a person/country is more efficient in producing a
good/service than another.
● COMPARATIVE ADVANTAGE: When a person/country can produce one good more
efficiently than another good (lower OC), compared to another person/country.
PRODUCTION POSSIBILITIES CURVE:
Curve that shows the possible combinations of the production of two goods, given that the
economy’s resources are scarce, as well as the level of technology (represents a trade off).
● Output bundles along the PPC are efficient
● Output bundles within the PPC are inefficient
● Output bundles beyond the PPC are impossible
Investing more in investment goods than consumption goods will allow the PPC to
expand over time as technology growth allows for a greater production of goods.
DEMAND
The relationship between price and the quantity demanded (the quantity consumers are
willing to buy at a specific time given a price)
LAW OF DEMAND: P increases, QD decreases (negatively related)
Changing the price of a good will cause a movement along the demand curve. All other
factors will cause the demand curve to shift.
SHIFTS IN DEMAND:
● Demand increases -> demand curve shifts right
● Demand decreases -> demand curve shifts left
CONSUMER INCOME: As consumer income changes, the goods/services they
purchase changes
● Inferior Goods:
Goods for which as income increases, demand decreases. (ie
homebrand foods)
● Normal Goods:
Goods for which as income increases, demand increases. (ie
jewellery)
CHANGE IN PRICE OF CLOSELY RELATED GOODS
Substitute Goods: Two goods that are substitutes for each other (ie, different brands)
X price increases = Y demand increases
Complementary Goods: Two goods that are consumed together (ie, printers and ink
cartridges)
X price increases= Y demand decreases
SUPPLY
The relationship between price and quantity supplied (the quantity of a good firms are
willing to produce at a given price)
LAW OF SUPPLY: Price increases, QS increases (positively related)
Movement along the supply curve refers to the change in
QS due to price change, all
other factors cause a shift.
SHIFTS IN SUPPLY
● Supply increases -> supply curve shifts right
● Supply decreases -> supply curve shifts left
MARKET EQUILIBRIUM: The intersection of the demand and supply curves is the
market equilibrium price
● SHORTAGE: QS <QD , results in price increases to decrease QD
● SURPLUS: QS >QD , results in price decrease to increase QD
PRICE CONTROLS:
● Price Ceiling: A legal maximum of the selling price of a good ordered by the
government. If the price ceiling is lower than the market equilibrium, it leads to a
shortage as there is excess demand
● Price Floor: A legal minimum of the selling price of a good ordered by the
government. If the price floor is higher that the market equilibrium, it leads to
surplus as there is excess supply.
Document Summary
Microeconomics: the study of individual firms within the market opposed to the entire economy. Normative analysis: an analysis that makes recommendations about economic policies. Positive analysis: an analysis that explains what and why things happen within the economy, without making recommendations. Scarcity: resources are finite, but wants are unlimited, therefore people must compromise and make decisions. Rational decision making: it it rational to pursue an action if benefits>costs. Thinking on the margin: if mb>mc, it is rational to take an action. Marginal cost: the additional cost of producing one more unit of a good/service. Marginal benefit: the additional benefit of consuming one more unit of a good/service. Opportunity cost: the value of the next best alternative forgone. Better allocation: a reallocation of goods in a way that is better off for all parties. Greater production: in the instance where greater production is available, each involved (voluntary exchange). party specializes in the activity in which they have the comparative advantage (lower.