ECON1101 Chapter Notes - Chapter 1: Flea Market, International Trade, Opportunity Cost
Natasha Warrell
Microeconomics:
TOPICS:
i. Introduction to Economics
ii. Supply and Demand
iii. Economics of the Firm
iv. Factor Markets
v. Taxes, Public Goods, and Externalities
vi. International Trade
Lecture 1 Notes:
Microeconomics:
Study the behaviour of individual firms and households or specific markets –
macroeconomics is the “economy as a whole” – not specific, individual markets.
• Use simple models and simplifying assumptions
• Assume rationality and maximising behaviour
• Does not require that people actually analyse rationally and logically seek to
maximise their objective but act as if they do
• Judge a model by its predictive power
Positive Analysis: Descriptive statement of cause and effect.
E.g. lower wages for low wage workers will lead to an increase in demand for those
workers.
Normative Analysis: Statements that embody value judgements
E.g. the Government should lower wages for the poor.
1 – The Central Idea
Scarcity and Choice for Individuals: Consumer Decisions
Scarcity: Resources are limited – forces people to make choices (for every choice
there are opportunity costs of not doing one thing because another has been chosen)
Economic Interactions: Trade/exchange of goods, people benefit – take place in a
market
Market: Arrangement by which buyers and sellers interact (E.g. New York Stock
Market or local flea market)
Economics: The study of how people deal with scarcity
Opportunity Cost: The value of the next best forgone alternative that was not chosen
because something else was chosen
Gain from Trade – General: Goods/services allocated in ways that are more
satisfactory to people, or because trade permits specialisation through the division of
labour
Gain from Trade - A Better Allocation: Improvements (income, satisfaction or
production) owing to the exchange of goods or services – mutually advantageous
means that both parties voluntarily engage. Total number of goods does not change
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Natasha Warrell
Scarcity and Choice for Individuals: Producer Decisions
Gain from Trade – Greater Production: Same as above – but resulting in a greater
production rate (example on page 5 in textbook)
Specialisation: A concentration of production effect on a single specific task –
specialisation creates a division of labour
Division of Labour: The division of production into various parts in which different
groups of workers specialise
Comparative Advantage: A situation in which a person or group can produce one
good at a lower opportunity cost than another person or group – person/group can
produce a good with comparatively less time/effort/resources than another
Absolute Advantage: When a country/person is more efficient in producing a good in
comparison to another
Scarcity and Choice for Individuals: International Trade:
International Trade: Exchange of goods and services between people or firms in
different nations
Scarcity and Choice for the Economy as a Whole: Production Possibilities:
Production Possibilities: Alternative combinations of production of various goods that
are possible, given the economy’s resources
E.g.
Production Possibilities
Movies
Computers
A
0
25,000
B
100
24,000
C
200
22,000
D
300
18,000
E
400
13,000
F
500
0
Scarcity and Choice for The Economy as a Whole: Increasing Opportunity Costs
Increasing Opportunity Cost: A situation in which producing more of one good
requires giving up an increasing amount of production of another good
Scarcity and Choice for The Economy as a Whole: The Production Possibilities
Curve
Production Possibilities Curve: A curve showing the maximum combinations of
production of two goods that are possible, given the economy’s resources
• Represents the choices open to a whole economy when it is confronted with
a scarcity of resources
• Point A is inefficient
• Point B is efficient
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find more resources at oneclass.com
