ECO130 Study Guide - Final Guide: Profit Margin, Frictional Unemployment, Marginalism
Economics Study
Opportunity cost ļ the best alternative sacrificed for a chosen alternative
Marginal analysis ļ an examination of the effects of additions to or subtractions from a
current situation
Production Possibility Frontier(PPF) ļ is a curve depicting all maximum
output possibilities for two goods, given a set of inputs consisting of resources and other
factors. The PPF assumes that all inputs are used efficiently.
DEMAND AND SUPPLY ā Microeconomics
Demand ļ inverse relationship between the price of a good or service and the quantity
buyers are willing to purchase. Consumers will only purchase additional units at a
decreased price.
Non price determinants ļ change in non price determinant causes a shift in the demand
cure.
Number of buyers ā population growth tends to increase the number of buyers which shifts
market demand curve to the right or decline to the left.
Tastes and preferences ā market influences consumers decision greatly
Income- usually with a rise in income there is a rise in demand, more purchases at any
price(normal good).
inferior good > inverse relationship between income and demand. Rise in income means
reduced purchases e.g. cheap jewellery
expectations -effect on demand when consumers anticipate future changes.
price of related goods ā substitute good ā competes with another good for consumer
purchases.
complimentary good ā good consumed with another, there is an inverse relationship. If
price of one rises less is bought of the other.
Supply ļ range of possible prices and quantity supplied. Price of good and quantity sellers
are willing to offer for sale. Changes in quantity supplied = movement along a supply
curve. Changes in non price determinant = shift In the curve.
Non price determinant ļ
Number of sellers -eg. Gov lifts barrier on textile imports.
technology ā make it possible to manufacture more., reduce production costs, increased
production more supplied at same price.
input prices ā natural resources, labour, capital, entrepreneurship. Eg. Increase in cost of
production = electricity prices go up. Eg. Carbon trade permits = increased in no of suppliers
competing, price increases
tax and subsidies ā increase in tax = increase in costs = reduce production = price rise.
Subsidies = supply curve shifts downwards.
price expectation ā
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PUBLIC GOOD ļ a good available to all provided by the government. Eg. Education,
transport. It would be difficult for the private sector to make money as people would go for
the free/cheaper option.
Market Structure
Perfect competition ā large number of small firms, a homogenous product and very easy
entry into and exit from the market.
-Competitive behaviour
-Firms have no influence over the market price
-The market demand curve and firms individual curve differ.
-In perfect competition the firms marginal revenue equals the price that determines
the position of the firms horizontal demand curve.
Monopoly ā characterised by a single seller, unique product, extremely difficult entry into
the market. Operate in a perfectly elastic market. If inelastic decreasing prices would lead to
a demand decrease.
-Buyer or seller has ability to effect market price
-Patents
-Control over key inputs
-No supply curve only a cost curve
-Monopolist chooses the price, only way to increase sales is to decrease price.
-Societies wellbeing is not maximised
3 main reasons for a monopoly: BARRIERS FOR ENTRY.
-unique resource e.g. wool (ownership of assets)
-natural monopolies e.g. electricity
-government created monopoly e.g. drugs (legal barrier)
āimperfect competitionā ā somewhere in the middle. Afew sellers.
Producer Surplus ļ amount producer of the good receives and minimum amount the
producer is willing to accept for the good. The difference is the surplus.
Social Surplus ļ The economic surplus (also known as the total welfare or social surplus) of
an activity or transaction is (roughly) defined as the total value added by that activity to all
members of society who are affected by that activity.
Market Failure ļ monopolists have producer power. and increase producer surplus. What
about the social surplus? Presence of external costs or benefits, cost incurred by society for
the production. Market failure occurs due to inefficiency in the allocation of goods and
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services. A price mechanism fails to account for all of the costs and benefits involved when
providing or consuming a specific good. When this happens, the market will not produce the
supply of the good that is socially optimal ā it will be over or under produced.
Government might try to intervene.
Reasons for market failure ļ
ļ·Negative Externality ļ hurt by some action taken(or lack of) by my neighbour. E.g.
pollution. If externality is not internalised(cost imposed on producers) then
production will be excessive and under-priced. Ways to internalise = corrective taxes,
property rights, market permits(pollution permit).
ļ·Underproduction of merit goods: a merit good is a private good that society believes
is under consumed, often with positive externalities. For example, education,
healthcare, and sports centers are considered merit goods.
ļ·Overprovision of demerit goods: a demerit good is a private good that society
believes is over consumed, often with negative externalities. For example, cigarettes,
alcohol, and prostitution are considered demerit goods.
ļ·Abuse of monopoly power: imperfect markets restrict output in an attempt to
maximize profit.
ļ·Lack of public goods: public goods are goods where the total cost of production does
not increase with the number of consumers. As an example of a public good, a
lighthouse has a fixed cost of production that is the same, whether one ship or one
hundred ships use its light. Public goods can be underproduced; there is little
incentive, from a private standpoint, to provide a lighthouse because one can wait
for someone else to provide it, and then use its light without incurring a cost. This
problem ā someone benefiting from resources or goods and services without paying
for the cost of the benefit ā is known as the free rider problem.
Marginal Social Cost Curve ļ efficient price of a product with pollution as a by product.
Revenue ļ
Average revenue = total revenue/output
market revenue = change in total revenue/change in output
Perfect competition ļ revenue should be greater then cost. (profit margin)
ļ monopoly The monopoly firm maximizes profit by producing an output Qm at point G,
where the marginal revenue and marginal cost curves intersect. It sells this output at
price Pm. lowers it price to increase quantity demanded , changes in both price and quantity
effect the firms total revenue.
Marginal Cost ļ the change in total cost when one additional unit of output is produced
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