1.1 – 1.4
• The problem of scarcity exists because all human wants cannot be
satisfied with limited time, money, and energy. Scarcity exists
• Opportunity cost is the cost sis the best alternative given up. Could be
equal to, less than, or greater than monetary costs.
• Voluntary trade is not a zero-sum game. Both traders gain. Mutually
beneficial gains from trade are caused by differences in comparative
• Opportunity cost = Give Up/Get
2.1 – 2.5
• Preferences describe your wants and their intensities
• The term demand describes consumers’ willingness and ability to pay
for a particular product/service.
• The diamond-water paradox illustrates the idea that what
consumers are willing to pay for a particular good depends on the
marginal benefit. The paradox is resolved by distinguishing marginal
value from total value. You would die w/o any water, so you would be
willing to pay everything you can for the first drink. But when water is
abundant and cheap, and you are not dying of thirst, the marginal
benefit is low, even though the total benefit of all water consumed is
high. Diamonds are desirable because they are relatively scarce.
• Willingness to pay depends on marginal benefit.
2.3 & 2.4
• The law of demand says that if the price of a product/service rises,
the quantity demanded decreases, and vice versa. Quantity demanded
is the amount you actually plan to buy at a given price.
• Market demand shows the sum of demands of all individuals willing
and able to buy a particular product/service. Changes
% 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐷𝑒𝑚𝑎𝑛𝑑𝑒𝑑
𝑃𝑟𝑖𝑐𝑒 𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝐷𝑒𝑚𝑎𝑛𝑑 = % 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒
𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 = 𝑃𝑟𝑖𝑐𝑒 𝑥 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦
• If the demand for good/service is inelastic , the price elasticity of
demand is <1. When the price is raised, the percentage decrease in
quantity demanded is less than the percentage rise in price, so total
revenue (P x Q) increases.
• Price Elasticity of Demand is influenced by substitutes, time to
adjust, and proportion of income spent on a product/service.
3.1 – 3.5
• Businesses must pay higher prices to obtain more labour because
workers are supplying time, and the marginal cost of their time
increases as more hours are supplied.
• For smart supply decision, the marginal cost is the opportunity cost of
time, thus the marginal cost increases as you provide more, and the
marginal benefit is measured in $ (wages you earn).
• Since marginal cost of your time increases, you give up the least
valuable time first. 3.2
Sunk costs are those costs that cannot be recovered. Sunk costs are not part
of additional opportunity costs and have no influence on smart choices!
Ex: You are considering selling you used car and buying a new car. Which of
the following would be a sunk cost?
▯ The sale price of the used car
▯ The cost of the new car
þ The insurance you paid for the used car
▯ The trade-in value of the used car
3.3 - 3.5
• The Law of Supply states that if the price of a product rises, the
quantity supplied of the product also increases since this creates
incentives for production to increase by providing the higher profits.
Individuals and businesses devote more of their time or resources to
producing or supplying because of the quest for profits.
𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑂𝑝𝑝𝑜𝑟𝑢𝑛𝑡𝑖𝑦 𝐶𝑜𝑠𝑡 = 𝑋 𝐺𝑖𝑣𝑒𝑛 𝑈𝑝
𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑋 𝐺𝑖𝑣𝑒𝑛 𝑈𝑝
𝑀𝑎𝑟𝑔𝑖𝑛𝑎𝑙 𝑂𝑝𝑝𝑜𝑟𝑢𝑛𝑖𝑡𝑦 𝐶𝑜𝑠𝑡 =
𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝑌
• Supply increases with improvement in technology, a fall in the price
of an input, a fall in the price of a related product/service, a fall in
expected future price, and increase in number of businesses, and vice
𝐸𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑆𝑢𝑝𝑝𝑙𝑦 = 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑆𝑢𝑝𝑝𝑙𝑖𝑒𝑑
% 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑃𝑟𝑖𝑐𝑒
• If the percentage change in quantity supplied is less than the
percentage change in price, elasticity of supply is less than 1 and is
called inelastic. Quantity supplied is relatively unresponsive to a
change in price.
• Elasticity of Supply of a product/service is influenced by:
availability of additional inputs, and the time production takes.
• Knowledge of the price elasticity of supply for an item allows accurate
projections of future outputs and prices, helping businesses avoid
disappointed customers. 4.1 – 4.4
• A market is a process between buyers and sellers. It is not a place.
• For markets to work and voluntary exchanges to happen, governments
must define and protect property rights and enforce contracts, or
agreements, between buyers and sellers.
• Voluntary exchange that occurs in the market is the result of
cooperation between the buyer and seller.
• For the buyers, MB ≥ Price or Marginal Opportunity Cost.
• For the seller, P ≥ Estimated Marginal Opportunity Cost.
• When the market price is too high, there is a surplus, and quantity
demanded is less than the quantity supplied. The surplus creates
pressure for prices to fall, and vice versa.
• Market-clearing price is the first name for the market price that
equalizes Q and Q . Balances the forces of competition between
consumers and businesses, with the forces of cooperation between
consumers and businesses.
• Equilibrium price exactly balances the forces of competition and
cooperation to coordinate the smart choices for consumers and
businesses. At the equilibrium price, there is no tendency for change.
• Price signals in markets create incentives, and coordinate the smart
choices of consumers and businesses.
• Here is an illustration of what could happen in a market.
• Consider the effect that the following event will have on the market for
jeans: The income of consumer’s increases. The demand increases, the
market-clearing price rises, and the quantity supplied increases.
5.1 – 5.5
5.1 – 5.3
• Price ceilings are set below the market-clearing price. Quantity
adjustment occurs when prices can’t adjust.
• Ex: Most of the employment impact of minimum wages will come from
businesses hiring fewer low-wage workers in the future.
• Price floors are set above the market-clearing price. Quantity
adjustment occurs when prices can’t adjust. • Rent controls result in shortages of rental housing. There is no incentive
the build more rental housing, and an incentive for owners of rental
apartment buildings to convert these into condominiums. The quantity
will adjust to the quantity supplied. Rent controls have unintended and
undesirable consequences: create housing shortages, giving landlords
the upper hand over tenants.
• The outcomes of well-functioning markets are efficient, but not always
equitable. Government may smartly choose policies that create more
equitable outcomes, even though the trade-off is less efficiency.
• Positive statement – About what is
• Normative statement – About what should be
6.1 – 6.3
• Obvious/explicit costs are costs a business pays directly. This includes
depreciation, which is a tax rule for spreading cost over lifetime of
• Implicit costs are hidden opportunity costs of what business owner
could earn elsewhere with time and money invested.
• Normal profits are compensation for business owner’s time and money;
the sum of hidden opportunity costs what business owner must earn to
do as well as best alternative use of time and money.
𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑃𝑟𝑜𝑓𝑖𝑡𝑠 = 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡𝑠 − 𝐻𝑖𝑑𝑑𝑒𝑛 𝑂𝑝𝑝𝑜𝑟𝑢𝑛𝑖𝑡𝑦 𝐶𝑜𝑠𝑡𝑠
𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑃𝑟𝑜𝑓𝑖𝑡𝑠 = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠 − 𝑂𝑏𝑣𝑖𝑜𝑢𝑠 𝑂𝑝𝑝𝑜𝑟𝑢𝑛𝑖𝑡𝑦 𝐶𝑜𝑠𝑡𝑠 + 𝑁𝑜𝑟𝑚𝑎𝑙 𝑃𝑟𝑜𝑓𝑖𝑡𝑠
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡𝑠 = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠 − 𝑂𝑏𝑣𝑖𝑜𝑢𝑠 𝐶𝑜𝑠𝑡𝑠
𝐻𝑖𝑑𝑑𝑒𝑛 𝑂𝑝𝑝𝑜𝑟𝑢𝑛𝑖𝑡𝑦 𝐶𝑜𝑠𝑡𝑠 = 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡𝑠 − 𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑃𝑟𝑜𝑓𝑖𝑡𝑠
𝐻𝑖𝑑𝑑𝑒𝑛 𝑂𝑝𝑜𝑟𝑢𝑛𝑖𝑡𝑦 𝐶𝑜𝑠𝑡𝑠 = 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑠 − 𝑂𝑏𝑣𝑖𝑜𝑢𝑠 𝐶𝑜𝑠𝑡𝑠 − 𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑃𝑟𝑜𝑓𝑖𝑡
• Smart business decisions depend on economic profits .
• When businesses pursue economic profits, the unintended
consequence is that markets produce the products/services consumers
• A business owner should leave an industry when economic profits are
negative, when additional benefits are less than additional opportunity
costs, and when revenues are less than all opportunity costs.
• Businesses expand and enter an industry with economic profits,
pushing quantity sold up and prices down, until prices are just enough to cover all opportunity costs of production and economic profits are
7.1 – 7.4
Market Structure and Pricing Power
Market Monopoloy Oligopoly Monopolistic Extreme
Structure Competition Competition
Pricing Power Price Maker Price Maker Price Maker Price Taker
(10) (5-9) (1-4) (0)
Product No closer Differentiated Differentiated Many perfect
Substitutes substitutes substitutes substitutes substitutes
Number of 1 Few Many Many, many
Barriers to High Medium None None
Elasticity of Low/Inelastic Low/Inelastic High/Elastic High/Elastic
• Market structure depends on the nature and degree of
competition in the industry
• Economies of scale occur when average costs fall as the scale of
production increase. This occurs when there are high fixed or sunk
• Economies of scale can lead to a monopoly because when the business
increases output, it can lower the cost per unit, and charge a lower
price, driving smaller firms out of business.
• With natural monopolies , one business can supply the entire market
at a lower cost than can two or more businesses. There are high fixed
costs. The marginal cost of delivering is quite low. As quantity of output
increase, average total costs fall. They create a challenge for policy
makers because there are gains related to the low-cost efficiencies of a
• Businesses’ quest for economic profits and the market power of
monopoly generate actions – cutting costs, improving quality,
innovating, advertising, etc. When competitors respond, prices are
driven towards levels f extreme competition. The process of creative
destruction unintentional improves productivity and living standards
for all. Competitor’s actions also result in business cycles. 8.1 – 8.4
• Marginal revenue is the additional revenue from selling one more
• Marginal revenue is less than the price for