ECON1101 Chapter Notes - Chapter 5: Economic Equilibrium, Marginal Utility, Marginal Cost
ECON1101
bananas and 8 rabbits. To find the opportunity cost of producing 1 banana,
this will be equal to 8 (loss) / 24 (gain), giving us an answer of ⅓.
Chapter 2: Supply in Perfectly Competitive Markets
● Market: The market for a given good or service is the set of all the
consumers and suppliers who are willing to buy and sell
that good or
service at a given price
● Market Equilibrium: Market equilibrium occurs when the price and the
quantity sold of a given good is stable
○ The equilibrium price is such that the quantity that consumers want
today is the same as the quantity that suppliers want to sell
Characteristics of a Perfectly Competitive Market
1) Consumers and Suppliers are price takers: Both suppliers and
consumers are not willing/able to affect the equilibrium price (if suppliers
increased price, consumers will buy from competitor and suppliers will lose
profits if they reduced prices. If consumers try to ask for lower price,
supplier will just serve another customer and there is no incentive for
customer to pay a higher price)
2) Homogenous goods: all suppliers sell exactly the same product
3) No externality: an externality is a cost or benefit that is incurred by
someone who is not involved in the production or consumption of a certain
good
4) Goods are excludable and rival: suppliers can prevent consumers from
consuming a certain good (excludability) and once consumed, that good
becomes unavailable to other customers (rivalry)
5) Full information: the suppliers and the consumers are perfectly informed
regarding the characteristics of the good (price and quality of good)
6) Free entry and exit: there is no cost to entry and no penalty for leaving
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Supply Curve for an Individual
● Marginal benefit: The marginal benefit of producing a certain unit of a
given good is the extra benefit accrued by producing that unit (i.e. if it takes
1 hr to harvest a bushel of Apples which sell for $1.90, the marginal benefit
is $1.90)
● Marginal cost: The opportunity cost of producing a certain unit of a good
(using the example above, if the same person can produce 2 units of fish
in 1 hr and sell it for $1.00 (50c each), the marginal cost is $1.00)
● Cost benefit principle: The cost benefit principle states an action should
be taken if the marginal benefit is greater than or equal to the marginal
cost
● Economic surplus: The economic surplus of a certain action is the
difference between the marginal benefit and the marginal cost of taking an
action (in the case above, this will be 90c ($1.90 - $1)
● Quantity supplied: The quantity supplied by a supplier represents the
quantity of a given good or service that maximises the profit of the supplier
(quantity of supply until the marginal benefit < marginal cost)
● Supply curve: The supply curve represents the relationship between the
price of a good or service and the quantity supplied of that good or service
● Law of supply: The Law of Supply describes the tendency for a producer
to offer more of a certain good or service when the price of that good or
service increases (if the price of Apples now sell for $2.10, the quantity
supplied will raise to 3 units of Apples (alternative is $2.00 of producing
Fish)
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● Horizontal interpretation of the supply curve: start from a certain price
and then use the supply curve to derive how many units of the good will be
supplied at this price (easier)
● Vertical interpretation of supply curve: start from a certain quantity then
find the associated price on the supply curve (more difficult)
○ This price is the minimum amount of money a producer is willing to
accept to offer a certain quantity of goods/services (aka Producer
Reservation Price)
Supply Curve for Firms
● Sunk Cost: this is a cost that once paid cannot be recovered
● Fixed cost: A fixed cost is associated with a fixed factor of production
○ Fixed Factor of Production: The cost associated with it does not
vary with the quantity produced (daily repayments of machinery - it
doesn’t matter if we use the machine more or less the repayments
remain constant)
● Variable cost: A cost that is associated with a variable factor or production
○ Variable Factor of Production: the cost associated with it directly
varies with the number of units produced
● Short Run: This denotes a period of time during which at least one factor
of production is fixed
● Long Run: This denotes a period of time during which all factors of
production are variable
● Let’s consider an entrepreneur producing soft drinks that sell at $1.20 per
unit (data in table below)
○ Requires machinery with a daily repayment of $100
○ Each employee costs him $12
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Document Summary
To find the opportunity cost of producing 1 banana, this will be equal to 8 (loss) / 24 (gain), giving us an answer of . Market: the market for a given good or service is the set of all the consumers and suppliers who are willing to buy and sell that good or service at a given price. Market equilibrium: market equilibrium occurs when the price and the. The equilibrium price is such that the quantity that consumers want quantity sold of a given good is stable today is the same as the quantity that suppliers want to sell. Marginal benefit: the marginal benefit of producing a certain unit of a given good is the extra benefit accrued by producing that unit (i. e. if it takes. 1 hr to harvest a bushel of apples which sell for . 90, the marginal benefit is . 90)
