AFM101 Chapter Notes - Chapter 1-7: Network Effect, Monopolistic Competition, Competitive Equilibrium
7 May 2018
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ECON101 NOTES
TOPIC 1:
CHAPTER 1: SCARCITY AND CHOICE
OFFSHORING
The process of firms moving the production of goods and services outside of their home
country is called offshoring (outsourcing).
SCARCITY
Is the situation in which unlimited wants exceed the limited resources available to fulfil
those wants.
RESOURCES
Inputs used to produce goods and services, including natural resources such as land, water
and minerals, labour, capital and entrepreneurial ability. These are also refrred to the
fatos of podutio.
ECONOMICS
Is the study of the choices people and societies make to attain their unlimited wants, given
their scarce resources.
ECONOMIC MODELS
Simplified versions of reality used to analyse real-world economic situations
THREE ECONOMIC IDEAS:
1. People are rational
2. People respond to economic incentives
3. Optimal decisions are made at the margin
- Marginal analaysis: analysis that involves comparing marginal benefits and
marginal costs
In economics we study how people make choices and interact in markets.
- Market: a group of buyers and sellers of a good or service and the institution or
arrangement by which tey come together to trade
SCARCITY, TRADE-OFFS AND THE ECONOMIC PROBLEM THAT EVERY SOCIETY MUST SOLVE
- Trade off: the idea that, because of scarcity of economic resources/factors of
production, society can produce only a limited amount of goods and services. This
leads to trade offs: producing more of one good or service means producing less of
another good or service.
TRADE OFFS FORCE SOCIETY TO MAKE CHOICES
- Especially true with respect to 3 questions:
1. What goods and services will be produced?
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Opportunity cost: the opportunity cost of an activity is the highest-valued alternative that
much be given up to engage in that activity.
2. How will the goods and services be produced?
In any cases, firms face a trade-off between using more workers and using more machines
3. Who will receive the goods and services produced?
This largely depends on how income is distributed
Centrally planned economy: an economy in which the government decides how economic
resources will be allocated
Market economy: an economy in which the decisions of households and firms interactingin
markets allocate economic resources
- Consumer sovereignty: in a market economy it is ultimately consumers who decide
what goods and services will be produced
- Firms must produce gns that meet the needs of the consumers or the firms will go
out of business
Mixed economy: an economy in which most economic decisions result from the interaction
of buyers and sellers in markets, but in which the government plays a significant role in the
allocation of resources.
EFFICIENCY AND EQUITY
Productive efficiency: when a good or service is produced using the least amount of
resources
Allocative efficiency: when production reflects consumer preferences
- In particular every good or service is produced up to the point where the last unit
provides a marginal benefit to consumers equal to the marginal cost of producing it
Dynamic efficiency: when new technology and innovation are adopted over time
Voluntary exchange: when both the buyer and the seller of a produce are made better off
by the transaction.
Equity: the fair distribution of economic benefits between individuals and between
societies.
ECONOMIC MODELS
Economic variables: something measureable that relates to resource use and that can have
different values e.g. wages, prices of hours worked.
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Economic models make behavioural assumptions about the motives of consumers and
firms.
To develop a model:
1. Decide on the assumptions of be used in developing the model
2. Formulate a testable hypothesis
3. Use economic data to test the hypothesis
4. Revise the model if it fails to explain the economic data
5. Retain the revised model to help answer similar economic questions in the future
Forming and test hypotheses in economic models:
- A hypothesis is a statement that may be either correct or incorrect about an
economic variable
- Economists must distinguish between correlation and causality
Postivie analysis: analysis concerned with what is and involves value-free statement that
can be checked by using facts.
Normative analysis: analysis concerned with what ought to be and involves making value
judgements, which cannot be tested.
Microeconomics: the sutyd of how households and firms make choices, how they interact in
markets and how the government attempts to influence their choices.
Macroeconomics: the study of the economy as a whole, including topds such as inflation,
unemployment and economic growth.
Graphs:
Serve 2 purposes:
1. They simplify economic ideas
2. They make the ideas more concrete so that they can be applied to real world
problems
KEY TERMS
Allocative efficiency
Centrally planned economy
Consumer sovereignty
Dynamic efficiency
Economic models
Economic variable
Economics
Equity
Macroeconomics
Marginal analysis
Market
Market economy
Microeconomics
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
The process of firms moving the production of goods and services outside of their home country is called offshoring (outsourcing). Is the situation in which unlimited wants exceed the limited resources available to fulfil those wants. Inputs used to produce goods and services, including natural resources such as land, water and minerals, labour, capital and entrepreneurial ability. These are also refrred to the (cid:858)fa(cid:272)to(cid:396)s of p(cid:396)odu(cid:272)tio(cid:374)(cid:859). Is the study of the choices people and societies make to attain their unlimited wants, given their scarce resources. Simplified versions of reality used to analyse real-world economic situations. Three economic ideas: people are rational, people respond to economic incentives, optimal decisions are made at the margin. Marginal analaysis: analysis that involves comparing marginal benefits and marginal costs. In economics we study how people make choices and interact in markets. Market: a group of buyers and sellers of a good or service and the institution or arrangement by which tey come together to trade.
