J1 Microeconomics Notes/Summary

H1 Economics Notes 📝 UNIT 1: THE CENTRAL ECONOMIC PROBLEM Term Explanation Resources Means of production a.k.a. factors of production, factor inputs, productive resources 🧠 acronym for resources: CELL 🧠 resources are not homogeneous and therefore are not perfect substitutes (Physical) C apital Man-made assets that are used to aid in further production e.g. machines, tools, factory buildings ❌ money ( financial capital) E ntrepreneur Coordination between other factors of production to produce new goods and services, explore new markets, innovate and take risks in anticipation of demand e.g. Sam Altman ( CEO of OpenAI ), Shou Zi Chew ( CEO of TikTok ) L and Natural endowments, which can be used for the production and distribution of goods and services e.g. soil, crude oil, minerals L abour Mental and physical effort used in the production of goods and services e.g. engineers, data scientists, drivers Scarcity Situation whereby the available resources are insufficient to produce everything that human beings need or want ‼ resources will always be limited relative to wants Opportunity Cost The benefit (or value) of the next best alternative forgone ‼ ONLY the top 2 choices matter should be explained in terms of benefits (money, time etc.)

🧠 concept of opportunity cost is illustrated by the negative slope of the PPC Utility The satisfaction that people get from consuming a good or service Marginal Analysis Making decisions based on small changes in resources, usually by one unit , to maximise self-interest ‼ an individual (or firm or society) should undertake an action if the marginal benefits from taking the action are at least as large as the marginal costs Marginal Benefit The increase in total benefit that results from carrying out one additional unit of the activity Marginal Cost The increase in total cost that results from carrying out one additional unit of the activity PPC A Production Possibilities Curve shows all the different maximum combinations of goods and services that can be produced in an economy, given the level of resources and technology ‼ Assumptions: ● The economy only produces 2 goods/services ● During the period, the Q uantity and Q uality of resources, and the level of T echnology remain fixed ( QQT ) ● Resources are fully and efficiently employed ❓ Outwards shift of PPC ● More goods and services can be produced in the economy ( a.k.a. economic growth) ● Usually brought about by the increase in quantity and quality

of resources ○ Due to improvement in technologies used to produce goods and services

Productive Efficiency All resources are used to their maximum potential NO unemployment or underemployment

‼ all points ON the PPC are productive efficient ( e.g. points A, B, C, D, E) Allocative Efficiency Production of the right combination of goods and services that is wanted by the economy ‼ only ONE point on the PPC is allocative efficient (societal welfare is maximised at that point) Positive Economics ● Describe and explain economic phenomena as it was or will be (focusing on the facts) ● Focus on cause-effect relationships, prediction about the future and includes the development and testing of economic theories ● Can be verified with the use of facts ● Does not involve value judgement Normative Economics ● Prescribe how economic economic outcomes and policy measures should or ought to be ● Involve issues of personal opinions ● Cannot be settled with the use of facts ● Require value judgement about economic fairness

UNIT 2A: BASICS OF THE MARKET ECONOMY Term Explanation Ceteris Paribus All other things remain constant Demand ( DD ) The quantity of a good or service that consumers are both willing and able to buy at each possible price during a given period of time, ceteris paribus Demand Curve A graphical plot of the demand schedule with price on the y-axis and quantity on the x-axis Law of Demand In a given time period, the quantity demanded ( Qd ) of a product is inversely related to its price, ceteris paribus ● The ↑ the price of a good or service, ceteris paribus, the ↓ the willingness and ability to buy the good or service and hence the smaller the Qd ● Conversely, the ↓ the price, ceteris paribus, the ↑ the Qd ● Hence, the law of demand suggests that the demand curve is downward-sloping

Law of Diminishing Marginal Utility ( LDMU ) According to the LDMU , beyond a certain point of consumption, as more and more units of a good or service are consumed, the additional utility a consumer derives from successive units decreases Individual Demand The DD of an individual consumer Market Demand Derived by summing up the total Qd by all consumers in the market at every given price over a period of time, ceteris paribus ‼ Unless otherwise stated, when we talk about demand, we are referring to the market demand Assumption : Market only has 2 buyers Derived Demand The DD for a factor of production that depends on the demand for the good which uses it (in its production) Examples : ● The DD for healthcare professionals is derived from the DD for healthcare services. As an ↑ in demand for healthcare services may lead to an ↑ in demand for healthcare professionals ● The DD for steel is derived from the DD for automobiles. As an ↑ in DD for automobiles may lead to an ↑ in DD for steel Supply ( SS ) The quantity of a good or service that producers are both

willing and able to sell at each possible price in a given period of time, ceteris paribus Supply Curve A graphical plot of the supply schedule with price on the y-axis and quantity on the x-axis Law of Supply In a given time period, the quantity supplied ( Qs ) of a product is directly proportional to its price, ceteris paribus ● The ↑ the price, ceteris paribus, the ↑ the willingness and ability to sell the good or service and hence the ↑ Qs ● Conversely, the ↓ the price, ceteris paribus, the ↓ the Qs ● Hence, the law of supply suggests that the SS curve is upw