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TitleIb MicroEconomics Notes
TagsDemand Curve Supply (Economics) Demand Price Elasticity Of Demand Economic Surplus
File Size501.6 KB
Total Pages15
Document Text Contents
Page 1

Economics Notes

Definition of Economics – Economics studies the human behavior involved in satisfying
many wants with scarce resources that have alternate uses.

The economic problem = SCARCITY

Economic resources (or factors of production)
= Anything that can be used to make goods and services available.


1) Land
free gifts of nature – all natural resources

2) Labor
All human input (physical or mental)

3) Capital
Man-made aids to production (e.g. tools and machines) and finance

4) Enterprise
An entrepreneur combines the other economic resources and takes risks (have to
decide what to make/do with the resources – businessman). They organize the
other factors of production.


Economic goods and free goods
Economic goods – goods that require scarce economic resources to be used up
Free goods – goods that do not require scarce economic resources to be used up (e.g. sea
water, sand)

Opportunity Cost
The value of the next best alternative given up by a course of action.
Example 1 – bought a coke  opportunity cost = fanta

What else could you have done/bought as a result instead
Example 2 - Could have been at home instead of economics class
Due to scarcity we have to make these decisions all the time. If a good or service has an
opportunity cost then it must be relatively scarce, so it will have a price and be classified as
an ‘economic good.’

A production possibility Frontier (PPF)

-A PPF shows all the combinations of two sets of goods which could be produced if all
economic resources are fully used (must be on the line if using all economic resources)
-The slope/gradient of the PPF represents opportunity cost (all different point on the
graph)
-In our case, the opportunity cost of agricultural goods increases as we increase Agricultural
production
-The principal of increasing costs states that as the production of a good expands, the
opportunity cost of producing another unit generally increases.
This is due to the fact that most economic resources are specialized

Page 14

Determinants of PED
-Availability of substitutes (the more substitutes, the more elastic demand)
-Time (the longer the time period considered, the more elastic demanded)
-% of income (If a good represents a small % of income, e.g. matches, demand is inelastic)
-Degree of necessity (the more it is necessary, the less elastic)

PED ≠ slope
Even when the demand curve is a straight line, with a constant slope, PED differs at all
points along the demand curve. This is because if we consider the top half of the demand
curve, where we have high prices and low quantities a change of say 10 units will
represents a small proportion of price and a large proportion of QD – therefore demand is
elastic.

PED and Revenue Boxes

1) rise in price where demand is
inelastic







2) fall in price where demand is
inelastic

3) rise in price where demand is
elastic







4) fall in price where demand is
elastic







Cross Elasticity of Demand (XED)
Definition – Responiveness of the demand for good X to a change in price of good Y
Formula –

% change QD good X
% change P good Y


± signs are important here!

Examples
-If the price of mars bars rises 10% and the QD for twix rises 9%

XED = 9/10 = 0.9
These two products are substitutes. They always get a positive number.

-If the price of petrol falls 10% and the QD for Porsche cars rises 8%

XED = 8/-10 = -0.8
These two products are complements. They will get a negative number.

-For unrelated goods

XED = 0
Unrelated goods will not affect each other.

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