Economics

Module One (1):

Production Possibility Frontier/Curve
This is a graph depicting all maximum output possibilities for two goods given a set of inputs
(resources, labor, etc.).
Assumptions made by the PPF:

Only two (2) goods can be used in this graphical trade off; e.g. the number of rabbits vs.
the number of berries.
The resources are fully and efficiently employed.
The level of technology is assumed to remain constant

Definitions:
Oppurtunity Cost: The cost of an alternative that must be forgone in order to pursue a certain
action. Put another way, the benefits you could have received by taking an alternative action.
Scarcity: The basic economic problem that arises because people have unlimited wants but
resources are limited.
Shortage: A shortage occurs whenever quantity demanded is greater than quantity supply at the
market price.
Choice: What someone must make when faced with two or more alternative uses of a resource
(also called economic choice).
Factors of Production:

Land (rent)
Labour (wages/salaries)
Entrepreneurship (profit)
Capital (Interest)

Utility
This is an economic term referring to the total satisfaction received from consuming a good or service.

Cardinal Approach to measuring utility

Cardinal utility states that the satisfaction the consumer derives by consuming goods and
services can be measured with numbers. Cardinal utility is measured in terms of utils (the units
on a scale of utility or satisfaction). According to cardinal utility the goods and services that are
able to derive a higher level of satisfaction to the customer will be assigned higher utils and
goods that result in a lower level of satisfaction will be assigned lower utils. Cardinal utility is a
quantitative method that is used to measure consumption satisfaction.
Ordinal Approach to measuring utility
Ordinal utility states that the satisfaction the consumer derives from the consumption of goods
and services cannot be measured in numbers. Rather, ordinal utility uses a ranking system in
which a ranking is provided to the satisfaction that is derived from consumption. According to
ordinal utility, the goods and services that offer the customer a higher level of satisfaction will be
assigned higher ranks and the opposite for goods and services that offer a lower level of
satisfaction. The goods that offer the highest level of satisfaction in consumption will be
provided the highest rank. Ordinal utility is a qualitative method that is used to measure
consumption satisfaction.

Demand
Demand: This refers to the entire relationship between prices and the quantity of this product or service
that people want at each of these prices; should be thought of as "the demand curve."
Quantity demanded: Refers to one particular point on the demand curve (not the entire curve); how
much of the product is demanded at one particular price, the horizontal distance between the vertical axis
and the demand curve.

The law of demand

P

Qd

Qd

Factors affecting demand:

Products Own Price

Consumer Income
Price of Related Goods
Tastes and Preferences inn consumers

Consumer expectations
Number of consumers in the market

Supply
Supply is the quantity of a product that a producer is willing and able to supply onto the market
at a given price in a given time period.
The law of supply: As the price of a product rises, so businesses expand supply to the market. A
supply curve shows a relationship between price and how much a firm is willing and able to sell
P

Qs

Qs

Factors Affecting Supply:

Input Prices
Technology
Competitors in the Market
Producers Expectations

Elasticity
Es/d < 1 Inelastic or relatively inelastic
Es/d = 1 Unitary Elasticity
Es/d > 1 Elastic

Inferior Good- An inferior good means an increase in income causes a fall in demand. It
has a negative YED. An example, of an inferior good is Tesco value bread. When your
income rises you buy less Tesco value bread and more high quality, organic bread.

Normal Good- This means an increase in income causes an increase in demand. It has a
positive YED. Note a normal good can be income elastic or income inelastic.

Luxury Good- A luxury good means an increase in income causes a bigger % increase in
demand. It means that the YED is greater than one. For example, high definition TVs
would be luxury. When income rises, people spend a higher % of their income on the

luxury good. (Note: a luxury good is also a normal good, but a normal good isnt
necessarily a luxury good)

Market Equilibrium
Market equilibrium in this case refers to a condition where a market price is established through
competition such that the amount of goods or services sought by buyers is equal to the amount of
goods or services produced by sellers.

Consumer Surplus
The difference between total benefit of consuming a given quantity of output and the total
expenditures consumers pay to obtain that quantity. (Above the equilibrium price)

Producer Surplus
This is the difference between the amount that a producer of a good receives and the minimum
amount that he or she would be willing to accept for the good. (Below the equilibrium price)

Dead Weight Loss

The costs to society created by market inefficiency caused by an inefficient allocation of
resources. Price ceilings (such as price controls and rent controls), price floors (such as minimum
wage and living wage laws) and taxation are all said to create deadweight losses. Deadweight
loss occurs when supply and demand are not in equilibrium.

Module Two (2):

Market Structure
Market structure is defined by economists as the characteristics of the market. It can be
organizational characteristics or competitive characteristics or any other features that can best
describe a goods and services market.
Characteristics:

The number of firm operating in a market.

The concentration ratio of company.
The amount and nature of costs in the market; It will show how the different costs affect
the contestability in the market. It will include the economies of scale and the presence of
sunk costs.
Pricing Power.
The levels of product differentiation.
Profit (normal, supernormal, economic).

Types:
Monopoly

Monopolistic Competition
Perfect Competition
Oligopoly.

Formula Sheet

Average Total Cost (ATC) = Total Cost / Q (Output is quantity produced or Q)

Average Variable Cost (AVC) = Total Variable Cost / Q Average Fixed Cost (AFC) = ATC
AVC
Total Cost (TC) = VC + FC
Total Variable Cost (TVC) = AVC X Output
Total Fixed Cost (TFC) = TC TVC
Marginal Cost (MC) = Change in Total Costs / Change in Output
Marginal Product (MP) = Change in Total Product / Change in Variable Factor
Marginal Revenue (MR) = Change in Total Revenue / Change in Q
Average Product (AP) = TP / Variable Factor
Total Revenue (TR) = Price X Quantity
Average Revenue (AR) = TR / Output
Total Product (TP) = AP X Variable Factor
Economic Profit = TR TC > 0
A Loss = TR TC < 0
Break Even Point = AR = ATC
Profit Maximizing Condition = MR = MC

Explicit Costs = Payments to non-owners of the firm for the resources they supply.
Perfect competition: the efficient market where goods are produced using the most efficient
techniques and the least amount of factors. This market is considered to be unrealistic but it is
nevertheless of special interest for hypothetical and theoretical reasons.
Monopoly: it represents the opposite of perfect competition. This market is composed of a sole
seller who will therefore have full power to set prices.

Oligopoly: in this case, products are offered by a series of firms. However, the number of sellers
is not large enough to guarantee perfect competition prices.

Monopolistic competition: this market is formed by a high number of firms which produce a
similar good that can be seen as unique due to differentiation that will allow prices to be held up
higher than marginal costs. In other words, each producer will be considered as a monopoly
thanks to differentiation, but the whole market s considered as competitive because the degree of
differentiation is not enough to undermine the possibility of substitution effects.

Market Failure
A market failure is a situation where free markets fail to allocate resources efficiently; productive
and allocative inefficiency.
Causes:

Lack of public goods

Environmental concerns
Positive and negative externalities
Underproduction of merit goods

Overprovision of demerit goods

Abuse of monopoly power

Definitions:

Public Goods- Goods with characteristics of non-rivalry and non-excludability. E.g.

national defense.
Merit Goods- Goods which people may underestimate benefits of. Also often have
positive externalities. E.g. education.
Demerit Goods- Goods where people may underestimate costs of consuming it. Often
have negative externalities. E.g. smoking, drugs.
Private goods- Goods which do have rivalry and excludability.
Free Goods- A good with no opportunity cost. E.g. breathing air.
Negative Externalities
Negative externalities occur when the consumption or production of a good causes a harmful
effect to a third party.
Examples of Negative Externalities

If you play loud music at night your neighbour may not be able to sleep.
If you produce chemicals and cause pollution as a side effect, then local fishermen will
not be able to catch fish. This loss of income will be the negative externality.
Social cost
With a negative externality the Social Cost > Private Cost
Positive Externalities
This occurs when the consumption or production of a good causes a benefit to a third party.

Examples of Positive Externalities

When you consume education you get a private benefit. But there are also benefits to the
rest of society. E.g. you are able to educate other people and therefore they benefit as a result of
your education.
A farmer who grows apple trees provides a benefit to a beekeeper. The beekeeper gets a
good source of nectar to help make more honey.
If you walk to work, it will reduce congestion and pollution, benefiting everyone else in
the city.

Social Benefit
With positive externalities the benefit to society is greater than your personal benefit. Therefore
with a positive externality the Social Benefit > Private Benefit
COSTS
Private Costs

Direct (private) monetary costs

External costs

Monetary, e.g. a new road may mean less money for train companies
Non- monetary e.g. poll, spoiling landscape, noise

Module Three (3):

The demand for; Supply of Theory
The rewards
Factor
Land
Labour
Capital
Enterprise

Derived Demand

Owner
Landlord
Labourer
Monetary Lender
Entrepreneur

Reward
Rent
Wages
Interest
Profit

Nature of Factor
Primary
Human Resource
Man Made
Man Made

Demand for a basic good (wanted not for its own sake but for the goods derived from it) such
as textiles, that is due to its use in the production of another good such as apparels.
Marginal Productivity Theory
A theory used to analyze the profit-maximizing quantity of inputs (that is, the services of
factor of productions) purchased by a firm in the production of output.

.INCOMPLETE

Wage Differentials
This is the difference in wages between workers with different skills in the same industry or
between those with comparable skills in different industries or localities.
Causes:

Supply and Demand

Positive and negative discrimination
Specialties
Labour Nobilities
Ethic discrimination

Labour Mobility
Mobility of labour means the capacity and ability of labour to move from one place to another or
from one occupation to another or from one job to another or from one industry to another.

Geographical
Occupational
Industrial
Horizontal
Vertical

Poverty
Poverty may be defined as the condition in which people do not have enough income to provide
for their basic needs such as food, clothing and shelter. But, it is difficult to settle on a universal
definition of poverty.
Absolute poverty: This is where person cannot afford the basic necessities of life. Such a person
is unable to sustain himself.

Relative poverty: This is where a person is considered poor in relation to someone else.
Measurements of poverty

The poverty line: This is an amount of income below which a family is considered poor.
To determine the poverty line the government first figures the cost of a years nutritious
low cost diet. This is then adjusted for family size and composition. Different poverty
lines are determined for different areas based on varying food prices.

Basic Needs: These are determined by the government along with international financial
institutions.

Causes

Unemployment
Restriction to job entries
Low Productivity

Effects

Unemployment

Lower Output

Inefficient Spending by the Govt.

Social and Environmental Costs