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EoF week1 Main concepts in Microeconomics, image, image - Coggle Diagram
EoF week1 Main concepts in Microeconomics
What is Economics about?
Model:
essential features of situation, simplified from reality, subjective.
Hypothesis
: logical consequences of model
Theory
= M+H : why people make choices and predict behaviour.
Demand
Law of demand:
increase in price=> decrease in quantity demanded. Movements.
Factors that
shifts
demand
Price of other goods
increase in price of
substitutes
=> increase the demand
increase in price of
complement
=> decrease in demand
2.Income
increase in income => increase in demand in
normal goods
increase in income=> decrease in demand in
inferior goods
3.increase in future
price expectation
=>increase in demand
increase in
tastes
of goods=> increase in demand
increase in
number of buyers
=> increase in demand
Core concepts
Scarce resources:
agents must make choices about use of resources.
Cost-benefit principle:
action should be taken if extra benefit outweigh cost.
Rational decision maker
: Well-defined objective, know consequences of decisions, choose decisions that make them better off.
Use
Opportunity Cost
as measure of cost: value of resources used in the next best alternative use.
Ignore
Sunk Cost
: resources already used, cannot be recovered at the moment of making decisions.
Marginal analysis
: analysis of extra(marginal) benefit and cost.
Marginal benefit:
additional benefit by increasing one unit of activity.
Marginal cost
:additional cost by increasing one unit of activity
Supply
Law of supply
: increase in price => increase in quantity supplied. Movements.
Factors that
shifts
supply
increase in
cost of production
=> decrease in supply
2.increase in future
price expectations
=> decrease in supply today
favourable
weather
factors => increase in supply
increase in
number of suppliers
=> increase in supply
Market equilibrium
Outcome of trade
Market price and quantity when
Qd=Qs
Perfect competition
Large number of firms
Each firm is a price-taker
Homogenous product
Perfect information
Free entry/exit from the market
equilibrium in perfectly competitive market
Market demand maps out
WTP
Market supply maps out
cost of producers
Efficiency:
use resources to produce an extra unit of good if WTP>= CoP
First Welfare Theorem
: equilibrium in a perfectly competitive market achieves
efficient
outcome.
Study government intervention case.
