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Microeconomics Notes

This is a sample of our (approximately) 12 page long Microeconomics notes, which we sell as part of the Microeconomics AS-Level Notes collection, a A - 90% package written at Withington Girls' School in 2013 that contains (approximately) 12 pages of notes across 1 different document.

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AS MICROECONOMICS Microeconomics - focuses on how individual markets work and fail The Economic Problem People have unlimited wants, however these wants outstrip the means of satisfying them - resources are not infinite Wants - the goods and services which we would like to purchase, without taking into account our ability to purchase them As people have unlimited wants, societies needed economic mechanisms in order to allocate goods and make a choice:

What to produce?

How to produce?

For whom to produce?

Economic Resources The creation of wealth involves taking resources and transforming them into goods and services that can be sold and consumed Types of resources:

1. Land - everything that is locked up in the Earth's surface - natural resources such as fossil fuels, minerals and timber (sea, atmosphere and space)

2. Labour - represents human effort into production - skills and enterprise of people

3. Capital - machinery and plant that are used to help transform resources into production (human capital refers to a person's ability to produce)

4. Enterprise - decision making and risk taking in terms of combining the other factors of production to produce particular goods and services Free market economy - an economy in which all economic decisions are decided by the private sector (reduced government intervention) Command economy - an economy in which all economic decisions are decided by the state

Allocation of Resources Resources are scarce and therefore cannot fulfil people's unlimited wants - because there are many competing demands, all societies have to make choices as to how these resources are allocated Opportunity cost - the value of what has to be given up in order to produce or consume more of something (it is the sacrifice of the next best good)

Eg. In a restaurant - the opportunity cost of ordering the steak would be to try the salmon

Production Possibility Diagrams Production possibility curve - a line showing all the different combinations of two goods that can be producing using all available resources

If a firm is producing on its production possibility curve - it is working to its full capacity and is efficient

The diagram can also be used to show opportunity cost - a movement along the curve shows a producer giving up some of one good to produce more of the other good Innovation - for example, if a new technique was created which meant that producers could produce more without increasing resources, this would be shown by an outward movement of the PPC Normative statement - a statement based on a value judgement or opinion which cannot be actually proved Positive statement - a statement that can be proved or disproved by reference to evidence

Market Forces Price mechanism - a means by which scarce resources might be allocated between different and competing uses Demand - the demand for a good or service backed up by the ability to pay for it (the demand curve shows the relationship between the price of a good or service and the quantity of that good or service that is provided)

A movement ALONG the demand curve shows you that the price of a good or service has changed

Shifts in demand - the movement of the demand curve to the right or left can be caused by 3 other factors

1. Price of other goods and services Substitutes - a good or service that consumers might consider as an alternative (example - when buying a Volkswagen, a consumer may consider other cars such as Honda and Toyota beforehand) Complements - goods or services that are often bought together (example - strawberries and cream)

2. Income The more money we earn, the more disposable income we have therefore the more likely we are to purchase a good or service

Normal goods - goods for which demand increases as disposable incomes increase and decrease as disposable incomes decrease Superior goods - goods for which a real increase in income results in a more than proportional increase in demand Inferior goods - goods for which demand falls as incomes rise

Elasticities Elasticity is a measure of responsiveness of one variable to changes in another Price elasticity of demand A measurement of the responsiveness of demand to a change in price

On a graph - a more vertical demand curve illustrates inelastic demand, and a more horizontal demand curve illustrates elastic demand

PED = % change in quantity demanded / % change in price
*In most cases PED will be a negative value - a positive value would indicate that demand rises along with increases in price or falls as price falls Inelastic - describes a variable that is not very responsive to changes in another (eg. Price inelastic - addictive goods such as cigarettes) Unitary elastic - a change in price leads to a change in demand of the same proportion Elastic - described a variable that is very responsive to a change in price Income elasticity of demand Measures the responsiveness of the demand for a product to changes in income YED = % change in quantity demanded / % change in income Cross elasticity of demand A measure of the responsiveness of demand for one product to changes in the price of another product XED = % change in quantity demanded of good X / % change in the price of good Y

If the goods are substitutes - for example, an increase in the price of bananas (substitutes) would lead to an increase in the demand for apples - the value would be positive

Brand loyalty - a business term used to indicate that consumers choose a particular product out of habit or belief that it is better in some way than others (eg. Coca cola)

If the goods are complements the value will always be negative

Supply A movement along the supply curve indicates a change in price of the good or service being produced Shifts in supply caused by:

1. Costs of production Costs of production refer to all payments that have to made in order to produce a good or service

For example, in increase in wage rates, increases costs for a firm and therefore reduces profits and supply

If costs fall, this acts as an incentive for firms to increase their supply

2. Changes in technology Innovation, research and development causing improvements in technology help to cut costs of production for firms

Causes a rise in the supply of goods and services - shifts the curve to the right

Price elasticity of supply A measure of responsiveness of supply to changes in price Supply curve - shows the relationship between the price of a good or service and the willingness of a producer to supply that good PES = % change in quantity supplied / % change in price
*It is very unlikely to achieve a negative value - this would mean that producers expand production in response to a fall in price What affects the elasticity of supply?

Availability of stocks and raw materials

Unused productive capacity (producing within the PPF Curve)

Availability of imports

Availability of trained labour

Market equilibrium Equilibrium price - the price at which demand supply are equal (where the demand curve and supply curve cross on the graph)

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