Microeconomics – Summary Notes
Week 1 – Markets and trade
Why microeconomics
Individual decision-‐making• Opportunity cost -‐ the value to you of the best thing that you must give up to get the item
o Value of the next best alternative (what you give up to get it)
• Sunk cost – a cost that has already been incurred and cannot be recovered
Trade
• Trade – any [voluntary] exchange (for money, for other goods ie: barter, for satisfaction for all participants, making them better off)
Week 2 – comparative advantage as a source of gain from trade
Absolute advantage
• The ability of an individual firm or country to produce more of a good or service than competitors using the same amount of resource
• How much input per unit output Comparative advantage:
• The ability of an individual, firm or country to produce a good or service at a lower opportunity cost than other producers
• In terms good term y foregone compared to x Tie in with trade
• Looking at opportunity cost not advantage, because it’s all about relative ability/performance
o What I do compared to what I give up
Product possibilities frontier
• Given the levels of input, the PPF shows the level of potential outputs for a person/group/country
• Shows what an individual country can produce and consumer in autarky
• Autarky – without trade
• On a graph forms a straight line if we have ‘constant returns to scale’
technology – constant opportunity cost
o Every time we turn one item into another, we have the same opportunity cost
Trade
Prices
• A relative price is expressed units of one good for units of another good o Market opportunity cost, how much you have to give up for another
good
• Trade depends of relative price
o Must lie between two individual opportunity costs of items willing to be traded
Fischer separation
• If prices are ‘right’ then a country will maximise its income by specialising in production, then it can trade to its desired level of consumption
