ECC1000 Full Course and Exam Notes
Contents (page number):
1 Chapter 1 - Five Foundations of Economics 1 Chapter 2 - Model Building and Gains From Trade 2 Chapter 3 - Supply And Demand
4 Chapter 4 - Elasticity
6 Chapter 5 - Efficiency of Markets 7 Chapter 6 - Price Controls
8 Chapter 7 - Externalities and Public Goods 9 Chapter 8 - Business Cost and Production 10 Chapter 9 - Firms in a Competitive Market 11 Chapter 10 - Monopoly
13 Chapter 13 - Oligopoly
13 Chapter 16 - Consumer Choice and Indifference Curves 15 Chapter 17 - Behavioural Economics
Chapter 1 - Five Foundations of Economics
Scarcity - economics is the study of how people allocate their limited resources to satisfy their unlimited wants:
• Scarcity means you have to give up something in order to get it
• Practically speaking, everything is scarce, besides air and gravity
• Do not confuse scarcity with shortage, which is where the quantity demanded is greater than the quantity supplied.
Five foundations of economics:
1. Incentives matter 2. Life is about trade-offs 3. Opportunity costs 4. Marginal thinking 5. Trade creates value
Incentives matter - knowing how incentives affect people’s behaviour is very important Trade-offs - to have one thing, you must give up another, e.g. a trade off is the the decision of choosing either GPS maps or have Ariana Grande in the car
Opportunity costs - the highest valued alternative which must be sacrificed to get something else i.e. the value of the trade-off is represented by the opportunity cost, e.g. If you go to class the opportunity cost is sleep (because you don’t sleep in class)
Marginal thinking - is the benefit of 1 more unit of something greater than the cost, therefore you want marginal benefit (MB) to be greater than marginal cost (MC)
Trade creates value:
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Markets bring buyers and sellers together to exchange goods and services-
Trading is the voluntary exchange of goods and services between two or more partiesChapter 2 - Model Building and Gains From Trade Types of analysis:
• Positive analysis - something testable - whether true or false does not matter but it is basically a
• factNormative analysis - an opinion - whether you agree or disagree does not matter
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Factors:
• Endogenous factors - factors we can control
• Exogenous factors - factors we cannot control
Production Possibilities Frontier - a model representing the combination of outputs available if all resources are used efficiently (this is to do with trade-offs)
• Law of increasing opportunity cost - e.g. as more pizzas are made, society will have to use more people who are less skilled at making them, so as you move along the PPF the
opportunity cost grows more and more - changes in relative cost mean that a society faces a significant trade-off if it tries to produce an extremely large amount of a single good
• Economic growth - the process that enable society to produce more output in the future e.g.
both more pizzas and wings can be made at the same time
• Specialisation - the limiting of one’s work to a particular area
• Absolute advantage - being able to produce more with the same amount of resources
• Once a ratio for specialisation has been found, divide one thing by the other thing to see if that new ratio is higher or lower and therefore whether trade will benefit both parties or not
• What is available - land, labour, capital, technology
• Comparative advantage - means having a lower opportunity cost than the other person
• Because of the law of increasing relative cost, the opportunity cost across a production possibilities frontier will probably not remain constant, as you increase the production of one good, you need to give up increasingly larger amounts of the other good
• Ceteris paribus - all other things being equal, this is when all other variables not mentioned are kept constant
• Economists make assumptions in their models so that they exclude variables that do not add predictive power to the model
• Autarky - no trade
• Consumer goods - goods produced for personal satisfaction
• Capital goods - goods used to produce other goods
MB - MC = FB (where FB is forgone benefit and also opportunity cost)
MB = marginal benefit, MC = marginal cost, MR = marginal revenue, MU = marginal utility (Below equations have no particular significance):
MB = MC MB < MC MR = MC MU = MC
Chapter 3 - Supply and Demand Market economy:
• Resources are allocated among households and firms with little or no government interference
• Invisible hand - consumers only buy want they want or need most
• Competitive market - a market where there are many buyers and sellers such that each one has only a small impact on market price and output
• Imperfect markets - where either the buyer or seller has significant influence over the market price
• Market power - a firm’s ability to influence market price of a good or service by exercise power over its supply, demand or both
• Monopoly - when a single company supplies the entire market for a particular good or service Demand index:
• Quantity demanded - is the amount of good or service that buyers are willing to purchase at the current price
• Law of demand - falls when price rises; rises when price falls
• Demand schedule - the relationship between the price of a good and the quantity demand
• For demand curve - a price changes causes a movement along a demand curve, but it cannot cause a shift of the demand curve
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• Purchasing power - how much you can afford to buy Types of goods:
• Normal good - something consumers will buy more of as their income goes up
• Inferior good - demand declines as income rises
• Complements - two goods that are used together
• Substitutes - two goods that are used in place of each other
• Excise taxes - taxes on a single product or service
• Sales taxes - general taxes on most goods and services
• Subsidy - payment made by the government to encourage the consumption and production of a good or service
Supply index:
• Quantity supplied - amount of good service that producers are willing to sell at the current price
• Law of supply - quantity of supply increase the price increases, quantity of supply falls when price falls
• Supply schedule - relationship between price of good and quantity supplied
• Supply curve - graph of relationship between prices in supply schedule and quantity supplied at those prices
Price change causes movement in the supply curve, a shift in the supply curve will occur a factor increases/ decreases supply
Equilibrium - the point where the demand curve and supply curve intersect Market Equilibrium:
Quantity Demand = Quantity Supplied Surplus:
Quantity Supplied > Quantity Demand Shortage:
Quantity Demand > Quantity Supplied Factors which influence demand:
• Price
• Price and availability - substitute and complement
• Consumer tastes
• Expected price of the future
• Excise taxes
• Subsidies
• Income
• Size of population
Factors which influence supply:
• Price
• Cost of inputs
• Business taxes
• Subsidies to firm
• Number of sellers
• Expected price in future
• Capital resources
Miscellaneous tips for chapter 3:
• Shift in demand curve, caused by changes in non-price factors
• Demand is like exogenous, while quantity demand is endogenous
• There is a direct relationship between price and quantity supplied
• If trying to work out what happens to the price and quantity (whether they increase or decrease) when both or one of the supply and demand change, apply a real world thing to it, like say when they supply or demand changes for the amount of footballs there are
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