Microeconomics

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WHAT IS ECONOMICS (Chapter 1)
DEFINITION OF ECONOMICS
* Scarcity: Limited resourcesTime, money.
* Inability to satisfy all of our wants
* Faced with scarcity we must choose among available alternatives * Trade offs
* Incentive: Reward that encourages and action or penalty that discourages * Microeconomics: Choices of:
* Individuals
* Businesses
* The way these choices interact in markets and the influence of the government * Macroeconomics:
* Study of the performance of the national economy and the global economy * E.g. Why did incomes in South Africa grow rapidly between 2004 and 2007 WHAT, HOW, FOR WHOM?
WHAT:
* Goods or services
* Changes over time
HOW:
Produced using productive resources called factors of production Factors of Production:
* Land: Natural resourcesEarn rent
* Labour: Work, time and effort that people devote to producing goods and servicesEarns Wages * Human Capital: affects the quality of labour
* Capital: Tools, instruments, machines, building etc. Earns interest * Financial capital is not a productive resource
* Entrepreneurship: Human resource that organises land, capital and labourEarns profit * Come up with new ideas about what and how to produce
* Make decisions, bear the risks that arise from these decisions THE ECONOMIC WAY OF THINKING:
CHOICES AND TRADE OFFS:
We face scarcityMust make choiceselect from available alternatives * Trade off: Giving up one thing to get something else
OPPORTUNITY COST:
Highest-valued alternative forgone
CHOOSING AT THE MARGIN:
Make your decision at the margin: compare the benefit of an activity with its cost * Marginal Benefit: Benefit that arises from an increase in activity * Marginal Cost: Cost of an increase in activity

To decide you compare MB and MC
* If MB > MCincrease in the action is rational
* If MB< MC Action should not be taken
NB: By evaluating MB and MC, choosing only those actions that bring greater benefit, we use scarce resources in a way that makes us as well off as possible. ECONOMICS : A SOCIAL SCIENCE
Positive Statements: What is?
* Can be checked against the facts
* Either right or wrong
Normative Statements: What ought to be
* Depend on values
* Cannot be tested
CAUSALITY:
* IF THIS…THEN THAT
* Direction of causality
* Just because two things are proximate does not mean they are related FALLACY OF COMPOSITION:
What is good for one is not necessarily good for all
* What is true of the parts is true of the whole or what is true of the whole is true of the parts POST HOC ERGO PROPTER HOC:
After this therefore because of this
* First event causes a second event because it occurred before the second.

THE ECONOMIC PROBLEM (Chapter 2)
PRODUCTION POSSIBILITIES AND OPPORTUNITY COST
PRODUCTION POSSIBILITIES FRONTIER:
Describes the set of maximum goods and services that can be produced Shows limits of production given the total resources

PRODUCTION EFFICIENCY:
Achieve if we cannot produce more of one good without producing less of some other good At a point on the PPF
Inside the PPFProduction is inefficient:
* Unused resources: Idle but could be working
* Misallocated resources: Assigned to tasks for which they are not best matched OPPORTUNITY COST:
Highest valued alternative forgone
Opportunity Cost is a Ratio:
Decrease in QP of one good divided by the increase in the QP of another good as we move along the PPF * O.C. of producing an additional Good A is equal to the inverse of the O.C. of producing an additional Good B

* Increasing O.C.
* Reflected by the bowed out shape of the PPF
Bowed outward because resources are not equally productive in all activities The more of either good we produce the less productive are the additional resources we use to produce that good and the larger is the OC of that good. USING RESOURCES EFFICIENTLY

THE PPF AND MARGINAL COST
*...
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