Microeconomics: Supply and Demand and Price

Topics: Supply and demand, Economics, Microeconomics Pages: 25 (6787 words) Published: September 23, 2012
Microeconomics syllabus

Chapter 1: Thinking as an economist

* Define and explain a range of core economic terms and concepts, including economic surplus, opportunity cost and sunk cost

Economic decision – any decision whereby securing something o value means going without some other thing of value

Economics – the study of how people make choices under conditions of scarcity and of the results of those choices for society

Economic surplus – the gain that results from undertaking an action when the benefits out weight the cost.

Opportunity cost – the value of the next-best alternative to undertaking a particular action

Sunk cost – a cost that cannot be recovered at the moment a decision is made.

* Distinguish between microeconomics and macroeconomics and between positive and normative economics

Microeconomics – the study of individual choice

Macroeconomics – the study of the performance of national economies and government policy

Positive economics – economic analysis that explains what happens and why, but does not state what should happen

Normative economics – economic analysis that states what should or ought to happen.

* State the scarcity principle and explain its implications for decision making

Scarcity principle – having more of one thing means we have less of another. People take into account the trade off they are making to gain something.

* State the cost-benefit principle and apply it to simple economic decisions

Cost-benefit principle – an individual should undertake a particular action if the extra benefits of undertaking that action are at least as great as the extra costs.

* State the incentive principle and explain its implications for decision making and policy

Incentive principal – a person is more likely undertake an action if its benefit rises, and less likely to undertake it if its cost rise.

* List and explain the common pitfalls that people encounter when applying the cost-benefit principle, and recognise these pitfalls in a range of real-world examples

Pitfall 1: failing to account for all opportunity costs - when performing a cost-benefit analysis of a firm, it is important to account for all relevant opportunity costs.

Pitfall 2: failing to ignore sunk costs - when deciding whether to undertake a particular action, it is important to ignore sunk costs – costs which cannot be avoided.

Pitfall 3: failing to account for all relevant benefits - it is important to account for all relevant benefits, defined as the most you would be willing to pay not to go without those things.

Pitfall 4: failing to measure costs and benefits as absolute dollar amounts rather than as proportions - many decision makers treat a change in cost or benefit as insignificant if it constitutes only a small proportion of the original amount. Absolute dollar amounts should be employed to measure costs and benefits.

Pitfall 5: failing to know when to use average costs and benefits and when to use marginal costs and benefits - The level of an activity should be increased if its marginal benefit exceeds its marginal cost

Pitfall 6: failing to incorporate time into cost-benefit thinking - cost-benefit analysis should require adjusting costs and benefits that occur at different points in time to reflect their value at a common point in time so they can be compared.

Chapter 2 Comparative advantage: the basis for trade

* Define and determine absolute advantage and comparative advantage

Absolute advantage: When one person is able to produce a good or service or perform a given task, with less resources than another person Comparative advantage; When one person’s opportunity cost of producing a good or service, or of performing a given task, is lower than another person’s opportunity cost.

* State and apply the principle of comparative advantage

Opportunity cost – when one person’s opportunity cost of producing a good or...
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