Economics: Micro and Macro concepts

• Economics focuses on the efficient allocation of limited resources to satisfy unlimited needs and wants.
• Economics is divided into microeconomics and macroeconomics.

Microeconomics

• Centers on individual markets, consumers, and businesses.

Macroeconomics

• Deals with national economic performance indicators, including GDP, inflation, and unemployment.

Relative Scarcity

• The core economic issue where resources (land, labor, capital) are limited.
• Needs and wants are unlimited, leading to necessary choices and opportunity costs.

Fundamental Economic Questions

• What to produce?: Determined by consumer preferences, often referred to as "dollar votes."
• How to produce?: Firms optimize production methods based on efficiency and profit opportunities.
• For whom to produce?: Distribution depends on the ability and willingness to pay, reflecting income and wealth distribution.

Opportunity Cost

• The value of the next best alternative that is given up when a choice is made.
• Trade-offs encompass all alternatives foregone.
• Opportunity cost is specifically the single best alternative foregone.

Production Possibility Frontier (PPF)

• Illustrates core concepts like scarcity, decision-making, opportunity costs, and efficiency in production.
• Assumes an economy produces only two goods or services with fixed resources in the short term.

Efficiency Concepts Related to PPF

• Productive Efficiency: Achieved when maximum output is produced with given resources.
• Allocative Efficiency: Resources are used to maximize benefits to society.
• Dynamic Efficiency: The ability to quickly adapt resource allocation in response to changing needs.
• Intertemporal Efficiency: Balancing resource allocation between current and future time periods.

Law of Demand

• There's an inverse relationship between price and quantity demanded; as price decreases, quantity demanded increases.
• It explained by the income and substitution effects.

Income Effect

• Lower prices increase consumers' real purchasing power.

Substitution Effect

• Lower prices encourage consumers to switch from more expensive substitutes.

Demand Curve Shifts and Movements

• Movements along the demand curve are caused by changes in price.
• Shifts of the demand curve are due to:
• Changes in disposable income
• Prices of related goods (substitutes and complements)
• Preferences and tastes
• Interest rates
• Population growth and demographics
• Consumer confidence

Law of Supply

• There's a direct relationship between price and quantity supplied; as price increases, firms supply more.
• Explained by profit motive, cost recovery, and opportunity cost considerations.

Profit Motive

• Higher prices increase potential revenue.

Cost Recovery

• Higher prices help firms cover increasing costs.
• Firms reallocate towards more profitable goods.

Supply Curve Shifts and Movements

• Movements along the supply curve are caused by changes in price.
• Shifts of the supply curve are due to:
• Changes in costs of production
• Number of suppliers
• Technological advancements
• Productivity changes
• Climate conditions and supply disruptions

Market Equilibrium

• Occurs at the point where quantity demanded equals quantity supplied.

Disequilibrium

• Excess demand (shortage): Prices increase until equilibrium is restored.
• Excess supply (surplus): Prices decrease until equilibrium is restored.

Market Adjustments

• Shifts in either demand or supply lead to a new equilibrium.
• Government intervention, through price controls, subsidies, or taxes, can affect equilibrium.

Market Failure

• Market fails to allocate resources efficiently meaning the free market doesn't lead to optimal resource allocation.
• Causes include: public goods, externalities, market power, and asymmetric information

Types of Government Intervention

• Price Controls:
  • Price ceilings (maximum prices) ensure affordability of essential goods like rent control.
  • Price floors (minimum prices) protect suppliers, such as minimum wage.
• Taxes & Subsidies:
  • Taxes increase production costs and reduce supply
  • Subsidies lower costs and increase supply.
• Regulation & Public Provision:
  • Governments directly provide services or regulate industries, like healthcare and education

Market Structures

• Pure Competition: Many sellers, identical product, no market power.
• Monopolistic Competition: Many sellers, differentiated products (e.g., clothing brands).
• Oligopoly: Few dominant firms (e.g., supermarkets, airlines).
• Monopoly: One seller, total market power (e.g., utilities).

Economics studies resource allocation to meet unlimited needs. It includes micro, focusing on markets and firms, and macro, examining national indicators. Scarcity requires choices, leading to opportunity costs related to production and distribution.