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Summary - Essentials of Economics
1 Limits, Alternatives, and Choices
What is economics?The socials science concerned with how individuals, institutions and society make choices under conditions of scarcity.
1.1 The Economic Perspective
What is the economic perspective?A viewpoint that envisions individuals and institutions making rational decisions by comparing the marginal benefits and marginal costs of their actions.
What are 'opportunity costs'?The value of the good, service of time forgone to obtain something else.
Economics presume humans behave in a way that they think maximizes their utility, e.g. that they are self-interested. Behaviour according to 'rational self-interest'.
What does rational or purposeful behaviour mean when understood in terms of economicsWorking to maximize utility, in a way that seems optimal, but does not have to be so: human logic may be faulty, decisions may be made under stress or under influence of emotion.
The decision to obtain the marginal benefit associated with some specific option always includes the marginal cost of forgoing something else.
What is marginal analysis?The comparing of marginal benefits and marginal costs to understand and estimate profits of actions.
1.2 Theories, Principles and Models
Elements of the scientific method:
- Observing real-world behaviour an outcomes
- Based on these, formulating a hypothesis
- Testing the hypothesis by comparing prediction and outcome
- Accepting/rejecting/adapting the hypothesis as to match the outcome
- Continuing to test
Economic principles are simplifications. How are they simplified? (three ways)
- Generalized (averages)
- Other-things-equal assumption
- Graphical expression
- Generalized (averages)
1.3 Microeconomics and Macroeconomics
What units does microeconomics concern itself with?Individual units, such as persons, households, firms.
Microeconomics looks at individual decision making, by measuring prices, numbers of employers, revenue, income, and expenditures of these individual units.
What is macroeconomics?The study of the economy as a whole, or of its aggregates, meaning the collections of categories of economic units (the 'consumer', etc.).
1.4 Individual's Economic Problem
What is the economic problem?The fact that choices have to be made, because wants are unlimited, but means to fulfil them are limited.
The economic problem is expressed in the 'budget line', which shows the combinations of two products sb. can buy given his income. It shows the attainable and unattainable combinations.
1.5 Society's Economic Problem
What are the economic resources?The land, labour, capital and entrepreneurial ability that go into the production of goods and services.
Land is not just land, but includes all natural resources, such as forests, oil, water.
The functions of an entrepreneur are as follows:
- taking initiative in combining factors of production
- making strategic business decisions
- risk bearing
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How are products differentiated? (5)
- By attributes/assets
- By service provided
- By location
- By brand names, packaging
- Some control over the pricing
What is monopolistic competition? 3 points
Much more competitive than monopolistic: there are
- relatively many sellers
- differentiated products
- easy entry to and exit from the market
What are the requirements for price discrimination? (3)
- Monopoly power to control output and price
- Market segregation - the buyers must somehow be put in different classes
- No resale
What is price discrimination?
The selling at different prices while this is not justified by differences in costs.
How do costs differ in a monopolistic economy?
- Economies of scale may not be fully exhausted.
- X-inefficiency: production at a higher than possible cost.
- Rent-seeking behaviour
- Less technological advance
What are the 4 effects of monopoly?
- The output is organized in such a way that the prices are higher, and the market yields neither allocative nor productive efficiency.
- Prices are higher, exceeding both MC and ATC
- Monopoly increases income inequality
- C0sts are different in a monopolistic economy
What are three misconceptions concerning the monopolist' behaviour?
- Monopolists do not always charge the highest price. Often, it is more beneficial to sell more at a lower price
- Monopolists seek maximum total profit, not maximum unit profit.
are more likely to make and maintain economic profit on top of normal
profit (included in the costs) but they can also make losses, due to
lack of demand and high costs.
What are two implications of the monopolist's demand curve?
- The marginal revenue is less than the price, because the price set higher means that the extra profit per higher priced units is lost. Monopolists could have overpriced three units, and sold them at a higher price, but instead chose to sell 5 at a lower price, to make more profit. This means selling all units between 3 and 5 at a lower price to: the marginal revenue decreases, along with the price. It stays lower.
- The monopolist is the price maker.
Is the demand curve for a monopolist perfectly elastic (horizontal) or not (sloping downwards)? Why?
It slopes downwards, because the monopolist can influence the market.
Name four barries to entry to a market, that enable a firm to operate as a monopoly?
- Economies of scale may be so great that only one (or few) firm (s) can afford to achieve the efficient scale.
- Legal barriers, so patents, licences
- Ownership or control of essential resources
- Pricing and other strategies