Compare and contrast homo economicus vs personae socialis.
Homo Economicus
“Economic man”
Rationality, Self-interest, Optimization, Knowledge of outcomes in a given situation
Personae Socialis
“Social people”
Social Influence, Not always rational, Bounded rationality, Multi-faceted Motivation, men are more risky
Movement vs shift in demand
Movement:
Change in Quantity Demanded due to a CHANGE IN PRICE while all other factors remain constant.
Shift:
A change in demand as a result of a change in factors other than the commodity’s own price.
Demand determinants
- Income:
Increase income–> Increase demand for normal goods
Decrease income–> Decrease demand for normal goods
Increase income–> Decrease demand for inferior goods
Decrease income–> Increase demand for inferior goods - Population:
Increase population–>Increase demand
Decrease population–>Decrease demand - Tastes and Preferences:
In favour–> Increase demand
Against–> Decrease demand - Expectations:
Expected to rise–>Demand increases today
Expected to fall–>Demand decreases today - Substitute Goods:
Price of A rises–> Demand for B increases
Price of A falls–> Demand for B decreases - Complementary Goods:
Price of A rises–> Demand for B decreases
Price of A falls–> Demand for B increases
Movement vs shift in supply
Movement:
- Change in quantity supplied
- Change in price.
Shift:
- Caused by changes in non-price factors/supply determinants
Supply determinants
- Input Prices:
Input price rises–>Decrease in supply
Input price falls–>Increase in supply - Number of Sellers/Producers:
Producers increase–>Supply increases
Producers decrease–>Supply decreases - Technology:
Tech Improves–>Supply increases - Expectations:
Expected to rise–>Supply decreases today
Expected to fall–>Supply increases today - Substitutes:
Price of A rises–>Supply for B decreases
Price of A falls–>Supply for B increases - Compliments:
Price of A rises–>Supply for B increases
Price of A falls–>Supply for B decreases
Equilibrium, shortage, and surplus
Equilibrium Price: Quantity demanded equals the quantity supplied.
Shortage: Price is lower than the equilibrium price
Surplus: Price is higher than the equilibrium price
Explain the market structures and entry barriers
- Perfect Competition, Monopolistic Competition, Oligopoly, Monopoly
Entry Barriers:
Increasing economic returns of scale, Market experience, Restricted ownership of resources, Legal obstacles (patents and copyrights), Market abuses (predatory pricing), Advertising
Production Costs
- Fixed Costs:
Do not change with the level of production. - Variable Costs:
Change directly with the level of production. - Total Production Costs:
Calculated by adding total direct materials, labor costs, and total manufacturing overhead costs. - Short-run Costs:
Include fixed costs, variable costs, and total costs (fixed + variable). - Long-run Costs:
All costs are variable, and firms can adjust all factors of production to reach a new equilibrium.
Marginal Calculations
- Marginal Productivity (MP):
(ON - OP) - Total Cost(TC):
#workers*Cost of labor - Marginal Cost(MC)
ΔTC/ΔTP - Law of Diminishing Marginal Productivity: The marginal utility from each additional units consumed declines as you increase consumption.
Define utility and marginal utility
- Utility: Satisfaction or happiness a consumer derives from consuming a product or service.
- Marginal Utility:
The change in total utility from consuming an additional unit of a good or service.
What are the three sectors of the economy?
The Primary sector consists of industries that extract or cultivate natural resources
The Secondary sector consists of industries that fabricate or process goods
The Service sector consists of trade and
information industries
What are the different production
processes?
- Labour-intensive process: Employs more labour and less capital (more physical plant and less equipment)
- Capital-intensive process: Employs more capital and less labour (less physical plant and more equipment)
Accounting vs Economic profit
Accounting Profit:
Definition: The difference between total revenue and explicit costs.
Formula:
AccountingProfit = TotalRevenue − ExplicitCosts
- Economic Profit:
Definition: The difference between total revenue and the sum of explicit and implicit costs.
Formula:
EconomicProfit = TotalRevenue −
( ExplicitCosts + ImplicitCosts )
Forms of government intervention
- Price Ceilings:
Purpose: To make goods affordable for consumers when prices are considered too high. - Price Floors:
Purpose: To ensure sellers can make a profit when prices are considered too low. - Subsidies:
Definition: Grants of money from the government to specific industries.
Effect: Increases supply, leading to lower prices for consumers and additional revenue for sellers. - Quotas:
Definition: Restrictions on the amount of product an individual producer can make.
Control: Managed by marketing boards (e.g., milk).
Elasticity of demand and supply calculations and what elastic and inelastic
How supply/demand responds to a change in price
PED= %ΔQuantityDemanded/%ΔPrice
PES= %ΔQuantitySupplied/%ΔPrice
PED/PES>1= Elastic
PED/PES<1= Inelastic
