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Mid-Semester Study Notes

Introductory Microeconomics (University of Queensland)

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Lecture 1 – Comparative Production Possibility Curve (PPC): A curve showing the maximum
Advantage and the Basis of attainable combination of two products that may be produced
Trade with available resources.

Efficient point of production (also attainable) = along the PPC

Inefficient point of production (also attainable) = to the left of the
PPC
Efficient but unattainable point of production = to the right of the
PPC

Absolute advantage: The ability of an economic agent to produce

more of a good or service than competitors using the same
amount of resources.

Opportunity cost: The highest-valued alternative that must be

given up to engage in an activity.

Comparative advantage: The ability of an economic agent to

produce a good or service at a lower opportunity cost than other
producers.

Important: To find an economic agent’s comparative advantage, do

not compare their absolute advantages. Compare their
opportunity costs.

Principle of comparative advantage: Everyone is better off if each

economic agent specialises in the activity to which they have a
comparative advantage (gains from trade)

Low-Hanging Fruit Principle: States that in the process of

increasing the production of any good, one first employs those
resources (i.e. economic agent) with the lowest opportunity cost
and once these are exhausted turn to resources (i.e. other
economic agents) with higher costs.

Important: Increasing opportunity cost forms a concaved PPC. This

is because as you move along the PPC, the opportunity costs of
different economic agents increases, forming a steeper and
steeper slope. Hence why the PPC is relatively flat at first and
thereafter begins to become more vertical.

Lecture 2 – Comparative Consumption Possibility Curve (CPC): The CPC represents all
Advantage and the Basis of possible combinations of two goods that the economy can feasibly
Trade consume when it is open to international trade.

Important: In an open economy, the CPC is to the right of the PPC,

given that trade allows for more products to be consumed. If it
were on or to the left of the PPC, trade would not occur.

In addition, an economic agent only trades when he receives more

of a good than that of his opportunity cost of not producing that

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Lecture 3-4 – Perfectly
competitive market
Lecture 3-4 – Supply in a
perfectly competitive market
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good.
Perfectly competitive market: A market that meets the conditions
of (1) many buyers and sellers, (2) all firms selling identical
products and (3) no barriers to new firms entering and exiting the
market.
Important: In a perfectly competitive market, both buyers and
sellers are price takers. That is, they are unable to affect the
market price as an individual and must buy and sell a product at
the given price.
Marginal benefit: The marginal benefit of producing a certain unit
of a given good is the extra benefit accrued by producing that unit.
Marginal cost: The marginal cost of producing a certain unit of a
given good is the extra cost of producing that unit.
Cost-Benefit Principle: States that an action should be taken if the
marginal benefit is greater than the marginal cost.
Economic surplus: the difference between the marginal benefit
and the marginal cost of taking a particular action.
Quantity Supplied: The amount of a good or service that an
economic agent is willing and able to supply at a given price.
Supply Curve: A curve that shows the relationship between the
price of a product and the quantity of the product supplied.
Law of supply: Holding everything else constant (ceteris paribus),
increases in price causes increases in quantity supplied, and
decreases in price cause decreases in the quantity supplied.
Important: Movement of quantity supplied is the result of a
change in price. A shift of the supply curve, on the other hand, is
the result of a change in either:
 Input prices
 Productivity (Advancements in technology)
 The price of a substitute
 Expected future prices
 The number of firms in the market
Producer reservation price: Denotes the minimum amount of
money the producer is willing to accept to offer a certain good or
service.
A profit-maximising level of output is where marginal revenue
equals marginal cost (MB=MC or P=MC, where P= Price). However,
this does not necessarily indicate that a firm will be making a net
profit. Instead it could be minimising its losses. This is referred to

Lecture 3-4 – Supply in a
perfectly competitive market
(continued)
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as loss minimising.
Important:
Profit( per unit )=( P− ACT )∗q
In addition,
∆ TC
Marginal Cost=
∆Q
A firms marginal cost curve is its supply curve only for prices at or
above average variable cost (or at or above the AVC curve). This is
due to the fact that a firm in a perfectly competitive market will
not produce when price is below average variable cost (i.e. P <
AVC). This is referred to as their shutdown point in the short-run.
Remember: In the short-run, a firm has at least one fixed cost. In
the long-run, all costs are variable.
In the long-run, a perfectly competitive market will supply
whatever amount of a good consumers demand at a price
determined by the minimum point on the typical firm’s average
total cost curve. If price is below this point, a firm will exit the
market. This is referred to as an exit condition.
Important: The marginal cost curve intersects both the AVC and
ATC curve at their minimum points (refer to below for reasoning).