Microeconomics Notes

9 key concepts - (Integrate in responses)

Scarcity

When resources and other factors of production are finite, human wants’ and needs are infinite.

Choice

An act of choosing between two or more possibilities; choice is necessary when scarcity requires
decisions about how to use resources to meet needs and wants.

Efficiency

Efficiency refers to improved use of resources. When a firm can produce the same good with
fewer resources.

Economic wellbeing

A concept related to peoples’ quality of life with material relational and subjective dimensions.

Equity

The concept of fairness or evenness and is considered an economic objective.

Sustainability

The ability of the present generation to meet its needs without compromising the ability of future
generations to meet their own needs. A resource is considered sustainable when the consumption
needs of the present generation are met without compromising the ability of future generations to
meet theirs.

Change

Changing / being different

Interdependence

Where two or more individuals or groups are mutually reliant on one another to survive or thrive.
Interdependence means that the firms in the market must take into account the likely reactions of
their rivals to any change in price, output or forms of non-price competition. It is a key aspect of
business competition and behaviour in an oligopoly and can be modelled by the use of game
theory.

Intervention

Intervention refers to when the government intervenes in the market to solve market failure.

Economic systems

The free-market economy is a rationing system where all economic decisions are taken by
consumers and producers through the price mechanism without government intervention, and
resources are privately owned by people and firms. Singapore is an example of a free-market
economy because cash can be taken in and out of the country (less government regulation) than
can be carried in and out of the US which is a mixed economy. Considered capitalist.

The centrally planned economy is a rationing system where all economic decisions are taken at
the centre by the government. There is no private property; all resources are owned by the state.
Also called ‘command economy’. China is a centrally planned economy/ command economy.
Considered socialists.

A mixed economic system is a system that combines aspects of both capitalism and socialism. A
mixed economic system protects private property and allows a level of economic freedom in the
use of capital, but also allows for governments to interfere in economic activities in order to
achieve social aims. The US has primarily mixed economy because there are few industries
reserved for the government and it exhibits characteristics of both capitalism and socialism.
If a country moves from point D to G it represents actual growth.

Points F and E are unattainable as they are outside the PPC. This is because resources are scarce
and the maximum potential output is indicated by the PPC.

If a change in the economy caused an increase in the maximum amount of goods that can be
produced, known as the potential output, the PPC would shift outwards, towards points E and F.
This is known as potential growth.

The following factors can increase the potential output of a country -

 An increase in the quantity of factors of production 

 An increase in the quality of factors of production 
 An improvement in technology

Definitions -

1.1

Actual output - The total amount of goods and services that an economy is producing at a
certain moment in time.

Actual growth - When an economy produces a greater amount of goods and services in one
period of time than in a previous one.
Consumer Surplus is the difference between the price consumers are willing and able to pay or
a good or serve and the price they actually pay.

Producer Surplus is the difference between the price producers are willing and able to supply
good / service for and the price they actually receive.

Productive efficiency is concerned with the optimal method of producing goods producing
goods at the lowest cost.

Allocative efficiency is concerned with the optimal distribution of goods and services.

Market failure in economics, is a situation defined by an inefficient distribution of goods and

services in the free market. In market failure, the individual incentives for rational behavior do
not lead to rational outcomes for the group.

Government intervention occurs when the government interferes with the market forces that
allocate resources in the economy.

Externalities occurs when the production or consumption of a good or service has an effect on a
third party. If the effect is harmful, we call it a negative externality. When the effect is beneficial,
we call it a positive externality.

Monopolies that have only one dominant firm, which can set prices for the market.

Monopolistic competition is when a market structure with many relatively small firms that sell
slightly differentiated products. Goods are differentiated by branding, or quality, or differences
in service.

Natural monopolies exist in a particular market if a single firm can serve that market at lower
cost than any combination of two or more firms. This is because of the large investments needed
to provide this good or service, so economies of scale won't be achieved until much greater
levels of output are produced.

Oligopoly is a market structure in which there are only a few large firms. There are high barriers
to entry and fierce competition between the few firms operating.

Perfect competition is a market structure in which the large number of firms, complete
homogeneity of goods, lack of barriers to entry and exit and the perfect information available
about goods means that firms have no price setting ability themselves.
Paper 1 Notes