Econ Notes

Notes on Microeconomics
Chapter 1-1: Basic Economics Concepts
1. Economics
 Economics is a social science.
 It studies human behaviour using scientific methods.
Economics develop economic theories to explain and predict human behaviour.
In the study of economics, we are concerned with how people use scarce resource to satisfy human
wants.
This relates to the following two important issues in economics:
(a) Resource allocation
This concerns how limited resources are allocated for the production of different goods and
services.
(b) Distribution of goods and services
This is also regarded as income distribution.
This concern how goods and services are distributed among different people.
2. Classification of economics
(a) Microeconomics
(b) Macroeconomics
3. Wants, Scarcity and Choice

3.1 Wants
Wants are human desires.
Human wants are unlimited.
3.2 Scarcity
Scarcity refers to the situation in which the resources available are not enough to satisfy all people’s
wants.
Scarcity is a relative concept.
We need to compare the availability of resources against people’s wants in order to determine whether
there is scarcity.
3.3 Choice
When scarcity exists, people need to make choices.
If a person is rational, he or she will choose an option with the highest value.
3.4 Scarcity and choice
Since people do not have sufficient resources to satisfy all our wants, they have to make choices
on the use of resources.
4. Opportunity cost
4.1 Concept of opportunity cost
Causes Problem Consequence
Unlimited wants
Opportunity
Scarcity Choice
costs
Limited resources
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4.2 Definition of opportunity cost
The opportunity cost of a choice is the value of the highest-valued option forgone.
4.3 Remarks on opportunity cost
(i) Change in the value of the chosen option will not affect the cost
(ii) The cost will change only if there is a change in the highest-valued option forgone or its value
(iii) change in the value of other option may not affect the cost
(iv) no choice implies no cost
(v) Past expenditure is not a cost
The cost that has been paid in the past and cannot be recovered.
It is not the opportunity cost of the choice; and does not affect current decision making.
(vi) Money is not just the money expense
Concept of full cost
Full cost = monetary cost (explicit cost) + non-monetary cost (implicit cost)
 Monetary cost refers to the actual payment involved in obtaining the chosen option.
 Non-monetary cost refers to the cost involved in obtaining the chosen option with no actual
payment made. Time cost is a common example of non-monetary cost.
4.4 Decision flow chart to tackle questions on opportunity cost
Identify of available options
Rank all options according to preference

(usually given in the question)
Question : Question : Question :

Identify cost Compare the costs of two acts Identity whether cost changes
Identity Identity
the cost of each act the cost of each act
Compare
the cost of each act If the value of the
If the highest-valued
option forgone chosen option
(or its value) changes or the
changes options other than
the highest-valued
option forgone
changes
Answer: Answer: Answer: Answer:
The highest-valued (i) costs are the Cost changes + Cost does not
option forgone same state increases or change +
(ii) different + decreases explanation
state which one is
higher and which is
lower
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4.5 Change of opportunity cost
Situation Effect on
(Value of A > Value of B > value of C) the opportunity cost
(a) A change in the value of the chosen option remains unchanged
(b) A change in the value of the highest-valued option forgone will change
(i) value of B  Increases
(ii) value of B  (value of B  > value of C) Decreases
(iii) value of B  (value of B  < value of C) decreases
New priority: value of A > value of C > value of B 
(c) A change in the value of other options forgone uncertain, depending on
whether the value of the
highest-valued option
forgone changes
(i) value of C  increases
Value of A > value of C  > value of B
(ii) value of C remains unchanged
Value of A > value B > value of C 
(iii) option B is not available decreases
Value of A > value of C
(iv) New option is added in the priority list increases
Value of A > value of D > value of B > value C
(iv) option B and option C are not available No cost
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Chapter 1-2: Basic Economics Concepts
1 Goods are:
(i) broadly defined as anything, including tangible goods and intangible services,
which can satisfy human wants.
(ii) things of which people prefer to have some rather than none.
2. Free Goods vs Economic Goods

2.1 Free goods
(i) Free goods refer to those goods that people do not prefer more of as the quantity available is sufficient
to satisfy all human wants.
(ii) As all human wants for free goods are satisfied, scarcity does not exist.
(iii) As there is no competition for free goods, no one is willing to pay for them.
(iv) Free goods are not produced from scarce resources which have alternative uses.
2.2 Economic goods

(i) Economic goods refer to those goods that people prefer more of as the quantity available is not
sufficient to satisfy all human wants.
(ii) As the quantity of economic goods available is not sufficient to satisfy all people’s wants, scarcity
exists.
(iii) People are willing to pay and compete for economic goods.
(iv) Economic goods may be produced from scarce resources which have alternative uses.
(v) Some goods can be regarded as free goods in some contexts and economic goods in other contexts,
depending on:
(a) the availability of the goods relative to human wants.
(b) how the good is defined.
(vi) Goods that are free of charge are not necessarily free goods. Economic goods can be provided to
consumers free-of-charge.
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3. Distinguish between economic goods and free goods
Yes Is the quantity available sufficient No

to satisfy all wants?
No Yes
Is more of it preferred?
Free No Are people willing to pay a price for Yes Economic

goods it? goods
No Is an opportunity cost involved in its Yes

production?
No Yes
Is an opportunity cost involved in its
production?
air, sand in housing,
desert, ice in clothes,
North Pole movies
Examples
4. Positive Statements vs Normative Statements

4.1 Positive statements
➢Positive statements are statements that describe what is, with no value judgement.
➢They are refutable by facts.
4.2 Normative statements
➢Normative statements are statements that describe what ought to be.
➢They involve value judgement on what is desirable or the best. They are not refutable by facts.
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Chapter 2-1: Economic Problems and Economic Activities
1. The Three Basic Economic Problems

Basic economic problem Meaning
What to produce Making choices about the kinds and quantities of goods to produce
How to produce Making choices about the methods of production
Making choices about how to distribute goods to people in society
For whom to produce
1.2. Resource allocation and income distribution

What to produce?
Problems of resource allocation
How to produce?
Problem of income distribution For whom to produce?
1.3 How Do Different Societies Tackle the Basic Economic Problems?

(i)
three basic economic problems can be tackled by
customs and traditions government decisions the market mechanism
Traditional economy Planned economy Market economy
(ii) Most societies are mixed economies in reality.
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2. Relationship between Specialization, Exchange and Private Property Rights
2.1 Specialization
➢ Specialization occurs when workers specialize in producing a good or a stage of production of
a good.
➢ Total output of an economy will be higher than that without specialization.
2.2 Exchange
➢ People can exchange the goods they produce for the goods they want in the market.
→ People can consume more goods.
→ People enjoy a higher standard of living.
➢ Exchange is a condition for specialization.
2.3 Private property rights
(i) Private property rights are the foundation for exchange to take place in a market economy.
(ii) Meaning of private property rights
➢ A person has private property rights over a good if he or she possesses
(a) the exclusive right to use
(b) the exclusive right to receive income and
(c) right to transfer.
(iii)
Right Meaning
Exclusive right to use The owner has the right to exclude others from using his or her
property.
Exclusive right to receive The owner has the exclusive right to receive income generated from
income his or her property.
Right to transfer The owner has the right to transfer his or her property to other
people.
(iv) Importance of private property rights in a market economy
➢ Well-defined and well-protected private property rights are the prerequisite for the
functioning of price mechanism.
➢ The price mechanism allocates the economic goods to the highest-valued users.
➢ If private property rights are not well defined and well protected, people will then use
non-price methods to allocate resources.
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3. Relationship between Scarcity, Competition and Discrimination
(i) Scarcity exists when the resources or goods available are not enough to satisfy all people’s wants.
(ii) People need to compete against each other for the resources or goods.
(iii) Different forms of competition.
2 forms of competition
Price competition Non-price competition
People compete for resources or People compete for resources or goods

goods on the basis of price. on the basis of factors other than price
examples
(i) age
(ii) sex
(iii) qualification
(iv) physical abilities
(v) appearance
(vi) academic performance
(vii) non-academic performance
(iv) Competition will lead to discrimination

➢ All forms of competition are discriminatory.
➢ This is because the aim of competition is to decide who can get the resources and goods
and how much they can get.
➢ To do so, rules are designed to discriminate (or distinguish) among those who can get the
resources and goods
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Chapter 2-2: Economic Problems and Economic Activities
1. Basic Economic Activities

1.1 Production and Consumption
Basic Economic Activities
Production Consumption
It is the act of turning existing It is the act of using goods and

resources into goods and services. services to satisfy wants.
examples examples
farming, manufacturing, watching a movie, having meals,
the provision of services, etc. walking through the park, etc.
1.2 Factors of production

➢ The resources used in production are called factors of production.
➢ They are land, capital, labour and entrepreneurship.
2. Circular Flows of Economic Activities

2.1 In an economy, production and consumption are interrelated.
Factor income Expenditure

Households
Factor service
Factor market Product market
Good & service

Firms
Production cost Revenue
Real flow Money flow
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2.2 Economic units
Basic Economic Activities
Households Firms
role role
consumption production
2.3 Basic types of markets
2 basic types of markets
Factor market Product market
A market for buying and selling A market for buying and selling
factors of production goods and services
2.4 Circular flows of economic activities in an economy

(i) 2 circular flows of economic activities in an economy
2 circular flows of economic activities
Real flow Money flow
A market for buying and selling A market for buying and selling
factors of production goods and services
(ii) Real flow

➢ The real flow refers to the flow of factor services as well as goods and services.
(a) For production
In the factor market, firms employ factor services that households provide for production.
(b) For consumption
In the product market, the goods and services that firms produce are sold to households for
consumption.
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(iii) Money flow
➢ The money flow refers to the flow of money income and money expenditure.
(a) Households
Households earn factor income by providing factor services to firms in the factor market.
Then they spend the factor income to buy goods and services produced by firms in the
product market.
(b) Firm
Firms receive revenue from the sale of goods and services to households in the product
market.
They use the revenue to pay their production costs of employing factor services from
households in the factor market.
3. Choice of consumption over time

3.1 Present consumption vs future consumption
Preference for consumption of good
Present consumption of goods trade off Future consumption goods
People are impatient, they usually prefer to

consume a good earlier to later.
3.2 Interest as a cost of earlier consumption and compensation for deferring consumption
(i) Definition of interest
Definition of interest
Borrower Lender
Interest is the cost Interest is the compensation for

(or the price or premium) deferring consumption
for earlier availability of goods or resources. (or deferring the use of resources)
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(ii)
For borrower:
Cost of present Present
consumption  consumption 
Interest Desire to
rate  borrow  Trade-off
For lender: Desire to lend 
Return on deferring Future
consumption  consumption 
(iii) Interest exists in both barter economies and monetary economies.

(iv) Interest can be in the form of goods or money.
3.3 Interest rate

(i) interest rate = interest
x 100%
principal
(ii) When interest rate increases (decreases),
current consumption will decrease (increase) and saving will increase (decrease).
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Chapter 3: Basic concepts of production
1. Production
Production is the act of turning input (or factors of production) into output.
2. Classification of Output
Classification of Output
classified by
rivalry and
Physical uses excludability
form in consumption
Goods Services Consumer Producer Private Public

goods goods goods goods
3. Goods and services

Goods Services
(i) Goods are tangible outputs of production. (i) Services are intangible outputs of production.
(ii) For example, DVDs and medical drugs are (ii) For example, musical performances and medical
goods as they have a physical form. diagnoses are services as they do not have
a physical form.
4. Consumer goods and Producer goods (Capital goods)

Consumer goods Producer goods (capital goods)
(i) They are goods used for final consumption. (i) They are goods used in a production process to
(ii) They directly satisfy human wants. produce other goods and services.
(ii) They do not directly satisfy human wants.
5. Private goods and public goods

Private goods Public goods
(i) They are goods which are both rival and (i) They are goods which are both non-rival and
excludable in consumption. non-excludable in consumption.
(ii) Rival in consumption: They cannot be Their consumption is concurrent in nature.
consumed concurrently by many individuals at (ii) Non-rival in consumption:
the same time without reducing the amount ➢ Consumption of the goods by one person does
available for other persons. not reduce the amount available to others.
(iii) Excludable in consumption: It is possible to ➢ The additional cost of serving a
prevent others from using the goods. public good to an extra consumer is zero.
(iii) Non-excludable in consumption:
➢ It is too costly to exclude others from
consuming the goods.
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6. Classification of Production
6.1 Types of production
Primary production Secondary production Tertiary production

It refers to those activities that It refers to those activities It refers to those activities that
extract raw materials from that turn raw materials into provide different kinds of services.
nature. semi-finished or finished
goods.
6.2 Interdependence of the three types of production

The three types of production are interdependent because each production sector uses the input of the
others and, at the same time, supplies the other with its own input.
7. Factors of production
4 types of factors of production
natural man-made human human

resources resources resources resources
land capital labour Entrepreneurship
return return return return

rent interest wages profit
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7.1 Land
(i) Definition of land
Land refers to all natural resources used in production. It is a gift of nature.
(ii) Return to land
The return for land is called rent.
(iii) Characteristics of land
(a) No cost of production is involved in land’s existence
(b) The supply of land cannot be increased artificially. It is stable in supply but not fixed.
(c) There is a cost of acquiring land to use because land is scarce and has alternative uses
7.2 Capital
(i) Definition of capital
Capital is the man-made resource used in production.
(ii) Return for capital
The return on capital is called interest.
(iii) Characteristics of capital
(a) Use of capital can increase the productivity of other factors of production,
(b) Increase in capital forgoes present consumption for future consumption.
(iv) Change in the stock of capital goods
(a) Capital formation (also called investment) refers to the production of capital goods.
(b) Depreciation (also called capital consumption) refers to the reduction in the stock of capital
goods resulting from wear-and-tear and obsolescence in production.
(v) Capital accumulation
(a) Capital accumulation refers to a net increase in the stock of capital goods.
Change in capital stock = capital formation – capital depreciation
Case Change in capital stock
(i) capital formation < capital depreciation Decreases
(ii) capital formation = capital depreciation Remains unchanged
(iii) capital formation > capital depreciation Increases / accumulates
(b) It involves giving up present consumption for future consumption.

➢ Interest rate  (),
➢ cost of financing investment  ()
➢ amount of investment  ()
➢ amount of capital accumulation  ()
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7.3 Differences between land and capital
Land Capital
Types of resources Natural resources Man-made resources
Features (i) Land involves zero cost in its (i) There is a cost to produce.
creation.
(ii) Resources which are natural and (ii) Resources which are
have not been processed, i.e. not human man-made and have been
effort is involved. processed, i.e. human effort is
involved.
Returns Rent Interest
8. Labour
(i) Definition of Labour
Labour is the human effort, both mental and physical, used in production.
(ii) Return for labour
➢The return for labour is called wage.
➢The return for labour is mostly certain and positive.
9. Entrepreneurship
(i) Definition
Entrepreneurship refers to those human efforts that make decisions and bear production risks.
(ii) Return for entrepreneurship
➢The return for entrepreneurship is called profit.
➢The return for entrepreneurship is uncertain and may even be negative.
(iii) Roles of entrepreneurship
➢ Risk-bearing
➢ Decision making
➢ Coordination and management of other factors of production
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Chapter 4-1: Labour and Division of Labour
1. Labour
➢ Labour is the human effort provided by a worker.
➢ It refers to the worker’s physical and mental effort.
➢ It is a kind of human resources.
1.2 Measure of labour

➢ Labour supply is measured in terms of the total number of working hours that workers provide
(i.e. total man-hours) per time period.
➢ Labour supply = number of workers employed x number of hours per worker
1.3 Factors affecting labour supply:

(i) the size and structure of the population
(ii) rewards for work
(iii)Number of working hours
(iv) Monetary rewards and future prospects
(v) Government policies
➢ Lowering the minimum work age or raising the retirement age increases the labour supply.
➢ Salaries tax lowers the rewards for work and decreases the labour supply.
➢ Welfare payments from the government, such as unemployment benefits,
reduce the labour supply because they lower the costs of being unemployed.
➢ The foreign labour policy affects the number o' mported workers, and thus the labour supply.
➢ Population policies such as birth control, family planning and immigration laws affect the
population, and thus the labour supply.
(vi) Social customs and practices
Social customs1 and practices, such as public holidays, festivals and the proportion of working
women also affect the labour supply. For example, in some Islamic2 countries, women are
discouraged to work.
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2. Labour productivity
➢ Average labour productivity is the amount of output per man-hour (per worker per unit of time).
➢ Average labour productivity = Total output (units)
Total unit of labour

= Total output (units)
Number of workers employed x number of working hrs per worker
2.1 Factors affecting labour productivity:

(i) Education and training
Education empowers workers with knowledge, while training develops better skills.
Both enhance labour productivity.
(ii) Working conditions
A comfortable working environment, like good ventilation, adequate lighting, helps increase
output.
(iii) Rewards and benefits
If more productive workers are rewarded with higher wage rates or better job prospects,
workers will motivated to work harder and faster.
(iv) Use of mechanization and technological level
With the help of machinery and advanced technology, workers can produce more output per
working hour
(v) Methods of organising and managing labour
Practice of division of labour can enhance labour productivity.
(vi) Health of workers
Heathy workers can concentrate on their work, have quicker responses, work faster and produce
more output.
3. Mobility of labour
3.1 Types of mobility of labour
Mobility of labour
Occupational mobility of labour Geographical mobility of labour
meaning meaning
the ability and willingness of a factor the ability and willingness of a factor
of production to change from of production to move from
one occupation to another. one place to another.
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3.2 Factors affecting occupational mobility of labour and geographical mobility of labour
Factors affecting
Occupational mobility of labour Geographical mobility of labour
(i) Wage differentials provide incentives for (i) Differentials in wages or job opportunities
people to change occupations. (ii) Stability of political and social factors
(ii) Higher occupational mobility is expected (iii) High / low cost of transportation/
when a economy is having structural changes. better transportation network
(iii) Professionals such as doctors, lawyers, (iv) Difference in cultural factors
engineer and accountant tend to have low (v) Immigration and emigration policies
occupational mobility because the cost of (iv) Availability of labour market information
acquiring such expertise is high or the cost of
change to other occupation is high.
(iii) Some professions have strict entry
requirements, and that lowers occupational
Mobility.
(iv) Younger workers, who usually have less
working experience, are more likely to
change occupations than experienced and
skilled workers because their opportunity
costs of changing occupations are lower.
(v) Availability of labour market information
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1. Wage payment method

1.1 types of wage payment method
Wage payment method
Piece rate Time rate Profit sharing Revenue sharing Tips

scheme scheme
Bonus
Basic salary + commission
2. Piece rate
2.1 Feature of piece rate
➢Workers are paid according to their amount of output.
2.2 Advantages and disadvantages of a piece rate

Advantages Disadvantages
To employers (i) To earn more, workers have to (i) It can be costly to measure each
produce more. This raises workers' worker's exact contribution if their
incentive to work and their productivity. work is not standardized or
(ii) It reduces the need for supervision requires teamwork.
against shirking. (ii) Workers may hurry to
produce more and sacrifice quality
for quantity. Stricter quality
control is needed.
To employee (worker) Workers can earn more if they are (i) Workers earn less if they are
hard-working or productive. lazy or less productive.
(ii) Workers have an unstable
income compared with a time rate,
and their income drops
when they have sick leaves or
holidays.
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3. Time rate
3.1 Feature of time rate
➢Workers are paid according to their working hours.
3.2 Advantages and disadvantages of a piece rate

To employers (i) Without the need to measure workers' (i) Workers may shirk as their
exact contribution, the cost of income does not directly depend
calculating wage payments is reduced. on their contribution.
(ii) Workers can pay more attention to Productivity therefore may
product quality as they do not have to decline.
hurry. (ii) More supervision is needed as
(iii) By offering a stable income, the employers have to assign and
firm can retain staff and save on the cost monitor the work of their workers.
of recruitment. Therefore, a higher administrative
cost is required.
To employee (worker) Workers can have more stable income. Workers cannot increase income
by working harder.
3.3 The choice between piece rate and time rate

Piece rate Time rate
1. cost of wage calculation Higher Lower
2. (a) worker’s work incentive Higher Lower
(b) monitoring cost Lower Higher
3. Quality control More important Import
4. Flexibility in wage payment Flexible Inflexible
5. (a) income stability Less stable More stable
(b) stability of the workforce Less stable More stable
4. Profit-sharing scheme
4.1 Feature of time rate
➢Wages are calculated based on a given percentage of the company’s profit and paid at the end of the
financial year.
4.2 Advantages and disadvantages of profit-sharing scheme

To employers (i) Workers have stronger incentive to The cost of calculating wages is
work hard. higher.
(ii0 The cost of supervision is lower.
Part of the business risk is shared by
workers.
To employee (worker) Employees can earn more by Employees’ incomes are less
performing better. stable.
Employees have to share part of
the business risk.
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5. Basic salary plus commission:
5.1 Feature of basic salary plus commission
➢Workers receive regular basic salaries and performance-based commission.
5.2 Advantages and disadvantages of basic salary plus commission

To employers (i) Workers have stronger incentive to The cost of assessing workers’
work hard. performance and measuring
(ii) The cost of supervision is lower. workers’ output is higher.
To employee (worker) (i) The basic salary safeguards the basic Employees’ incomes are less
livelihoods of employees. stable.
(ii) Employees can earn more by
working harder.
6. Tips:
6.1 Feature of tips
➢Tips are a gift of money paid directly by a customer to someone who provides services.
6.2 Advantages and disadvantages of basic salary plus commission

To employers (i) Workers have stronger incentive to (i) Employees’ incomes are less
work hard. stable.
(ii) The cost of supervision is lower. (ii) Employees have to share part
Part of the business risk is shared by of the business risk.
workers.
To employee (worker) Employees can earn more by providing
better services.
7. Conditions of use of piece rate, time rate, profit-sharing scheme (bonus) , revenue-sharing scheme
(basic salary + commission), tips.
Piece rate Time rate Profit-sharing Revenue-sharing Tip
scheme scheme
(i) When workers' (i) When workers' For supervisors and For sales For workers who
contribution can be contribution is managers whose representatives and directly provide
easily measured. too costly to performance is real estate agents services to
(ii) When product measure decisive to whose customers
quality can be (e.g., the firm's profit efforts are difficult
easily monitored. non-standardized to measure and
work or teamwork). monitor
(ii) When high
product quality is
required.
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1. Division of labour
1.1 Meaning of division of labour
➢ Division of labour (Specialisation) is a practice in which workers specialise in producing a good or
in a stage of production of a good.
2. Types of division of labour

Simple division Complex division Regional division
of labour of labour of labour
A worker specializes in A worker specializes in a particular A district or region specializes in
producing a particular good. stage of the production of a good. producing a particular good or in a
particular production stage of a
good.
3. Advantages of division of labour

(i) Increasing (average) labour productivity
(a) Choosing the best people to do the job
(b) Practice makes perfect (learning by doing)
(c) Saving time on training
(d) Saving time on moving from one task to another
(e) Stimulus to mechanization
(ii) Economy in the use of capital
(iii) Improving standard of living
4. Disadvantages of division of labour

(i) Work becomes monotonous
(ii) Greater risk of unemployment
(iii) Greater degree of interdependence
(iv) Loss of craftsmanship
(v) Standardization of products
5. Limitations of division of labour

(i) Trade barriers (e.g. tariffs and quotas) restrict exchange for goods. This leads to a decrease in
demand for goods. Hence, it limits a wider scope of division of labour.
(ii) If the size of the market is not big enough, it is not cost-effective to divide the work.
(iii) It would be difficult to practise division of labour when producing products that require originality
and uniqueness.
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S4 Economics
Notes on Law of Diminishing Marginal Returns
(I) Input-output Relationship in the Short Run

(i) Variable factors and fixed factors
Variable factors Fixed factors
They are the factors of production that change in They are the factors of production that do not
quantity as output changes. change in quantity as output changes.
(ii) Short run vs long run
The short run The long run

(fixed factor + variable factor(s)) (No fixed facor, all are variable factors)
It refers to a period in which at least one of the It refers to a period in which all factors of
factors of production is a fixed factor. production are variable factors.
(II) Calculate total product (TP), average product (AP) and marginal product
(i) Total product (TP) is the total quantity of output produced by a firm in a period of time.
(ii) Average product (AP) is the average quantity of output produced by one unit of a variable factor in a
period of time.
(iii) Marginal product (MP) is the change in total product resulting from employing an additional
unit of a variable factor in a period of time.
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(III) Law of diminishing marginal returns
(a) The law of diminishing marginal returns

The states that in the short run, when a variable factor keeps being added to a given quantity of fixed
factor, marginal product of that variable factor will finally decrease, holding technology constant.
Notes:
(i) The law of diminishing marginal returns is not applicable in the long run.
(ii) All other things involved in the production process are assumed to be constant and the variable
factor must be homogeneous.
(b) Hints for illustrating the law of diminishing marginal return
Example 1
Given data: fixed factor, variable factor and total production.
(i) The law of diminishing marginal is only applicable in the short run.
(ii) Check whether the given data on fixed factor and variable factor show that the production is
in the short run.
(a) the data of fixed factor is a constant and
(b) the data of variable factor varies when output.
(iii) Use total product to calculate marginal product (MP =TPn – TPn – 1).
(iv) After calculating all the marginal product with respect to the total product, check whether the
marginal product will
eventually fall.
Example 2
Given data: fixed factor, variable factor and average production.
(i) The law of diminishing marginal is only applicable in the short run.
(ii) Check whether the given data on fixed factor and variable factor show that the production is
in the short run.
(a) the data of fixed factor is a constant and
(b) the data of variable factor varies when output.
(iii) Use average product to calculate total product with respect to variable factors employed.
(iii) Use total product to calculate marginal product (MP =TPn – TPn – 1).
(iv) After calculating all the marginal product will respect to total product, check whether the
marginal product will eventually fall.
2
(IV) Cost-output relationship in the Short Run
(i) Total cost (TC), average cost (AC) and marginal cost (MC)
(ii) Total cost (TC) is the sum of all costs incurred in production.
(iii) Average cost (AC) and average variable cost (AVC)

-Average cost (AC) is the total cost per unit of output.
-Average variable cost (AVC) is the total variable cost per unit of output.
(iv) Marginal cost (MC) is the change in total cost resulting from producing an additional unit of
output.
3
S4 Economics
Notes on Economies of Scale
(I) Scale
When a firm increases (reduces) its output level by increasing (reducing) the employment of all factors of
production, its scale of production increases (decreases).
(i) Economies of scale

Average cost decreases when the scale of production increases.
(ii) Diseconomies of Scale
Average cost increases when the scale of production further increases.
(iii) Optimal scale
The firm produces at an output level where its average cost is at minimum in the long run.
(iv) The long run average cost (LRAC) curve is U-shaped.
(II) (Internal) economies scale
Internal economies of scale, which focus on the saving in cost due to the expansion of the firm’s size or
scale. Internal economies of scale result in a reduction in the average cost of production.
Possible causes are as follows:

(i) lower cost of financing (financial economies of scale)
-Firms of a larger scale may obtain credit at a lower per-unit interest cost because a larger firm
tends to have more assets and is often considered to be more stable.
(ii) lower input price from bulk purchases
-A large firm often purchases large quantities of input and can bargain for lower prices or greater
discount.
(iii) a wider scope of division of labour (managerial economies of scale)
-Firms of a larger scale can practise a larger scope of division of labour to raise labour productivity
and lower average production cost.
(iv) Use of specialized or advanced equipment
-Firms of a larger scale can use specialized production equipment to save cost because they can spread
the cost of equipment over a larger output.
(v) Able to afford research and development cost
-Firms of a larger scale can afford research and development to raise productivity and reduce average
cost.
(vi) Able to hire specialists
-Firms of larger scale can afford to hire specialists because the cost of employing professionals can be
spread over a larger output.
(vii) lower average advertising cost (marketing economies of scale)
-A larger firm can spread its advertising cost over a larger output. This reduces the average
promotion cost.
(viii) save stock-keeping
-Firms of a larger scale can keep a smaller stock-to-output ratio. This saves the cost of storing
1
Inventory.
(ix) Spreading risk by diversification
(a) Spreading risk by product diversification
-The business risk due to changes in demand for individual products can be lowered.
(b) Spreading risk by market diversification
-The expansion of business into more regions can lower the business risk due to changes in
regional demand.
(c) Spreading risk by sources of raw materials diversification
-The purchase of raw materials from several suppliers can ensure a more stable supply
and price.
(III) (Internal) diseconomies of scale

Diseconomies of scale occur in a firm when an increase in production scale causes an increase in long
run average cost.
(i) Management diseconomies (Managerial diseconomies)
-The costs of supervision and coordination tend to rise as the number of workers, divisions and levels
inside the firm increase.
(ii) Marketing diseconomies
If a firm already has a large market share, the promotion cost per unit of output increases.
(iii) Financial diseconomies
-If a firm over-expands in a market, banks will demand a higher interest rate on loan.
(IV) External economies of scale

External economies of scale focus on the saving in production cost derived from the expansion of the
whole industry (e.g. financial industry).
(i) Saving promotion costs
-The concentration of similar firms in a place has advertising effects. For example, the Golden
Computer Centre is well-known in Hong Kong. This saves promotion costs.
(ii) Saving delivery costs from suppliers
-Firms can enjoy lower delivery costs from suppliers because suppliers can deliver goods in bulk to
individual firms at the same time.
(iii) Saving labor recruiting and training cost
Workers with related skills may gather together, reducing the cost of recruiting and training workers.
For example, Silicon valley in the US is a place where IT talent gathers.
(iv) Supporting industries
This saves the cost of finding or the input and services the firms need. For example, the
development of business will bring in banks and other financial services, which will help the firms to
get funds to finance their operations.
(v) Better infrastructure
Transport networks and other related infrastructure would be developed more quickly. It would be
2
more cost-effective and convenient for firms.
(V) External diseconomies of scale

External diseconomies of scale focus on the undesirable effects that result from the expansion of the whole
industry.
(i) Rising input prices
-The demand for related input (e.g. labour) will increase. It may push up input prices.
(ii) Problems of over-crowded
-The supporting facilities may not catch up with the development of the industry. For example,
The road network may become overloaded and there may also be problem of waste disposable.
-End of notes-
3
Chapter 6-1: Ownership, Expansion and Integration of Firms
1. Types of firms ownership
Firms ownership
Public Private
enterprises enterprises
Government Public
Owners bear Owners bear
departments corporations
unlimited liability limited liability
Sole Partnership Limited

proprietorship companies
Private limited Public listed

companies limited companies
companies
Methods of raising capital
Shares or stocks Shares or debentures (bonds)
2. Firms
2.1 Features of a firm
(i) A firm is a planning unit of production.
(ii) It makes decisions regarding the employment of factors of production and the production of goods
and services.
(iii) It can exist without a physical location.
2.2 A firm is different from a plant.
2.3 The ownership of firms can be divided into public ownership and private ownership.
1
3. Public enterprise and private enterprise
3.1
Firms ownership
Public Private
enterprises enterprises
Government Public
departments corporations
3.2
Public enterprise Private enterprise
(i) Ownership Owned and controlled by owned by Private individuals
the government
(ii) Aim Profit-maximization Non-profit making /
promote the welfare of society
(iii) Financed by taxes or public funds private funds
(iv) Run by Government Officials The owners or employed managers
(v) Profit / loss Borne by the owners Borne by the general public
(vi) managerial incentive Weaker incentive to run the Stronger incentive to run the
enterprise enterprise
(v) Examples Education Bureau, Hongkong and Shanghai Banking
Fire Service Department Corportion
3.3 Types of public enterprises

(i) Government departments
Government departments financed directly by the government
Government departments financed by trading funds
(ii) Public corporations
3.4 Features of public enterprises

(i) Not separate legal entities from the government
(ii) Adequate and stable sources of capital
(iii) Better access to information and statistical data
(iv) Reliable supply of goods and services at lower prices
(v) Higher average production costs
2
3.5 Public Corporation in Hong Kong
(i) Nowadays, the government has set up various kinds of public corporations,
for example, the Airport Authority Hong Kong4 and the Hospital Authority.
(ii) One major objective is to improve the operational efficiency of these organizations.
(iii) Public corporations differ from the traditional public enterprises in the following ways:
(a) They are separate legal entities from the government.
(b) They are financially independent and have separate accounts from the government.
(c) They are managed by a board of directors accountable to the government.
The directors and employees are not government officials.
(d) They may run on commercial principles.
3.6 Government Departments and public corporations

Government Department Public Corporation
(i) Ownership The government The government
(ii) Aim Non-profit making / Profit-maximization
promote the welfare of society
(iii) Management By government officials By a board of directors appointed by
the government
(iv) Financed Financed by the government Financially independent of the
government
(v) Staff Mostly civil servants Mostly not civil servants
(vi) managerial incentive Weaker incentive to run the Stronger incentive to run the
enterprise enterprise
(vii) Examples Education Bureau, The Airport Authority,
Fire Service Department The Post Office,
The Hospital Authority
3
4. Private enterprises
Private
enterprises
Owners bear Owners bear

Sole Partnership Limited

proprietorship companies
Private limited Public listed

companies limited companies
companies
Methods of raising capital
Shares or stocks Shares or debentures (bonds)
4
4.1. Features of different types of private enterprises
Limited company
Sole proprietorship Partnership Private limited Public limited
company company
Number of
1 2 or above 1-50 1 or above
owners
Legal status not a legal entity a legal entity
Liability (i.e. the owner’s liability is not confined (i.e. the owner’s liability is confined to
to the amount of the initial investment) the amount of the initial investment)
Continuity limited lasting
Profits tax higher than sole proprietorship and
lower than limited company
rate partnership
Set-up more complicated than sole proprietorship
more simple than limited company
procedure and partnership
Transfer of needs the consent needs the consent of
- freely transferrable
ownership of all partners other shareholders
Disclosure of
to its shareholders to the general
accounting no to partners only
only public
information
⚫ narrower than limited company ⚫ wider than sole ⚫ wider than sole
⚫ cannot issue shares and bonds proprietorship and proprietorship
partnership and partnership
Sources of ⚫ can issue shares ⚫ can issue shares
capital and bonds, but and bonds to the
they cannot be public
freely traded on
the stock exchange
5
4.2 Sources of Capital
(i) Features of shares and bonds
(a) Shares:
Certificates of ownership which represent the ownership of shareholders in a limited
company
(b) Bonds
Certificates of debt issued by a limited company to raise capital
(ii) Comparison of shares and bonds
Shares Bonds
Status of holders owners of the company creditors of the company
Rate of return variable rates of dividend fixed rate of interest
holders having voting rights holders not having voting rights
Voting rights
at the AGM at the AGM
Maturity no maturity date a fixed maturity date
Priorities for repayment if holders repaid after bondholders holders claiming repayment before
the company winds up shareholders
(iii) Advantages and disadvantages of issuing shares and bonds to raise capital
Issuing shares to raise capital Issuing bonds to raise capital

Advantages • The company has no obligation to pay • Existing shareholders’ control over
dividends to shareholders. the company will not be diluted.
• The company has no obligation to redeem • The risk of the company being
the shares. taken over will not be increased.
• The company’s ability to obtain new
loans from banks will not be affected.
Disadvantages • Existing shareholders’ control over the • The company has an obligation to
company will be diluted. pay a fixed rate of interest to
• The risk of the company being taken over bondholders.
will be increased. • The company has an obligation to
redeem bonds from the
bondholders.
• The company’s ability to obtain
new loans from banks will not be
affected.
6
(iv) Advantages and disadvantages of buying shares and bonds from small investors’ point of view
Buying Shares Buying Bonds

Advantages • Shareholders have voting rights at the • The rate of return is more certain.
AGM. • Bondholders can claim repayment
• Dividend rate may be higher if the before shareholders if the company
company makes huge profits. winds up.
Disadvantages • The rate of return is uncertain. • Bondholders do not have voting
• Shareholders are the last to claim rights at the AGM.
repayment if the company winds up. • Bondholders cannot get extra returns
even if the company makes huge
profits.
7
Chapter 6-2: Ownership, Expansion and Integration of Firms
1. Ways of expansion
Ways of expansion
Integration Internal expansion

(external expansion)
meaning meaning
A firm enlarges its scale through taking A firm expands within its existing
over or merging with another firm. operation and management structure.
example example
Hong Kong Exchanges and Clearing Opening new branch

Limited acquired London Metal
Exchange Holdings Limited
2. Types of expansion
Types of expansion
Horizontal Vertical Lateral Conglomerate

expansion expansion expansion expansion
Vertical forward expansion Vertical forward expansion
1
3. Meaning of different types of expansion
Meaning
(a) Horizontal expansion A firm expands into a business at the same stage of production of
the same product.
(b) Vertical expansion A firm expands into a business in a different production stage of the
same product.
(i) Vertical backward expansion A firm expands into a a previous stage of production.
(ii) Vertical forward expansion A firm expands into a latter stage of production.
(c) Lateral expansion A firm expands into a business of related but not competing
product.
(d) Conglomerate expansion A firm expands into a business of unrelated production.
4. Motives for different types of expansions
4.1 General motives for expansions

(i) To enjoy economies of scale
(ii) To use resources more efficiently (for external expansion)
(iii) To take advantage of brand names and technology.
4.2 Specific motives for different types of expansions
Type of expansion Motive

•To increase market share
•To reduce the number of competitors
Horizontal expansion (external horizontal expansion only)
•To reduce duplication of facilities
(external horizontal expansion only)
Backward
•To ensure a reliable supply of input
expansion
Vertical
Forward •To ensure a market outlet for its products
expansion •To gain access to first-hand information on the market
•To enhance competitiveness by offering related products
•To reduce risk and cost by product diversification
Lateral expansion
•To utilize the brand value by selling other product under the same
brand
•To reduce risk and cost by product diversification
Conglomerate expansion • To utilize the brand value by selling other product under the same
brand
2
Chapter 7: Competition and Market Structure
1. Market
Seller Buyers
conducted conducted
Selling Market buying
transaction transaction
goods & services goods & services
an arrangement by which people buy and sell their goods and services
examples of arrangement
(i) amarket place
(ii) an online system
(iii) a telecommunication system
(iv) by mail
2. Market structure
Market structure
meaning
Competition among firms

types of competition
Price competition Non-price competition
examples examples
(i) product promotion
(i) offering discounts
advertising, brand building, packaging and gift offering
(ii) lower the prices
(ii) offering products with different levels of quality, functional features
(iii) offering products at different times or location
3. Market power (monopoly power)

➢ It refers to the ability of the sellers to set or control prices in the market.
➢ Sellers in different markets have different degrees of market power.
1
4. Market conditions affecting market power
(a) Number of sellers
(b) Number of buyers
(c) Ease of entry to and exit from the market
(d) Nature of products (homogeneous product or differentiated products)
(e) Availability of market information
5. Market structure
Market structure
Perfect competition Imperfect competition

(price taking) (price searching)
Monopolistic competition Oligopoly Monopoly
Sources of monopoly power
(i) Government franchise

e.g ferry routes
(ii) Government ownership
e.g. postal services in Hong Kong
(iii) High set-up costs and natural monopoly
e.g. building power plants
(iv) Ownership of superior resources
e.g. diamonds
(v) Patent and copyright
e.g. inventions, songs, articles
(vi) Cartel and integration
2
6. Features of different market structures
Features Perfect Imperfect competition
Competition Monopolistic Oligopoly Monopoly
competition
(a) Number of Many buyers who are small and not associated with each other
buyers
(b) Number of Many sellers who Many sellers who A few sellers One seller
sellers are small and not are small and dominating the
associated with not associated with market
each other each other
(c) Ease of entry Free entry Free entry Restricted entry No entry
(d) Nature of products Homogeneous Differentiated Homogeneous or No close
products products differentiated substitutes
products
(e) Availability of Perfect information Imperfect information Imperfect Imperfect
market information information information
(f) Sellers’ decision Each seller is too Each seller is too small Interdependent Reduce its
small to have any to have any influence in pricing policies output so as
influence on other on other sellers. to sell at a
sellers. higher price
(g) Forms of Not engaging in Engaging in price Engaging in price Engaging in
competition non-price competition and competition and price
competition non-price competition non-price competition
competition and non-price
competition
(h) Other feature of price taking Price searching Price searching Price
the seller(s) searching
3
4.1. Features of different types of private enterprises
Limited company
Sole proprietorship Partnership Private limited Public limited
company company
Number of
1 2 or above 1-50 1 or above
owners
Legal status not a legal entity a legal entity
Liability (i.e. the owner’s liability is not confined (i.e. the owner’s liability is confined to
to the amount of the initial investment) the amount of the initial investment)
Continuity limited lasting
Profits tax higher than sole proprietorship and
lower than limited company
rate partnership
Set-up more complicated than sole proprietorship
more simple than limited company
procedure and partnership
Transfer of needs the consent needs the consent of
- freely transferrable
ownership of all partners other shareholders
Disclosure of
to its shareholders to the general
accounting no to partners only
only public
information
⚫ narrower than limited company ⚫ wider than sole ⚫ wider than sole
⚫ cannot issue shares and bonds proprietorship and proprietorship
partnership and partnership
Sources of ⚫ can issue shares ⚫ can issue shares
capital and bonds, but and bonds to the
they cannot be public
freely traded on
the stock exchange
4
4.2 Sources of Capital
(i) Features of shares and bonds
(a) Shares:
Certificates of ownership which represent the ownership of shareholders in a limited
company
(b) Bonds
Certificates of debt issued by a limited company to raise capital
(ii) Comparison of shares and bonds
Shares Bonds
Status of holders owners of the company creditors of the company
Rate of return variable rates of dividend fixed rate of interest
holders having voting rights holders not having voting rights
Voting rights
at the AGM at the AGM
Maturity no maturity date a fixed maturity date
Priorities for repayment if holders repaid after bondholders holders claiming repayment before
the company winds up shareholders
(iii) Advantages and disadvantages of issuing shares and bonds to raise capital
Issuing shares to raise capital Issuing bonds to raise capital

Advantages • The company has no obligation to pay • Existing shareholders’ control over
dividends to shareholders. the company will not be diluted.
• The company has no obligation to redeem • The risk of the company being
the shares. taken over will not be increased.
• The company’s ability to obtain new
loans from banks will not be affected.
Disadvantages • Existing shareholders’ control over the • The company has an obligation to
company will be diluted. pay a fixed rate of interest to
• The risk of the company being taken over bondholders.
will be increased. • The company has an obligation to
redeem bonds from the
bondholders.
• The company’s ability to obtain
new loans from banks will not be
affected.
5
(iv) Advantages and disadvantages of buying shares and bonds from small investors’ point of view
Buying Shares Buying Bonds

Advantages • Shareholders have voting rights at the • The rate of return is more certain.
AGM. • Bondholders can claim repayment
• Dividend rate may be higher if the before shareholders if the company
company makes huge profits. winds up.
Disadvantages • The rate of return is uncertain. • Bondholders do not have voting
• Shareholders are the last to claim rights at the AGM.
repayment if the company winds up. • Bondholders cannot get extra returns
even if the company makes huge
profits.
6
Micro-economics
Chapter 8 – Demand & Supply : Price Determination
1. Demand
1.1 Concepts of Demand
➢ Demand refers to the quantities of a good that consumers are willing and able to buy at all given
prices over a period of time, ceteris paribus (i.e. holding all other things constant).
➢ Demand
(i) It is a want supported by purchasing power.
(ii) It refers to the quantities demanded of a good at all given prices.
(iii) It refers to the quantity of a good that a consumer plans to buy.
(iv) It is time-specific.
➢ Individual demand and market demand:
Individual demand Market demand
It is the demand of an individual consumer It is the sum of the individual demands of all
consumers in the market
➢ Market demand can be found by:
(i) horizontal summation of individual demand schedules
(ii) horizontal summation of individual demand curves
1.2 The Law of Demand

➢ The law of demand states that an increase (a decrease) in the price of good will result in a
decrease (an increase) in its quantity demanded, ceteris paribus.
➢ The relationship between price and quantity demanded
The downward-sloping market demand curve implies that price and quantity demanded
are inversely related, other things being constant.
➢ Application of the law of demand
(i) The full price of a good refers to the sum of the monetary price and the non-monetary price
(such as time cost).
(ii) When the full price of a good increases (decreases), its quantity demanded decreases (increases).
2. Supply
2.1 Concepts of Supply
➢ Supply refers to the quantities of a good that producers are willing and able to sell at all given
prices over a period of time, ceteris paribus.
➢ Supply:
(i) It refers to both the producers’ willingness and ability to sell a good.
(ii) It shows the quantities supplied of a good at all given prices.
(iii) It refers to the quantity of a good that a producer plans to sell is time-specific.
➢ Individual supply and market supply:
Individual supply Market supply
It is the supply of an individual It is the sum of the individual supplies of all producers
producer in the market
➢ Market supply can be found by:

(i) horizontal summation of individual supply schedules
(ii) horizontal summation of individual supply curves
2.2 The Law of Supply

➢ The law of supply states that an increase (a decrease) in the price of a good will result in an
increase (a decrease) in its quantity supplied, ceteris paribus.
➢ The upward-sloping market supply curve implies that price and quantity supplied are positively
related, other things being constant
1
3. Determination of Equilibrium Price and Output
3.1 Market equilibrium
➢ Market equilibrium is a state in which the market quantity demanded equals the market quantity
supplied and there is no tendency for the price to change.
➢ The price and quantity at market equilibrium are called:
(i) equilibrium price (or market clearing price); and
(ii) equilibrium quantity.
➢ In a demand-supply diagram, market equilibrium refers to the intersection point of
the market demand curve and the market supply curve.
3.2 Market disequilibrium

Unit price
S
surplus
P2
P1
shortage
D
Quantity
0
Market disequilibrium
Price is set above the equilibrium Price is set below the equilibrium
the quantity demanded is greater than the quantity demanded is smaller than
the quantity supplied the quantity supplied
Excess supply (surplus) Excess demand (shortage)
3.3 In situations of excess demand and excess supply:

Excess demand Excess supply
(Qd > Qs) (Qd < QS)
Price will increase will decrease
Quantity demanded will decrease will increase
Quantity supplied will increase will decrease
Result Qd = Qs Qd = Qs
2
4. Money Price (Nominal Price) and Relative Price
4.1 Money price (nominal price)
When the price of a good is expressed in terms of money, it is called the money price
(nominal price).
4.2 Relative price

(i) When the price of a good is expressed in terms of another good, it is called the relative price.
Relative price of goods A in terms of good B
= Money price of good A
Money price of good B
(ii) Relative price and the law of demand

➢ An increase (a decrease) in the relative price of a good will result in a decrease (an increase)
in its relative quantity demanded, ceteris paribus.
➢ When the money prices of higher-priced and lower-priced goods increase by the same amount,
the relative price of the higher-priced good will decrease while the relative price of the
lower-priced good will increase. According to the law of demand, people will buy a greater
proportion of higher-priced goods.
3
Notes Micro-economics
Chapter 9-1 – Demand & Supply : Change in Market Price
1. Change in demand
1.1 Change in quantity demanded versus change in demand
The differences between the effects of a change in quantity demanded and those of a change in demand
are:
Change in Quantity Demanded Change in Demand
(i) The demand schedule remains unchanged. (i) The whole demand schedule changes.
(ii) A change in quantity demanded refers to a (ii) A change in demand refers to a change in
change in the quantity of a good demanded caused the quantity demanded of a good at every given
by a change in its price, ceteris paribus. price due to changes in any factor other than its
(iii) The change of quantity demanded is indicated price.
by a movement along the same demand curve. (iii) The price of the good is constant.
(iv) The change of demand is indicated by a
shifting of entire demand curve.
An increase in price of the good An increase in demand
P
P
P2 ⚫B
P1
P1 ⚫A
D2
D D1
Q
0 Q2 Q1 Q
0 Q1 Q2
A decrease in price of the good A decrease in demand
P P
P1 ⚫C
P1
P2 ⚫A D1
D D2
0 Q Q
Q1 Q2 0 Q2 Q1
-It is represented by a movement along the same -It is represented by a shift of the entire demand
demand curve. curve.
(i) P➔Qd (i) D➔Dd  (D curve shifts upward.
(ii) P ➔Qd  (ii) D ➔Dd (D curve shifts downward.
1
1.2 Factors affecting demand
(i) Income (consumers’ purchasing power)
Normal goods are those goods for which the demand will increase (decrease)
when people’s income increases (decreases).
(ii) Inferior goods are those goods for which the demand will decrease (increase)
when people’s income increases (decreases).
(iii) Consumers’ preferences for the goods
When people prefer more of the goods, the demand for the goods will increase.
(iv) Price and availability of related goods
Two goods are substitutes when they An increase (a decrease) in the price of one
satisfy similar wants or needs. good leads to an increase (a decrease) in the
Substitutes
demand for the other.
The two goods are in competitive demand.
Two goods are complements when An increase (a decrease) in the price of one
they are usually used together to good leads to a decrease (an increase) in the
Complements
satisfy a certain want or need. demand for the other.
The two goods are in joint demand.
The demand for factors of production An increase (a decrease)in the demand for a
Derived
of a good is a derived demand for its good will lead to an increase (a decrease)in
demand
output. the demand for its factors of production.
(v) Expectations of future prices

➢If the price of a good is expected to decrease (increase) significantly in the near future,
the present demand for the good will decrease (increase).
(vi) Number of consumers in the market
➢When there are more (fewer) consumers in the market,
it is more likely that the market demand will increase (decrease).
(vii) Other factors affecting demand: weather, government policies, natural disasters, etc.
1.3 Effects of a change in demand

Case Diagram Explanation
D (i) State the reason
P for an increase in demand for
S
good X.
P2
(ii) D curve shifts upward.
(iii) Describe the new equilibrium:
P1 D2
Pe 
D1 Qe 
Q
0 Q1 Q2
D (i) State the reason

P
for a decrease in demand for
S good X.
P1 (ii) D curve shifts downward.
P2 D1
Pe 
D2
Qe 
Q
0 Q2 Q1
2
2. Change in Supply
2.1 Change in quantity supplied versus change in supply
The differences between the effects of a change in quantity supplied and those of a change in supply
are as follows:
Change in Quantity Supplied Change in Supply

(i) The supply schedule remains unchanged (i) The whole supply schedule changes.
(ii) A change in quantity supplied refers to a (ii) A change in supply refers to a change in the
change in the quantity of a good supplied caused quantity supplied of a good at every given price
by a change in its price, ceteris paribus. due to changes in any factor other than its price.
(iii) It is indicated by a movement along the same (iii) The price of the good is constant.
supply curve. (iv) It is indicated by a shifting of the entire
supply curve.
An increase in price of the good An increase in supply

P
P S1
S
S2
B
P2
P1
P1 A
0 Q
Q1 Q2 0 Q
Q1 Q2
A decrease in price of the good A decrease in supply

P
P S
S2
S1
C
P1
D P1
P2
0 Q
Q2 Q1 0 Q
Q2 Q1
-It is represented by a movement along the same -It is represented by a shift of the entire supply
supply curve curve.
(i) P➔ Qs  (i) S➔Qs  (S curve shifts downward)
(ii) P➔ Qs  (ii) S➔ Qs  (S curve shifts upward).
3
2.2 Factors affecting supply
(i) Cost of production
When the cost of production of a good increases (decreases),
the supply of the good will decrease (increase).
(ii) State of technology
Technological improvement lowers the cost of production and increases supply.
(iii) Price and availability of related goods
When two goods require similar An increase (a decrease) in the price of one
Competitive input to produce, good leads to a decrease
supply they are usually in competitive (an increase) in the supply of another good
supply. when two goods are in competitive supply.
When one good is a by-product An increase (a decrease) in the price of one
of another good, good leads to an increase
Joint supply
these two goods are usually in (a decrease) in the supply of another good
joint supply. when two goods are in joint supply.
(iv) Government policy

Government policies such as the implementation of sales tax may increase (decrease) the cost of
production, leading to a decrease (increase) in supply.
(v) Expectations of future prices

If the price of a good is expected to increase (decrease) in the future,
the present supply of the good will decrease (increase).
(vi) Number of producers in the market
When there are more (fewer) producers in the market,
the market supply is more likely to increase (decrease).
(vii) Other factors affecting supply: weather, natural disasters, political disturbances, etc.
2.3 Effects of a change in supply

S P (i) State the reason
for an increase in supply of
S1 good X.
D
P1 S2 (ii) S curve shifts downward.
P2
Pe 
Qe 
Q
0 Q1 Q2
S (i) State the reason

P for a decrease in supply of
good X.
D S2 (ii) S curve shifts upward.
P2 S1 (iii) Describe the new equilibrium:
P1
Pe 
Qe 
Q
0 Q2 Q1
4
Notes on Micro-economics
Chapter 9-2 – Demand & Supply : Change in Market Price
(I) Increase in Demand and Increase in Supply

D <S Unit Price -D curve shifts upward
D2 S1
D1 -S curve shifts downward
S2 -the D curve shifts to the right by a
P1
smaller extent than the S curve
P2 -Results:
(1) Pe  from P1 to P2.
0 Q1 Q2
Q (2) Qe  from Q1 to Q2.
D >S -D curve shifts upward

Unit Price
D2
-S curve shifts downward
S1 -the D curve shifts to the right by a
D1 S2 greater extent than the S curve
P2 -Results:
P1 (1) Pe  from P1 to P2.
(2) Qe  from Q1 to Q2.
0 Q1 Q2 Q
D =S D2
-D curve shifts upward
Unit Price
S1 -S curve shifts downward
D1 -the D curve shifts to the right by the
S2
same extent as the S curve
P2 = P1 -Results:
(1) P remains unchanged
Q
(2) Qe  from Q1 to Q2.
0 Q1 Q2
P.1
(II) Increase in Demand and Decrease in Supply
Case Diagram Causes & Effects

D<S Unit Price
-Increase in demand:
D curve shifts upward
D2 S2
D1 -Decrease in supply:
P2 S1 S curve shifts upward
-D curve shifts to the right by a smaller extent
P1
than the S curve.
-Results:
0 Q (1) Pe  from P1 to P2
Q2 Q1
(2) Qe  from Q1 to Q2.
D>S -Increase in demand:

Unit Price D2
D curve shifts upward
D1 S2
-Decrease in supply:
P2 S1
S curve shifts upward
P1 -D curve shifts to the right by a larger extent than
the S curve.
-Results:
0 Q
Q1 Q2 (1) Pe  from P1 to P2.
(2) Qe  from Q1 to Q2.
D=S -Increase in demand:
Unit Price D curve shifts upward
S2 S1 -Decrease in supply:
P2
S curve shifts upward
P1 D2 -D curve shifts to the right by the same extent
as the S curve.
D1
-Results:
0 Q
Q1 (1) Pe 
(2) Qe remains unchanged
P.2
(III) Decrease in Demand and Increase in Supply

D<S -Decrease in demand:
Unit Price D curve shifts downward
D1 S1
D2 -Increase in supply:
P1 S2 S curve shifts downward
-D curve shifts to the left by a smaller extent
P2
than the S curve.
-Results:
0 Q (1) Pe  from P1 to P2.
Q1 Q2
(2) Qe  from Q1 to Q2.
D>S -Decrease in demand:

Unit Price
D curve shifts downward
D1 -Increase in supply:
D2 S1 S curve shifts downward
P1 S2 -D curve shifts to the left by a larger extent than
the S curve.
P2
-Results:
(1) Pe  from P1 to P2.
0 Q (2) Qe  from Q1 to Q2.
Q2 Q1
D=S -Decrease in demand:

D1 S1 S2 -Increase in supply:
P1 D2
S curve shifts downward
P2 -D curve shifts to the right by the same extent
as the S curve.
-Results:
(1) Pe  from P1 to P2
0 Q
Q1 (2) Qe remains unchanged
P.3
(VI) Decrease in Demand and Decrease in Supply

D<S Unit Price
-Decrease in demand:
D1 S2
D2 -Decrease in supply:
P2 S1 S curve shifts upward
-D curve shifts to the left by a smaller extent than
P1
the S curve.
-Results:
Q (1) Pe  from P1 to P2
0 Q2 Q1
(2) Qe  from Q1 to Q2
D>S -Decrease in demand:

Unit Price
-Decrease in supply:
D1
D2 S2 S curve shifts upward
S1
-D curve shifts to the left by a larger extent than the
P1
S curve
P2
-Results:
(1) Pe  from P1 to P2
(2) Qe  from Q1 to Q2
0 Q2 Q1 Q
D=S -Decrease in demand:

S2 -Decrease in supply:
S1
D1 S curve shifts upward
D2
P2 = P1 -D curve shifts to the right by the same extent as
the S curve
-Results:
(1) Pe remains unchanged
0
Q2 Q1 Q (2) Qe  from Q1 to Q2.
P.4
Chapter 10 – Demand & Supply : Change in Market Price
1. Concepts of Price Elasticities
Price Elasticities
Price Elasticity of Demand (Ed) Price Elasticity of Supply (Es)
(1) Definition of Ed (6) Definition of Es
(2) Measurement of Ed (7) Measurement of Es
(3) Types of Ed (8) Types of Es
(4) Factors affecting (9) Factors affecting Es

Ed
(5) Relationship between Ed& TR

TR
1
2. Point Elasticity of Demand Versus Arc elasticity of Demand
Point elasticity of demand Arc elasticity of demand

Qd 2 − Qd1 Qd 2 − Qd1
x100% x100%
Qd1 Qd1 + Qd 2
=
P2 − P1 = 2
x100% P2 − P1
P1 x100%
Qd P1 P1 + P2
= x
Qd1 P 2
Qd P1 P1 + P2
= x Qd 2
P Qd1 = x
Qd1 + Qd 2 P
2
Qd ( P1 + P2)
= x
P (Qd1 + Qd 2)
2
3. Types of Price Elasticity of demand
Type Definition Ed Diagram

Elastic -%  in Qd Ed > 1
P
demand > %  in price
D
OR P2
-%  in Qd P1
> %  in price
Q
0 Qd2 Qd1
Inelastic -%  in Qd< Ed < 1

demand % in price P
D
OR
P2
-%  in Qd
P1
<%  in price
Q
0 Qd2 Qd1
Unitarily -%  in Qd = %  in price Ed = 1
elastic P
D
demand OR
P2
%  in Qd = %  in price
P1
Q
0 Qd2 Qd1
Perfectly Qd drops to zero on the Ed = 

elastic slightest increase in price.
P
demand
OR
P1 D
Qd increases indefinitely on
the slightest decrease in price.
Q
0
Perfectly Qd is absolutely not Ed = 0

P
inelastic responsive to price changes. D
demand
Q
0 Qd
3
4. Relationship between price elasticity of demand and seller’s total revenue
(i) Total revenue (TR) = Price x Quantity consumed

= PxQ
= Total expenditure of consumers
(ii) Relationship between price elasticity of demand and seller’s total revenue
Types of Ed Directions Explanation Effect on Total Revenue Diagram

of price
change
Elastic Increase % increase in price (i)
demand < % decrease in Qd Gain in TR P
(Ed>1) < loss in TR D

(ii) P2
decrease in TR gain
P1
loss
Q
0 Qd2 Qd1
Elastic Decrease % decrease in price (i)

demand < % increase in Qd Gain in TR P
(Ed>1) >loss in TR
D
(ii)
increase in TR P1
loss
P2
gain
Q
0 Qd1 Qd2
Inelastic Increase % increase price (i)

demand > % decrease in Qd Gain in TR P
(Ed<1) >loss in TR D
(ii)
P2
increase in TR
gain
P1
loss
Q
0 Qd2 Qd1
Inelastic Decrease % decrease price (i)

demand > % increase in Qd Gain in TR P
D
(Ed<1) < loss in TR
(ii)
P2
decrease in TR
loss
P1
gain
Q
0 Qd1 Qd2
4
Types of Ed Direction Explanation Effect on Total Revenue Diagram
of Price
Change
Unitarily Increase % increase in price (i)
P
elastic or = % change in Qd Gain in TR D
demand decrease = loss in TR
P2
(Ed = 1) (ii)
gain
TR remains unchanged
P1
loss
Q
0
Qd2 Qd1
5. Measurement of Price elasticity of supply (Es)

% change in Qs
Es =
% change in P
Qs2 − Qs1 P2 − P1
= x100%  x100%
Qs2 + Qs1 P2 + P1
2 2
Qs 2 − Qs1 P + P1
= x 2
Qs 2 + Qs1 P2 − P1
5
6. Types of Price Elasticity of Supply
Types of Es Definition Es Diagram

Elastic supply %  in Qs Es > 1 P
> %  in price
P2 S
P1
Q
0 Qs1 Qs2
Inelastic supply %  in Qs Ed < 1

< %  in price P
S
P2
P1
Q
0 Qs1 Qs2
Unitarily elastic supply %  in Qs Es = 1 P

= %  in price
S
P2
P1
Q
0 Qs1 Qs2
Perfectly elastic supply Qs drops to zero on Es = 

the slightest decrease
P
in price.
or
Qs increases P1 S
indefinitely on the
slightest increase in
Q
price.
0
Perfectly inelastic supply Qs is absolutely not Es = 0 P

responsive to price S
changes
Q
0 Qs
6
Chapter 13 : Efficiency and the Market
1. The theory behind demand

1.1 Marginal benefit and total benefit
(i) Difference between marginal benefit and total benefit
Total benefit Marginal benefit
(i) Total benefit is the sum if the marginal benefits (i) Marginal benefit is the benefit a person
of a given quantity of the good. receives from acquiring one more unit of the
(ii) Total benefit rises when the marginal benefit is good.
still positive. (ii) This is the maximum amount he is willing to
pay for one more unit of the good.
(iii) MB of nth unit of a good
=TB of n units of good -TB of (n-a) unit of a
good
(iv) The marginal benefit of a good will decrease
when more of the good is acquired.
(v) This means a person’s willingness to pay for
an additional unit of a good decreases when he
has more of it.
Unit Price
total benefit (MB)

8
8
6
6
4
4
2 MB curve 2 MB curve
0 1 2 3 4 5 Quantity
0 1 2 3 4 5 Quantity
(ii) The total and marginal benefit schedule of good X to an individual

Good X Marginal benefit ($) Total benefit ($)
1 8 8
2 6 8 + 6 = 14
3 4 8 + 6 + 4 = 18
4 2 8 + 6 + 4 + 2 = 20
5 0 8 + 6 + 4 + 2 + 0 = 20
1
1.2. Consumption Choice
(I) Consumer surplus
(i) Consumer surplus (CS) is the extra Unit Price
amount a consumer is willing to pay over the
amount that he has to pay for a good. a⚫
(ii) Consumer surplus
MB = P
= total benefit – total expenditure
= area abQ0 – aea PbQ0 ⚫
P
or b
Consumer surplus
MB curve
= sum of difference between the MB of price
of each good X bought 0 Q Quantity
(II) Maximizing consumer surplus

(a) Condition for maximizing consumer surplus : MB = P
(i) MB > P => CS with further consumption
(ii) MB < P => CS  with further consumption
2
2. The theory behind supply
2.1 Profit maximization
(i) Assumed that each firm seeks to maximize profit.
(ii) Profit = total revenue – total cost
2.2 Total cost and marginal cost

(i)
Total cost Marginal cost
In the short run, it is the sum of total fixed cost and It refers to the change in total cost resulting from
total variable cost. producing an additional unit of output.
(ii) Calculating MC
MC of the nth unit of a good

= TC (or (TVC) of n unit of a good – TC (or TVC) of (n-1) unit of a good
2.3 Marginal cost and supply

(i) Marginal cost is the minimum amount that a producer is willing to receive for producing an
additional unit of the good.
(ii) A supply curve reflects the marginal cost of every quantity of the good to the producer.
Price
2.4 Concepts of Producer surplus
(i) Marginal cost (MC) measures a producer’s minimum supply-price for an extra unit of a good.
(ii) Calculating marginal cost from total cost (TC):
Assume market price = $4 per unit
Quantity Total cost Marginal cost

0 2 -
1 3 3-2=1
2 5 5 - 3 =2
3 8 8–3=3
4 12 12 – 8 = 4
5 17 17 -12 = 5
(iii) Producer surplus refers to the difference between the minimum amount a producer is willing to
receive to produce a good and the amount he or she actually receives.
Producer surplus (PS)

= Total revenue (P x Q) – total variable cost (MC)
or
PS = Σ(P – MC) for the quantity sold
= (P – MC1) + (P – MC2) + (P – MC3) + …
3
(iv) When the price of a good increases (decreases), producer surplus will increase (decrease).
(v) Producer surplus is maximised when the price of a good equals the marginal cost of the last unit of
the good produced.
2.5 In a perfectly competitive market, both the profit and PS are maximised when MC = P.
Unit price ($)

MC curve
(i) MC curve = supply curve (for a price taker)

E
Market (ii) MC increases with output
Pm
price (iii) Ps = area hPmE
(iv) TVC = area 0hEQ1
h MC = P (v) TR = area PmEQ10
0 Q1 Quantity
(i) Profit in the long-run production

= TR -TVC
= producer surplus
(ii) Profit in the short-run production
= TR – TVC – TFC
= producer surplus - TFC
3. Economic efficiency and total social surplus

3.1 The concept of total social surplus
In the absence of government intervention,
total social surplus = total benefit – total cost
3.2 Efficiency
It means the total social surplus is maximized under the present resource allocation.
Efficiency = Maximization of total social surplus
4
3.3 The condition for efficiency
➢ Total social surplus is maximized when the marginal (MB) from each good is equal to its respective
marginal cost (MC).
➢ Total social surplus is maximized when MB = BC
Unit price ($)

MB = MC=P
S = MC
A⚫
⚫MB1
⚫MC2
E
P
⚫MB2
⚫MC1
D = MB
H⚫
0 Q2 Q1 Q3 Quantity
Under perfect competition (Without government intervention)
(i) Output at Q2, underproduction exists (inefficiency output).

MB1>MC1
➔ TSS is not maximized➔deadweight loss (area MB1EMB2)
If output increases towards Q1, TSS will increase.
(ii) Output at Q3, overproduction exists (inefficiency output).
MB2<C2
➔TSS is not maximized, ➔deadweight loss (area EMC2MB2)
If output decreases output towards Q1, TSS will increase.
(iii) Output at Q1,
total social surplus is maximized where
MB = MC =P
maximized TSS = maximized (CS + PS)
= areaPAE + area PEH
3.4 Changes in consumer surplus, producer surplus and total social surplus
(i) Changes in demand (assuming a parallel shift)
a. Demand  b. Demand 
• CS  • CS 
• PS  • PS 
• TSS  • TSS 
(ii) Changes in supply (assuming a parallel shift)

a. Supply  b. Supply 
• CS  • CS 
• PS  • PS 
• TSS  • TSS 
5
4. The functions of price
➢ Two functions of prices:
(i) Allocative function
 Market prices direct resources to produce the goods that have the highest benefits.
(a) The market prices provide information for allocating the resources to different uses.
(b) The market provide incentives for people to act according to the price signals.
(ii) Rationing function
Goods are rationed (or distributed) to consumers who value the goods the most.
6
Chapter 12 : Market Intervention (I)
1. Ways of Market Intervention

1.1 Concepts of market intervention
Market Intervention
(1) Price Intervention (2) Quantity intervention (3) Tax and Subsidy
(Quota)
(i) maximum (ii) minimum (i) Per-unit (ii) Per-unit

price control price control Tax Subsidy
2.1 Price Invention

Maximum Price control (Price Ceiling) Minimum Price Control (Price Floor)
(i) Meaning (i) Meaning
➢ When the government sets a price below the ➢ When the government sets the price above
market equilibrium price on a good, the market equilibrium price,
it is a maximum price. it is a minimum price.
➢ Sellers are not allowed to charge more than ➢ Buyers are not allowed to pay less than
this maximum price. this minimum price.
e.g. government medical services, taxi fares e.g. minimum wage policy on imported
and bus fares. foreign workers.
P P
g• S =MC
g• excess
supply
PB •a S =MC
Pf a• price floor
Pe •b Pe •b
c
Pc • price ceiling •c
excess D = MB
demand h•
D =MB
h• Q
0 Qc Qe Q
0 Qf Qe
1
Maximum Price control (Price Ceiling) Minimum Price Control (Price Floor)
(ii) Effective Price Ceiling (ii) Effective Price Floor
➢To be effective, it must be set below the ➢To be effective, it must be set
market equilibrium price. above the equilibrium price.
(iii) Effects on price, quantity and total revenue (iii) Effects on price, quantity and total revenue
(a) Excess demand (a) Excess (demand/supply)
Qd > Qc at the market price of Pc. Qd < Qc at the market price of Pf.
(b) Market price (Pc) < Pe (b) Market price (Pf) > Pe
(i) It reduces price from Pe to Pc. (i) It raises price from Pe to Pf.
(ii) It reduces quantity transacted (ii) It reduces quantity transacted
from Qe to Qc. from Qe to Qf.
(c) Total revenue (c) Total revenue
As both price and quantity transacted (i) Depending on the elasticity of demand
are reduced, the sellers’ total (1) If demand is elastic,
revenue decreases. the imposition of the price floor will
reduce the sellers’ revenue.
(2) If demand is inelastic,
the imposition of the price floor will
raise the sellers’ revenue.
(ii) If the government buys up the surplus
Both price and quantity transacted
are raised, the sellers’ total
revenue decreases.
(iv) Creates a Black Market Price concession may occur illegally.

A black market may arise.
Black market price (PB)> regulated price (PC)
(v) Methods of rationing: (v) Methods of rationing:

(1) First come, first served The excess supply may or may not be bought
(2) By sellers’ preference non-price up by the government.
(3) By ability
methods
(4) By need
(5) By drawing lot
(vi) Efficiency loss (MB > MC) (vi) Efficiency loss (MB > MC)
➢underproduction ➢underproduction
➢deadweight loss (area abc) ➢deadweight loss (area abc)
(vii) Total social surplus
(I) Before imposition of price ceiling (I) Before imposition of price ceiling
(i) consumer surplus : area Pegb (i) consumer surplus : area Pegb
(ii) producer surplus: area Pebh (ii) producer surplus: area Pebh
(II) After imposition of price ceiling (II) After imposition of price floor
(i) consumer surplus : area Paga (i) consumer surplus : area Pfga
(ii) producer surplus : area hPc C (ii) producer surplus : area Pf ach
(iii) consumer surplus : area PePBab
(iv) producer surplus : area PcPebc
2
3. Quantity intervention
3.1 Quotas
(i) Meaning:
➢It is a limit on the maximum quantity of goods that can be offered for sale.
➢Sellers are not allowed to sell more than this maximum limit.
-e.g. a quota on the issue of taxi licences
(ii) Economic effects of an effective quota
(a) An effective quota should be set at an output level
P
lower than the original equilibrium output level.
(b) Imposition of an effective quota g• S2 =MC2
➢The new supply curve becomes hBS2 with a kink at
point B.
(c) Effects on Price, Quantity & Total Revenue Pm •C S1 =MC1
(1) Price increases from Pe to Pm.
(2) Quantity transacted decreases from Qe to Qm. Pe •E
(3) Total revenue (depending on the elasticity of demand: •B
(i) If demand is inelastic, the sellers’ total revenue
D =MB
increases. h•
(i) If demand is elastic, the sellers’ total revenue Qm Qe
Q
decreases. 0
(d) Efficiency Loss (MB > MC)

➢underproduction
➢deadweight loss (area CEB)
(e) Total social surplus
(I) Before imposition of quota (II) After imposition of quota
(1) consumer surplus : area gEPe (1) consumer surplus : area gcPm
(2) producer surplus: area PeEh (2) producer surplus : area PmCBh
(3) total social surplus: aea gEh (3) total social surplus : area aCBh
3
4. Tariff Vs Quota
Per-unit tax (Tariff) Quota

P
P S2
D S2
Pm S1
t S1 C
P2
Pe
P1
B
D
Q A
0 Q2 Q1 Q
0 Qm Qe
(i) Per unit tax is imposed on the sales of (i) Quota is a restriction on the total quantity of
goods and services. output or sales.
(ii) Imposition of per-unit tax (ii) Imposition of quota
(a) Supply of good decreases. (a) Supply curve becomes ABS2 with a kink at
(b) Supply curve shifts upward. point B.
(c) Pe increases. (b) Pe increases.
(d) Qe decreases. (c) Qe decreases.
(iii) Effectiveness of a per-unit tax (iii) Effectiveness of a quota

Depending on the price elasticity of Quota is most effective in
demand of the good: restricting the amount of a good
(1) more elastic sold by setting the quota at the
- A small percentage raises in price will desired amount (Qm).
lead to a large percentage falls in Qd.
P S2
D t S1
P2
P1
Q
0 Q2 Q1
(2) more inelastic

S2
P D
S1
P2 t
P1
Q
0 Q2 Q1
- A large percentage raises

in price will lead to a small percentage
falls in Qd.
4
5. Per-unit sales tax and Per-unit subsidy Intervention
Per-unit tax Per-unit subsidy

(i) Meaning (i) Meaning
A sales tax is imposed on a per-unit basis if the The government provides producers with a
same amount is taxed on every unit of the goods production subsidy on a per-unit basis of a
regardless of its value. certain good.
P
S2
=MC2 P
D =MB S1 =MC1
t S1 =MC1 D =MB a
P2 •a
P3 • s S2 =MC2
P1 •b
P1 •c
P3 •c •
P2 •b
Q
0 Q2 Q1 Q
0 Q1 Q2
consumers’ tax burden consumers’ benefit
producers’ tax burden producers’ benefit
(ii) Total revenue to the sellers: (ii) Total revenue to the sellers:
➢Total revenue before per-unit tax ➢ Total revenue before per-unit subsidy
=P1 x Q1 =P1 x Q1
➢Total revenue after per unit tax ➢ Total revenue after per-unit subsidy
=P2 x Q2 =P3 x Q2
(iii) Tax revenue to the government (iii) Subsidy provided by the government
= tax rate x quantity transacted = subsidy rate x quantity transacted
= (P3 - P2) x Q2 =(P3 - P2) x Q2
(v) Efficiency loss (MB> MC) (v) Efficiency loss (MB < MC)
➢underproduction ➢ overproduction production
➢deadweight loss (area abc) ➢deadweight loss (area abc)
(vi) TSS  (vi) TSS 

(Sum of the losses in CS & PS > tax revenue)
5
6. Deviations from Efficiency
(i) Government intervention such as an effective price ceiling, price floor, quotas and unit taxes will
lead to underproduction, while unit subsidies will lead to overproduction.
(ii) All of them will lead to a deadweight loss.
Price ($)
S = MC
A
P2
B F H
C G I
P1
E
D = MB
0 Quantity
Q1 Q2
(iii) Imposition of the following measures:

Effective price ceiling: Effective price
Effective quota: Q1
P1 floor: P2
Consumer Area: A + B + C Area: A Area: A
surplus Change: Uncertain Change:  Change: 
Producer Area: E Area: B + C + E Area: B + C + E
surplus Change:  Change: Uncertain Change: Uncertain
Total social Area: A + B + C + E Area: A + B + C + E Area: A + B + C + E
surplus Change:  Change:  Change: 
Deadweight loss Area: F + G Area: F + G Area: F + G
(iv)
Lowering effective Lowering effective A reduction in an
price ceiling price floor effective quota
Change in CS Uncertain  
Change in PS  Uncertain Uncertain
Change in TSS   
Change in
  
deadweight loss
-End of Notes-
6

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Econ Notes

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Notes on Microeconomics

Chapter 1-1: Basic Economics Concepts

3. Wants, Scarcity and Choice

Causes Problem Consequence

Identify of available options

Rank all options according to preference

Question : Question : Question :

2. Free Goods vs Economic Goods

2.2 Economic goods

Yes Is the quantity available sufficient No

Free No Are people willing to pay a price for Yes Economic

No Is an opportunity cost involved in its Yes

4. Positive Statements vs Normative Statements

1. The Three Basic Economic Problems

1.2. Resource allocation and income distribution

Problem of income distribution For whom to produce?

1.3 How Do Different Societies Tackle the Basic Economic Problems?

three basic economic problems can be tackled by

customs and traditions government decisions the market mechanism

Traditional economy Planned economy Market economy

(ii) Most societies are mixed economies in reality.

Price competition Non-price competition

People compete for resources or People compete for resources or goods

(iv) Competition will lead to discrimination

1. Basic Economic Activities

Basic Economic Activities

It is the act of turning existing It is the act of using goods and

1.2 Factors of production

2. Circular Flows of Economic Activities

Factor income Expenditure

Factor market Product market

Good & service

Real flow Money flow

2.3 Basic types of markets

2 basic types of markets

Factor market Product market

2.4 Circular flows of economic activities in an economy

Real flow Money flow

(ii) Real flow

3. Choice of consumption over time

Preference for consumption of good

Present consumption of goods trade off Future consumption goods

People are impatient, they usually prefer to

Interest is the cost Interest is the compensation for

(iii) Interest exists in both barter economies and monetary economies.

3.3 Interest rate

Goods Services Consumer Producer Private Public

3. Goods and services

4. Consumer goods and Producer goods (Capital goods)

5. Private goods and public goods

Primary production Secondary production Tertiary production

6.2 Interdependence of the three types of production

4 types of factors of production

natural man-made human human

return return return return

(b) It involves giving up present consumption for future consumption.

1.2 Measure of labour

1.3 Factors affecting labour supply:

➢ Average labour productivity = Total output (units)

Total unit of labour

Number of workers employed x number of working hrs per worker

2.1 Factors affecting labour productivity:

Occupational mobility of labour Geographical mobility of labour

1. Wage payment method