Download ECON1001 notes completely free + more videos and cheat sheets: http://goo.gl/xzGCHT

1. NOTESECON1001: Microeconomics for Business
Decision Making
University of Newcastle

2. Table of Contents
1 INTRODUCTION 4
1.1 DEFINITION OF ECONOMICS 4
1.1.1 KEY CONCEPTS 4
1.2 THE FOUR ECONOMIC DECISION PITFALL 4
1.3 ABSOLUTE AND COMPARATIVE ADVANTAGE 5
1.4 THEORY OF COMPARATIVE ADVANTAGE 5
1.5 PRODUCTION POSSIBILITY CURVE 5
1.5.1 THE PRODUCTION POSSIBILITY CURVE FOR A MANY PERSON ECONOMY IS BOW SHAPED – 5
2 SUPPLY AND DEMAND 7
2.1 MARKET 7
2.2 DEMAND CURVE 7
2.3 SUPPLY CURVE 7
2.4 MARKET EQUILIBRIUM 7
2.5 FACTORS LEADING TO AN INCREASE IN DEMAND 8
2.6 FACTORS LEADING TO AN INCREASE IN SUPPLY 8
2.7 SUMMARY 8
2.8 LAW OF DEMAND 9
2.9 NEEDS VS. WANTS 9
2.10 LAW OF DIMINISHING MARGINAL UTILITY 9
2.11 RATIONAL SPENDING RULE 9
2.12 CONSTRUCTING MARKET DEMAND AND SUPPLY CURVES 9
3 ELASTICITY 10
3.1 PRICE ELASTICITY OF DEMAND 10
3.2 FACTORS AFFECTING THE PRICE ELASTICITY OF DEMAND 10
3.3 CROSS PRICE ELASTICITY 10
3.4 PRICE ELASTICITY OF SUPPLY 10
3.5 FACTORS AFFECTING THE PRICE ELASTICITY OF SUPPLY 11
4 PROFIT MAXIMISATION 12
4.1 TYPES OF PROFIT 12
4.2 INVISIBLE HAND THEORY 12
4.3 FORMS OF MARKET EFFICIENCY 12
5 EFFICIENCY 13
5.1 MARKET EFFICIENCY ERROR! BOOKMARK NOT DEFINED.
5.2 FACTORS OR FORCES THAT CAN LEAD TO A REDUCTION IN ECONOMIC SURPLUS ERROR!
BOOKMARK NOT DEFINED.
5.2.1 PRICE CEILINGS ERROR! BOOKMARK NOT DEFINED.
5.2.2 PRICE FLOORS ERROR! BOOKMARK NOT DEFINED.
5.2.3 PRICE SUBSIDIES ERROR! BOOKMARK NOT DEFINED.
5.2.4 TAXES ERROR! BOOKMARK NOT DEFINED.
6 MONOPOLY AND MONOPOLISTIC COMPETITION 14
6.1 PRICE SETTER 14

3. 6.2 THREE TYPES OF IMPERFECT COMPETITION 14
6.3 FACTORS CREATING MONOPOLY/IMPERFECT COMPETITION 14
6.4 ECONOMIES OF SCALE 14
6.5 MONOPOLIST’S PROFIT MAXIMIZATION RULE 14
6.6 PRICE DISCRIMINATION 15
7 OLIGOPOLY AND GAME THEORY 16
7.1 ELEMENTS OF A GAME 16
7.2 NASH EQUILIBRIUM 16
7.3 PRISONER’S DILEMMA 16
8 MARKET FAILURE 17
8.1 EXTERNAL COSTS OR NEGATIVE EXTERNALITIES 17
8.2 EXTERNAL BENEFIT OR POSITIVE EXTERNALITY (DIAGRAM) 17
8.3 SOLUTIONS TO MINIMIZE EXTERNALITIES IN THE MARKET 17
8.4 COASE THEOREM 17
8.5 COMMON RESOURCES 17
8.6 POSITIONAL EXTERNALITIES 18
8.7 POSITIONAL ARMS RACE 18
8.8 RIVALRY 18
8.9 EXCLUDABILITY 18
8.10 FOUR TYPES OF GOODS 19
8.11 FREE RIDER PROBLEM 19
8.12 DIFFERENT FORMS OF TAXES 19

4. 1 Introduction
1.1 Definition of Economics
Economics is the study of how people make choices under conditions of
scarcity.
AND the study of the results of those choices on society.
Microeconomics is the study of the individual consumer, firm and market
behaviour
Macroeconomics on the other hand, is the study of the aggregate economy
1.1.1 Key concepts
Cost benefit principle – AN individual or firm, should only take an action if,
and only if, the extra benefits from taking the action are at least as great as
the extra costs
Economic surplus is the gain that results from taking an action when the
benefits > costs
Scarcity principle – having more of one good means having less of another
Economic decision is any decision where securing something of value
means going without some other thing of value this relates to the Trade-
off (no free lunch) principle of economics
Opportunity cost - the value of the next best alternative to taking a
particular action
1.2 The Four Economic Decision Pitfall
Measure costs and benefits as absolute dollar amounts rather than as
proportions
Account for all opportunity costs
Ignore sunk costs – i.e. when eating at an all you can eat Buffet
Know when to use average costs & benefits and when to use marginal costs
& benefits

5. 1.3 Absolute and Comparative Advantage
Absolute Advantage Comparative Advantage
When one person is able to produce a
good or perform a given task with less
resources than another person
When one person’s opportunity cost of
producing a good or service is lower
than another individual’s opportunity cost
E.g. if Person A can write an economics
report in 1 hr, while Person B can write
the same economics report in 2hrs,
Person A would have absolute
advantage in writing an economics
report
Sources
Differences in resources of a
nation/region – e.g. Australia vs.
NZ
Country’s cultures and institutions
Innate born skills for individuals –
e.g. genetics
1.4 Theory of comparative advantage
When two people have different opportunity costs of performing
various tasks, they can always increase the total value of output if
each person concentrates their efforts on those activities for which
their opportunity costs are the lowest
The lower an individual’s opportunity cost means that they are
forgoing an activity that is low in value
1.5 Production possibility curve
A graph that describes the maximum amount of one good that can be
produced for every possible level of production of another
good
Downward slope of the PPC illustrates the Scarcity
Principle – how having more of one good means having
to settle less of another
Any point that lies either below or to the right of the PPC
is said to be an un-attainable point – meaning that it
cannot be produced with currently available resources
Any point to the left of the PPC is also known as the
inefficient point – in the sense that the existing
resources that an individual has allows for the production of at least
one more good without sacrificing the production of any other good.
Another point lying on the PPC is the Efficient point
1.5.1 The Production possibility curve for a many person
economy is bow shaped –
This is due to the Low hanging fruit principle – in
that we always exploit on those individuals with the
lowest opportunity costs first before looking for
suppliers/producers with higher opportunity costs.

6. Checkspoonfeedme.com forfreevideosummaries,notes&cheatsheetsbytopstudents.
NOTESMATH1002:LinearAlgebra
TheUniversityofSydney