Economics 1A - (Economics 1 -Micro) - Study Guide PDF

Preview

Summary

Download Economics 1A - (Economics 1 -Micro) - Study Guide PDF

Description

B.com in Accounting B.com in Marketing and Business Management B.com in Information Management B.com in Business Management

Module: Economics 1A/Economics 1

Module Code: ECO110

STUDY GUIDE

TABLE OF CONTENTS STUDY UNIT 1: WHAT ECONOMICS IS ALL ABOUT?........................................................ 1 1.1

Introduction ................................................................................................................ 1

1.2

What is economics? ................................................................................................... 1

1.3

Microeconomics and Macroeconomics: ...................................................................... 2

1.4

Scarcity, Choice and Opportunity cost ........................................................................ 3

1.5

Types of Economic Resources: .................................................................................. 4

1.6

Opportunity Cost ........................................................................................................ 4

1.7

Production Possibilities Curve (PPC):......................................................................... 5

1.8

Interpretation of the Production Possibilities Curve (PPC): ......................................... 5

1.9

Application of the production possibilities curve .......................................................... 7

1.10

Understanding Economics as a social science: .......................................................... 8

1.11

Understanding Economics as an imperial science: ..................................................... 8

1.12

Positive and Normative Economics: ........................................................................... 8

1.13

Why do economists disagree in their analysis of economic phenomenon? ................. 9

1.14

A discussion of some common mistakes usually made by economics scholars in reasoning about economic issues .............................................................................. 9

Case study: Why do Economists Disagree?........................................................................ 10 Self-Assessment Questions ................................................................................................ 11 References ......................................................................................................................... 12 STUDY UNIT 2: ECONOMIC SYSTEMS ............................................................................ 14 2.1

Introduction .............................................................................................................. 14

2.2

The Three Fundamental Economic Questions:......................................................... 14

2.3

The economic system:.............................................................................................. 15

2.4

The Traditional Economic System ............................................................................ 15

2.5

The Command Economic System ............................................................................ 16

2.6

The Free Market Economic System .......................................................................... 17

2.7

Socialism Economic System..................................................................................... 18

2.8

The Mixed Economic System ................................................................................... 18

2.9

Economic Theories:.................................................................................................. 19

Self-Assessment Questions ................................................................................................ 21 References ......................................................................................................................... 21 STUDY UNIT 3: THE INDEPENDENCE BETWEEN THE MAJOR SECTORS, MARKETS AND FLOWS IN THE MIXED ECONOMY........................................................................ 23 3.1

Introduction .............................................................................................................. 23 i

3.2

The circular flow model of the economy.................................................................... 23

3.3

Introducing the Government in the circular flow of production income and spending 26

3.4

Introducing the foreign sector in the circular flow of income and spending................ 27

3.5

The Role of Financial institutions in the circular flow of income and spending .......... 28

3.6

How to calculate Total Production, income and spending in the economy ................ 29

Self-Assessment Questions ................................................................................................ 30 References ......................................................................................................................... 31 STUDY UNIT 4: DEMAND, SUPPLY AND PRICE .............................................................. 32 4.1

Introduction .............................................................................................................. 32

4.2

Demand.................................................................................................................... 32

4.3

Supply ...................................................................................................................... 38

4.4

Market Equilibrium .................................................................................................... 42

4.5

Consumer Surplus and Producer Surplus................................................................. 43

4.6

Important Concepts .................................................................................................. 45

Self-Assessment Questions ................................................................................................ 46 References ......................................................................................................................... 46 STUDY UNIT 5: DEMAND AND SUPPLY IN ACTION ........................................................ 47 5.1

Introduction .............................................................................................................. 47

5.2

Change in demand ................................................................................................... 47

5.3

Changes in Supply ................................................................................................... 49

5.4

Simultaneous changes in demand and supply .......................................................... 50

5.5

Government intervention .......................................................................................... 51

Self-Assessment Questions ................................................................................................ 53 References ......................................................................................................................... 54 STUDY UNIT 6: ELASTICITY ............................................................................................. 55 6.1

Introduction .............................................................................................................. 55

6.2

Defining Elasticity ..................................................................................................... 55

6.3

Price Elasticity of Demand........................................................................................ 56

6.4

Determinants of price elasticity of demand ............................................................... 56

6.5

Categories of Price Elasticity of demand .................................................................. 57

6.6

Price elasticity of Supply ........................................................................................... 59

6.7

Important Concepts .................................................................................................. 60

Self-Assessment Questions ................................................................................................ 61 References ......................................................................................................................... 61 STUDY UNIT 7: THE THEORY OF DEMAND: THE UTILITY APPROACH ......................... 62 ii

7.1

Introduction .............................................................................................................. 62

7.2

Utility ........................................................................................................................ 62

7.3

Marginal Utility and Total Utility ................................................................................ 63

7.4

Consumer equilibrium in Utility approach.................................................................. 64

7.5

Important Concepts .................................................................................................. 65

Self-Assessment Questions ................................................................................................ 66 References ......................................................................................................................... 66 STUDY UNIT 8: THE THEORY OF DEMAND: THE INDIFFERENCE APPROACH ............ 67 8.1

Introduction .............................................................................................................. 67

8.2

Indifference Curves .................................................................................................. 67

8.3

The Budget line ........................................................................................................ 69

8.4

Important Concepts .................................................................................................. 71

Self-Assessment Questions ................................................................................................ 71 References ......................................................................................................................... 72 STUDY UNIT 9: BACKGROUND TO SUPPLY: PRODUCTION AND COST...................... 73 9.1

Introduction .............................................................................................................. 73

9.2

Profit, Revenue and Cost Concepts.......................................................................... 73

9.3

Production in the short – run and long run ................................................................ 76

9.4

Costs in the short run ............................................................................................... 79

9.5

Production and Cost in Long run .............................................................................. 81

Self-Assessment Questions ................................................................................................ 82 References ......................................................................................................................... 82 STUDY UNIT 10: MARKET STRUCTURE: PERFECT COMPETITION .............................. 84 10.1

Introduction .............................................................................................................. 84

10.2

Market Structures: An overview ................................................................................ 84

10.3

The equilibrium condition for any firm ....................................................................... 86

10.4

Perfect Competition .................................................................................................. 87

10.5

Long-run Equilibrium Position under perfect competition .......................................... 91

Self- Assessment Questions ............................................................................................... 92 References ......................................................................................................................... 92 STUDY UNIT 11: MARKET STRUCTURE: MONOPOLY AND IMPERFECT COMPETITION93 11.1

Introduction .............................................................................................................. 93

11.2

Monopoly .................................................................................................................. 93

11.3

Monopolistic Competition ......................................................................................... 95

11.4

Oligopoly .................................................................................................................. 96 iii

Self-assessment questions ................................................................................................. 97 References ......................................................................................................................... 98

iv

List of Tables Table 1.1 The Production Possibilities Curve (PPC) .................................................................. 5 Table 4.1 Difference between Change in Quantity Demand and Change in Demand................34 Table 4.2 The Supply Schedule ................................................................................................38 Table 4.3 Demand and Supply Schedule ..................................................................................42 Table 6.1 Categories of price elasticity of demand ....................................................................57 Table 7.1 Marginal utility from apples consumption ...................................................................64 Table 7.2 Determine the equilibrium combination which yields maximum utility ........................64 Table 8.1 Combination of meat and bread that yield the same level of satisfaction ...................68 Table 8.2 Affordable combinations of bread and meat ..............................................................70 Table 9.1 Short-run Production Schedule..................................................................................77 Table 9.2 Average and Marginal product...................................................................................78 Table 9.3 Total, Fixed and variable cost schedules of a maize farmer ......................................79 Table 9.4 Schedules, to distinguish them from total cost schedule............................................80 Table 10.1 Market Structures ....................................................................................................85 Table 10.2 Marginal and Average revenue under perfect competition .......................................88 Table 10.3 Cost and profit schedule under perfect competition .................................................89 Table 11.1 Revenue Structure for a Monopoly ..........................................................................94 Table 11.2 Monopolistic Competition versus Perfect Competition .............................................96

v

List of figures Figure 1. 1 Graphical illustration of the Production Possibilities Curve (PPC) ............................. 6 Figure 1. 2 Movements of the Production Possibilities Curve (PPC) .......................................... 7 Figure 3. 1 The Three Major Flows in the Economy ..................................................................24 Figure 3. 2 The circular flow of goods and services between households and firms ..................25 Figure 3. 3 The circular flow of income and spending................................................................26 Figure 3. 4 Government in the circular flow of production income and spending .......................27 Figure 3.5 The foreign sector in the circular flow of income and spending.................................28 Figure 3.6 The Role of Financial institutions in the circular flow ................................................29 Figure 4.1 The demand curve ...................................................................................................33 Figure 4.2 Two substitutes: Butter and Margarine ....................................................................36 Figure 4.3 Complements ...........................................................................................................37 Figure 5.1 Changes in demand .................................................................................................48 Figure 5.2 Changes in supply ....................................................................................................50 Figure 5.3 Simultaneous changes in demand and supply .........................................................51 Figure 5.4 Graphical Illustration of Price Ceilings ......................................................................52 Figure 5.5 Price floors and ceilings ...........................................................................................53 Figure 6.1 Categories of price elasticity of demand ...................................................................58 Figure 6.2 Different categories of price elasticity of supply ........................................................60 Figure 8.1 An indifference curve ...............................................................................................68 Figure 8.2 An indifference Map .................................................................................................69 Figure 8.3 the budget line .........................................................................................................70 Figure 8.4 Consumer Equilibrium ..............................................................................................71 Figure 9.1 Economic Profit and Accounting Profit .....................................................................76

vi

Module Information Name of programme Type of programme NQF Level Name of module Credits Notional hours Module purpose

Learning Outcomes:

B.com in Marketing and Business Management Contact (Full-Time & Part Time) 7 Economics 1A 10 100 This module introduces students to concepts and practices in microeconomics. Microeconomics covers the basics of microeconomic analysis as well as the structure and operation of the economy explained through the role of microeconomic theory including the price mechanism, consumer and producer equilibrium and market structures models. Information is provided on the natural forces of supply and demand and how equilibrium is attained. The module emphasizes the significance of graphical illustration of economic phenomena...