Essay on Economics: Supply and Demand and Price

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TABLE OF CONTENTS
Introduction

2

Supply and Demand

3

Elasticity

5

Government Intervention and Regulation

7

Cost of Production

9

Profit Maximisation

12

Price Discrimination

16

Welfare and Markets

18

International Trade

19

Market Failure

21

1

MICROECONOMICS
REFERENCES (Diagrams and Tables all from the below textbook)
Mankiw, N. G., 2009. Principles of Microeconomics: 5th Edition. (South Western Cengage Learning)
1.
2.
3.
4.

Rational REASONING
Understand CHAIN of CAUSATION
PRICE setting and DISCRIMINATION
GAME THEORY

Economics

Resources
Scarcity
Theories

Problem solving skills for commerce and public policy
“Way of thinking” to help understand how the economy and society work, assists in guiding decisions
“Study of economic activity” – decisions about how to use our resources
“The study of how society manages its scarce resources”
Time and human capital
Physical and financial assets
Natural resources
Not sufficient resources to satisfy people’s wants
Means decisions need to be made about how to use available resources
Consist of a model and a hypothesis (prediction)
MODEL: a model of the situation we are interested in studying
: Essential features of situation being studied, “simplifies and omits”
HYPOTHESIS: a hypothesis that is derived from the model
Economic Theory, decision makers are always rational

Rational

Have well defined objectives
Make choices that are consistent with achieving that objective

HOW to MAKE DECISIONS
All actions are associated with benefits and costs
The best action for a rational decision maker to choose will maximize total net gain
Total Net Gain =

Total BENEFIT – Total COST

HOW to MEASURE COST
Measure of cost of an action should be in terms of resources used
Opportunity Cost

Sunk Cost
Productivity

Value of resources used in taking that action in their next best alternative used
“Cost of something is what you give up to get it”, to get something we like, we usually have to give up another thing that we like, “trading off one goal against another”
For productivity growth in agriculture, resources used are
- Capital
- Labor
- Other services
- Effect on human health and aquatic life (from pesticides runoff into surface water/leaching into groundwater)
Output is the agricultural growth
Productivity is lower when account taken of environment cost
Resources used before making choice about action (NOT included in Opportunity Cost)
Outputs and Inputs, the amount of input per unit of resources used to produce that output

HOW to MEASURE BENEFITS
Measure benefits from an action in terms of a decision maker’s objective
MAKING an OPTIMAL DECISION
The optimal quality or level of an activity for a rational decision maker to choose is the action, which maximizes total net gain
Marginal Benefit MB
Marginal Cost MC

Addition to total benefit by doing or increasing by one unit of level of an activity
Addition to total cost by doing or increasing by one unit the level of an activity
Use opportunity cost and IGNORE sunk costs

HOW TO MAKE CHOICES?
Use BENEFIT-COST PRINCIPLE (Marginal Rule)
DO activity if MB ≥ MC
DON’T DO activity if MB ≤ MC
Only take an action if the additional benefits of that action outweigh the additional costs
This rule maximizes total net gain, achieving the best outcome for a rational decision maker
ROLE of INCENTIVES
When the benefits or costs of different actions alter, it is to be expected that rational decision makers will change the actions they choose, the decision makers are responding to incentives
Changes to benefits and costs causes changes to optimal action
2

Factors that Influence MARKET OUTCOMES
1. Demand and Supply
2. Elasticity
3. Government Regulation
1. DEMAND and SUPPLY
Market
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