Summary: F581 Microeconomics | Karthik Suresh

Read the summary and the most important questions on F581 Microeconomics | Karthik Suresh

• 1 The reasons for individuals, organisations and societies having to make choices.

• 1.1.3 Scarcity

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• Three decisions we have to make as a result of scarcity?

  What, How and for whom to produce.

• 2 Competitive Markets

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• 2.1 Demand

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• WIFCAPS (Non-price factors of demand)

  Weather, Income, Fashion, Compliments, Advertising, Population, Substitutes.

• 2.2 Supply

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• GTFC (Non-Price factors)

  Government (e.g. Regulations, Taxes, Subsidies), Technology, Firms (e.g. Govt regulation of numbers of firms in industry), Costs of Production (Internal business reasons, external factors)

• 2.4 Elasticities

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• Determinants of PED (SHITPOND)

  • Substitutes (Closeness, Availability, Price)
  • Habitual
  • Income (proportion)
  • Time (LR or SR, time to find substitutes)
  • Percentage change in price
  • Off Peak/Peak (e.g. Trains)
  • Necessity
  • Definition (Industry or brand?)

• Determinants of PES (GTSC)

  • Government (Do they intervene? Hold stock to release to during period of uncertainty (e.g. wheat)?)
  • Time (with time response will be greater)
  • Stock (Spare? e.g. Saudi Oil)
  • Capacity (Spare? May be able to quickly produce more, e.g. if machines were not working to full potential.)

• Business relevance of PED

  • Helps explain price variations (e.g. transport, leisure/ suppliers would try to maximize profits by charging different prices for different PED)
  • Can be used to estimate impact of changing prices on revenue (NB: revenue maximized if market is operating at a point where PED=1, price needs to be increased when PED is inelastic and decreased when PED is elastic)
  • Future resource/production planning (e.g. whether a business should hold additional capacity to cope with changes in price)
  • Miscalculation can lead to inefficient allocation of resources.

• Business Relevance of YED

  • Plan future resource/production in response to steady economic growth (helps explain business rationalization e.g. retrenchment)
  • Influences firms decision to rebrand (e.g. if high growth predicted, aim to promote g/s as normal good, if recession predicted, aim to promote g/s as inferior good.)

• Business relevance of XED

  • Important for firms operating in competitive market.
  • E.g. XED figures will influence a firms marketing strategy by helping identify rivals, complimentary goods etc. 

• Business relevance of PES

  • Explain why price variations in a market are large or small (e.g. will influence the extent of price change in response to shift in demand curve)
  • Can aid businesses to asses how much stock or spare capacity they may wish to maintain.

   

• 3 Market Failure and Government Intervention

• 3.1 What is market failure/ Types of market failure

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• Private Costs/Benefits

  The costs or benefits incurred by those directly involved in the decision making associated to an economic transaction.