- – Positive economics: based on facts and testable theories e.g. inflation is 2%
- – Normative economics: based on opinion
- – Opportunity cost: is the sacrifice foregone of the next best alternative
- – Demand curve will shift to the right if real incomes rise, price of substitute rises, price of complement falls, changes in taste
- Giffen good: higher price leads to increase in demand
- Maximsing Utility occurs where MUa =Mub
Pa Pb - PED = %change in QD / %change in price
- YED = % change in QD/ %change in income
- Cross Elasticity of demand = %change in QDa / % change in price of good b
- PES = % change in QS / %change in price
- An Inferior good YED <0
- A normal good YED> 0
- A luxury good YED >1
- If PED is 0.3 an increase in price would lead to an increase in revenue for firms
- A shift in supply is caused by an increase in number of suppliers, an improvement in technology, a fall in costs, a subsidy, better weather
- Determinants of Price Elasticity of Supply
a) number of producers - b. existence of spare capacity
- c. factor mobility
- d. time period
- Determinants of Price Elasticity of Supply
- Cost Benefit Analysis COBA involves measuring private and external benefits and private and external costs, To see whether a project is worth undertaking
Monopolistic Competition
- i) differentiated product
- ii) freedom of entry
- iii) many firms
- iv) normal profit in long run
Perfect competition
i) many firms
ii) homogenous product
iii) freedom of entry and exit
iv) normal profit in long run
v) perfect knowledge
vi) allocoative efficient p=mc
vii) productive efficient lowest point of AC