MICRO ECONOMICS SUMMARY

1

.      Economics is divided into two major parts;

·         Microeconomics: it deals with the behavior of individual consumer and firms and how individual market and firms are organized.

·         Macroeconomics: deals with the aggregate economy. Note; Macro economics deals with the smaller part of the economy while macro economy deals with aggregate economy (whole)

2.      Classical school defined economics as a science of material wealth. Prominent figure in this school were; Adam Smith, J.B. Say, J.S. Mill, David Ricardo and Thomas Malthus.

3.      The Neo-Classical School identified human welfare as the main object of man’s effort and wealth as the source of it. Prominent figure in this school were; Alfred Marshall, Ac Pigou, E.Canan, I Fisher, V.Paretto etc.

4.      The Limitation of Both the classical and the Neo-Classical school of thought was limiting the scope of economics to only material goods.

5.      The Scarcity Definition (Modern Definition). According to this school of thought, economics is regarded as a social science which studies human behavior as a relationship between ends and scare means which has alternative uses. – Lionel. C. Robins

·         Ends refers to the basic needs of man (wants / good & services)

·         Means  refers to the resources used to acquire the basic needs (ends)

6.      Positive economics is concerned with;

·         What will happen

·         What is happening

·         What actually happened, it is an objective science (Value free)

7.      Normative economics deals with;

·         What  should happen

·         What might happen

·         What ought to happen, it is a subject science (Value laden)

8.      The Economic problems are;

·         Scarcity: Limited resources used to achieve unlimited wants

·         Wants: Insatiable desire of human being own goods and services

·         Choice: Selecting one wants among several alternatives

·         Scale of preference: List of wants arranged in order of their relative importance

·         Opportunity cost (real cost): Cost in terms of forgone alternative

9.      Basic Economics problem;

·         What to Produce: The is caused by scarcity and also the market demand

·         How to Produce: This is determined by the technique of production i.e. Labour or Capital intensity

·         For whom to produce: This is determined by the demographic profile i.e. sex grade, age grade, religion, tribe etc.

·         Efficient use of resources: proper use of resources in order to achieve maximum output.

10.   Deductive reasoning: a methodology of thinking or reasoning from a generalization aspect (general conclusion) down to a specific aspect.

11.   Inductive reasoning: a methodology of reasoning/thinking from a specific conclusion up to the generalization aspect.

12.   Stock Concept: a variable which has no time dimension. It is measured at a point in time

13.   Flow Concept: a variable which has time dimension. It is measured over a period of time.

14.   Production Possibility Curve (PPC): It is a curve or locus of points that show the possible combination of two commodities which can be produced in an economy using all available resources with the existing technology in an efficient manner.

15.   Marginal rate of transformation (MRT): it is the rate at which one commodity must be given up in order to produce more of another commodity. It depicts the slope of the PPC.

16.   The economic system is an arrangement which defines how resources are owned, produced, distributed and controlled in the society. The types are:

·         Capitalism: private ownership and control of productive resources

·         Socialism (command or planned economy): Government ownership and control of the productive resources.

·         Mixed economy: productive resources are owned and controlled by both the private individual and the government.

17.   Demand is the total quantity of goods and services that a consumer is willing and able to buy at a particular price over a given period of time.

18.   Law of demand states that all other factors held constant, the higher the price, the lower the quantity demanded and the lower the price the higher the quantity demanded.

19.   Major factors that affect demand are;

·         Commodity’s own price

·         Price of related commodity

·         Income of the consumer

·         Consumer taste and preference

·         Future price expectation

20.   Demand function is the relationship between demand and its determinant

21.   A change in quantity demanded (movement along the demand curve) is causes by price alone while a change in demand  (shift in demand curve) is caused by other factors affecting demand

22.   Types of demand are;

·         Derived demand: These are demand caused be demand for other commodities i.e. demand for factors of production.

·         Competitive demand: These are demand which compete for the same consumer income; they are seen as close substitute of each other e.g. Bournvita and Milo

·         Joint/complement demand: They are demand which when consumed together derive maximum satisfaction than when consumed together, such goods are demanded for together e.g. can and petrol.

23.   Goods that violate law of demand are called exception to law of demand and they are: i. inferior goods ii. Ostentatious goods iii. Future price expectation.

24.   Engel curve is a curve that shows the relationship between consumer income and the demand for a commodity (normal and inferior good)

25.   Supply is the total quantity of goods and services a producer is willing and able to offer for sale at a particular price over a given period of time

26.   Law of supply states that the higher the price the higher the quantity supplied and the lower the price the lower the quantity supplied.

27.   Supply of good s is influenced by:

·         Commodity’s own price

·         Price of related product

·         Price of factor cost

·         State of technology

·         Government policy

28.   Supply function is the relationship between quantity supplied and its determinant.

29.   A change in quantity supplied (movement along the supply curve) is causes by price alone while a change in supply  (shift in supply curve) is caused by other factors affecting supply

30.   Equilibrium point is the point of intersection between the demand and supply curve. The price of their intersection is called the equilibrium price while the quantity is called equilibrium quantity.

31.   The price above the intersection will create an excess supply (surplus), while the price below the intersection, will create an excess demand (shortage).

32.   Elasticity of demand is the degree of responsiveness to changes in demand/quantity demanded as a result of changes in price, price of related commodity and income of the consumer.

33.   Elasticity of demand are divided into;

·         Price Elasticity of demand (PED): the degree of responsiveness to change in quantity demanded as a result of change in price

·         Cross Elasticity of demand (CED): the degree of responsiveness to change in demand of one commodity as a result of change in price of another commodity

·         Income Elasticity of demand (YED): the degree of responsiveness to change in demand as a result of change in income.

34.   Price elasticity of demand has five coefficient

·         Elastic: a small change in price lead to a larger change in quantity demanded. ED > 1

·         Inelastic: a small change in price will lead to a smaller change in quantity demanded. ED < 1

·         Unitary elastic: a change in price, will lead to the same change in quantity demanded. ED = 1

·         Perfectly elastic: a change in price will lead to either the whole commodity being bought or not bought at all. ED = œ (infinity)

·         Perfectly inelastic: a change in price will not have any effect on the quantity demanded. ED = 0

35.   The price elasticity of demand is determined by:

·         Availability of close substitute

·         Luxury or necessity goods

·         Proportion of income spent by the consumer

·         Pattern of expenditure

36.   Under Income elasticity of demand (YED), if the coefficient elasticity of demand is Positive (+) and greater than 1, such commodity is said to be a superior goods, if the coefficient elasticity of demand is positive (+) but less than 1, such commodity is said to be a normal good and if the coefficient elasticity of demand is negative (-), such commodity is said to be an inferior good.

37.   Under the cross elasticity of demand, if the coefficient elasticity of demand is Positive (+), such commodities are said to be competitive in nature, but if the coefficient elasticity of demand is Positive (-), such commodities are said to be joint/complimentary in nature.

38.   Total revenue is the product of price & quantity. (TR=P x Q)

39.   For an elastic commodity, an increase in price will lead to a decrease in TR, while a decrease in price will lead to an increase in TR.

40.   For an inelastic commodity, an increase in price will lead to an increase in TR, while a decrease in price will lead to a decrease in TR.

41.   Under the Marginal utility theory (cardinalist approach), it is believed that satisfaction of a commodity (utility) can be measured in imaginary no known as utils.

42.   Under the Indifference curve theory (ordinalist approach), it is believed that utility cannot be measured but rather ranked.

43.   Total utility is the total satisfaction a consumer derive from the consumption of a particular commodity. Total utility is a function of quantity of the commodity consumed i.e. TU=f(Q)

44.   Average utility is the satisfaction per commodity. That is Total utility divided by quantity consumed i.e. AU=TU/Qty

45.   Marginal utility is the additional satisfaction derived from the consumption of an additional commodity. i.e. MU=∆TU/∆Qty

46.   The law of diminishing marginal utility states that as more of a commodity is consumed, MU declines.

47.   Under MU theory, a consumer is said to be in equilibrium when MU per Naira (MU/P) is the same for all commodity consumed.

48.   The indifference curve, rest on the concept of; budget line, indifference curve, indifference map & law of diminishing marginal rate of substitution.

49.   Budget line shows the different combination of two goods that a consumer can buy, given his money income and market price of the two commodities.

50.   Indifference curve is a curve or locus of point that shows different point representing different combination of two goods which yield the same utility.

51.   The law of diminishing marginal rate of substitution states that the less of one commodity (A) a consumer gives up and the more of another commodity (B) he obtains in the process, the less willing he is to give up commodity A for commodity B.

52.   Under the indifference curve theory, a consumer is said to be at equilibrium at point of tangency between the budget line and the indifference curve.

53.   Production is the creation of utility or wealth. There are 3 types of production (i) primary (ii) secondary (iii) tertiary production.

54.   In the analysis of production process, factors of production are divided into 2; (i) Fixed factor: input whose quantity do not change during the course of production. (ii) Variable factor: input whose quantity change during the course of production.

55.   Period of production are; (i) short-run: some factors of production are fixed and some are variable (ii) Long-run: all factors of production are variable.

56.   Factors of production are: Land (N), Labour (L), Capital (K) and Entrepreneur (E).

57.   Production function is the relationship between output and input Qty=f(N,L,K,E)

58.   There are 3 concepts in short-run period; (i) Total Product (TP): the amount of commodity that can be produced using all input. (ii) Average Product (AP): Output per factor of production that is output per labour (TP/labour) (iii) Marginal Product (MP): it is the change in total product caused by a addition change in input (∆TP/∆L).

59.   Law of diminishing return states that as more units of variable factor is applied to quantity of fixed factor, the average and marginal product of the variable factor will rise but eventually decline.

60.   Isocost is a line that shows the possible combination of two commodities a firm is able to buy given the cost and money income.

61.   Isoquant is a curve or locus of point that show the different combination of two commodities a firm can produce which will yield the same level of output.

62.   The concept of return to scale describes how output responds to changes in quantity of input used in the production process. It is divided into:

(i)                 Increasing return to scale

(ii)               Constant return to scale

(iii)             Decreasing return to scale.

63.   In the short-run theory of cost, there are fixed cost & variable cost. The firms total cost is the sum of all total fixed cost and total variable cost. The Marginal cost is the change in total cost divided by change in output (∆TC/∆Qty)

64.   Both the inverse S-shape of the total cost curve and the U-shape of the average and marginal curves in the short-run reflect the law of diminishing returns.

65.   There are no fixed costs in the long-run since all factors are variable. The long-run average cost is total cost divided by output (TC/qty). The Marginal cost is the change in total cost divided by the change in output (∆TC/∆Qty).

66.   The marginal cost (MC) curve cuts the average cost (AC) curve from below at its lowest point.

67.   The nature of the marginal and average cost curve shows that as the level of output increases, both cost decreases up to a point.

68.   When the average cost is falling, the marginal cost is below it while the average cost starts rising.

69.   The marginal cost will cross the minimum point of average total cost before rising.

70.   Explicit cost are payment made for resources that are purchased from outside while Implicit cost refers to the cost of the resources supplied by the owners.

71.   The long-run average curve is derived from the short-run average cost curves. The U-shape of the curve reflects the laws of return to scale and it is explained by economies and diseconomies of scale.

72.   Economies of scale refer to the cost savings derived by the firm as it increases its plant size.

73.   Diseconomies of scale refer to the higher unit cost the firm incurs as a result of setting up a larger plant.

74.   Internal economies are those cost savings that accrue directly to the firm by increasing its output level or its plant size.

75.   The firms total revenue is the price times quantity sold (P X Q). The average revenue is total revenue divided by quantity sold (TR/Q). Marginal revenue is the change in total revenue divided by change in qty sold. (∆TR/∆Qty).

76.   For a firm operating in a perfectly competitive market, the demand and marginal revenue curve are the same.

77.   To an economist, profit is the difference between total revenue and total cost (TR-TC). A firm earns normal profit if its cost equals its total revenue (TR=TC).

78.   Under the market structure classification, there are four main types of market structure:

(i)                 Perfect Competition

(ii)               Monopoly  

(iii)             Monopolistic competition (iv)

(iv)              Oligopoly. This market classification is based on the number of firms or sellers in the market or industry.

	PERFECT COMPETITION	MONOPOLY	MONOPOLISTIC COMPETITION	OLIGOPOLY
NUMBER of buyers & sellers	Many buyers and sellers	One seller	Many buyers and sellers	Few buyers and sellers
PRODUCT	Homogeneous product	Heterogeneous product	Similar but differentiated product	Homogeneous/differentiated
Mobility of resources	Free entry & exit	No free entry & exit	Free entry & exit	No free entry & exit

79.    Perfect market is characterized by a large number of buyers & sellers, the product are homogeneous, there is perfect mobility of resources and all buyers and sellers possess perfect knowledge of the market condition. The short-run equilibrium or profit maximizing position of a perfectly competitive firm is the output level where MC=MR=P.

80.   Monopoly is the form of market organization in which there is a single firm producing a commodity or services for which there are no close substitutes.

81.   A monopoly firm is able to make a positive economic profit both in the short-run and long-run.

82.   Monopolistic competition is characterized by a large number of firms each producing a product that is differentiated from the products of other firms in the industry. There are no barriers to entry.

83.   Price discrimination occurs when the same type of commodity or services are sold to different buyers at different prices when the cost of production are the same for the commodities or services.

84.   Oligopoly is a market structure characterized by a few number of firms with recognized mutual interdependence. Therefore any changes in a firm’s price or output influences the sales and profits of its competitors.

85.   Oligopolistic firms earn positive economic profit both in the short-run and long-run due to barrier to entry.

ARTICLE BY MONDAY DESMOND