ECON1101 notes - THINKING AS AN ECONOMIST Take into account...

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THINKING AS AN ECONOMIST Take into account opportunity costs value of the foregone alternative(s). Ignore sunk costs costs that cannot be avoided even if the action is not undertaken. Cost-benefit principle keep undertaking an action up until the point where MB (the benefit of undertaking an additional unit) becomes less than MC. COMPARATIVE ADVANTAGE Produce a good at a lower opportunity cost relative to that of a competitor. Production possibilities curve – combinations of two goods that an economy can produce with its given level of resources. Straight Line PPC (constant opportunity cost) Outward bound PPC (increasing opportunity cost) Opportunity cost of A =
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SUPPLY & DEMAND Increase in demand Price floor ELASTICITY Demand Price elasticity Elastic > 1 price revenue Inelastic < 1 Unit elastic = 1 price revenue P E Q E D D S S Price Quantity D 2 D 1 D 2 D 1 surplus (excess supply) P E Q D D D S S Q S P MAX = Elasticity of demand = 1 slope P Q
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Perfectly inelastic
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