ECO2101 Microeconomics Microeconomics Lecture Gap Sheets(way)

Course Overview

L1 Introduction Difficult Topic

L7 Output and Cost

Heavy & Many

Economics Concepts Concepts
• Scarcity, Opportunity Cost Product
• Factors of Production • Total Product (TP), Average Product (AP), Marginal
• Production Decision Product (MP)
• Marginal Analysis • Law of Diminishing Returns / Law of Diminishing
Marginal Returns
Production Possibilities Frontier (PPF) Short Run Cost
• Total Cost (TC), Ave Total Cost (ATC)
• Total Fixed Cost (TFC), Ave Fixed Cost (AFC)
• Total Variable Cost (TVC), Ave Variable Cost (AVC)
L2 to L4, L12 – Demand & Supply • Marginal Cost (MC)
Long Run Cost

L2 – Demand & Supply

L3 – Market Equilibrium & Efficiency L8 – 11 Market Structures
L4 – Elasticity Difficult Topics

L12 - Externality
L8 – Perfect Competition (Standard Product)
L9 – Monopoly (Single Firm)
L10 – Monopolistic Competition (Differentiated Product)
L5 – 6 Consumer Theory L11- Oligopoly (Few Firms)

1. Market Features
L5 – Budget Line, Utility 2. Profit Maximisation
Consumer Equilibrium 3. Short Run Equilibrium
4. Long Run Equilibrium
L6 – Indifference Curve 5. Market Efficiency
Consumer Equilibrium 6. Special Topics
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 Microeconomics Lecture Gap Sheets(way)
Bloom Taxonomy on Learning
Suggestions on How to Learn

What is Bloom’s Taxonomy?

Bloom's Taxonomy, created in 1956 under the leadership of educational psychologist Dr Benjamin Bloom in order to promote higher forms of thinking in
education, such as analyzing and evaluating concepts, processes, procedures, and principles, rather than just remembering facts (rote learning)

What are the uses of Bloom’s Taxonomy framework?

• the ability to create achievable learning goals that teachers and students
understand, and build a definitive plan to meet them.
• to better assess student learning and performance.

How to Apply Bloom’s Taxonomy?

• asking questions and delivering assignments that directly correlate with
specific learning objectives in each stage of the process DMS
• example, posing multiple choice questions can help gauge a basic
understanding and remembering of a subject, while analysing situations
towards entering the application or analysis stage
DMS

Challenges in Studying Economics

• Concepts– Remember and Understand
o Lots of these and hence remembering and understanding these are keys to success in studying Economics.

• Application – Apply and Analyse Situations

o Analytical and thinking skills will be shared and discussed on how to analyse situations using the concepts learned. Studying economics is
also about learning analytical thinking skills.

• Go to class
o Yes, … going to class and actually paying attention can really help you out.

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 Lecture 1 – Introduction to Microeconomics
Microeconomics Lecture Gap Sheets(way)
Part 1 – Fundamental Economics Concepts

1.1 What is economics – Scarcity, Choices and Opportunity Cost ?

Jaguar
Our wants are unlimited
Our resources are limited Cannot ________ all our wants
_________
__________
________
Porshe

Economics is about making ___________ among ______________

Attend Class or Make $1M
Lamborghini
How to make choices
Depend on ______________ / _______________ incentive
OR

Attend Class Make $1m Outside

Why Study MFS Why Singapore ? Why SIM ?
/Diploma ?
Negative Incentives

Opportunity Cost
Example 1 Attend class or do something else and make $1m Attend Class or …..

What is the opportunity cost of attending class ? ________ Watch World Cup
or

Opportunity cost : What you ______________ to _____________ something OR

Go Starbuck
Example 2 Attend class or watch world cup, go to Starbuck or work part-time and make $100 or

What is the opportunity cost of attending class ?

Opportunity cost : ________________________ alternative that you give up Work Part time and earn $100

Example 3 You are working as a saleperson. You earn $1k in commission in 1 week. You decide to go for a 1 week holiday,
which cost you $2k.
What is the opportunity cost of going for the 1 week holiday ? __________________
Opportunity cost : What must you ____________ to get something

Example 4 What is your opportunity cost of attending DMS in SIM ?

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 Microeconomics Lecture Gap Sheets(way)
1.2 Classification of Economics
• Microeconomics
Microeconomics is the study of choices that individuals and businesses make, the way those choices interact in markets, and
the influence of governments.

• Macroeconomics
Macroeconomics is the study of the performance of the national and global economies.

1.3 Two Types of Economic Analysis

(1) Positive Analysis (Positive Statement)

* Deal with _________, _____________
* Can be tested to be true or false
do not have to be correct
The moon is made of cheese. The price of oil has dropped from $100 to $35 a barrel in 2015.
If I study hard, I will get an “A”.

(2) Normative Analysis (Normative Statement)

* Deal with ____________, _______________
* ________________ based
cannot be verify whether statement is valid or invalid
Mobile phones should be banned in all public places. Car prices in Singapore are too high.
If I study hard, I should get a good grade.
They tend to contain words such as ought, should, fair, and inequitable.

Example
“government-provided healthcare increases public expenditures" is a ____________ economic statement, because it can be
tested whether it is true or false.

"government should provide basic healthcare to all citizens" is a ______________ economic statement. There is no way to
prove whether government "should" provide healthcare; this statement is based on opinions about the role of government in
individuals' lives, the importance of healthcare and who should pay for it.

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 Microeconomics Lecture Gap Sheets(way)
1.4 Resources or Factors of Production
To satisfy human wants, resources are required.

Factors of production or Types of Resources

1) Labour (quality depends on human capital – education, training, experience)
earns ___________
2) Land (gifts of nature)
earns ___________
3) Capital (machineries and building)
earns ___________
4) Entrepreneur (labour that organises labour, land and capital)
earns ___________

Part 2 – Rational Choices and Marginal Analysis

Making choices - Example
Yield Marginal Benefit, MB Marginal Cost, MC
(Incremental benefit) (Incremental cost)
No fertilizer $75/acre
1st round fertilizer $100 $_____ $20 ________
Do it

2nd round fertilizer $120 $_____ $20 ________
Decision point

3rd round fertilizer $130 $_____ $20 ________
Don’t do it

Marginal Analysis : ____________________________

• Marginal Analysis
• Make choices at the margin No
Fertiliser 1st Round 2nd Round 3rd Round
• Marginal benefit - Incremental benefit from producing one more unit $130
$120
• Marginal cost - Incremental cost from producing one more unit $100
• Marginal benefit > Marginal cost
incentive to do $75 $20 $20 $20
Marginal benefit < Marginal cost
no incentive

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Yield Yield Cost Yield Cost Yield Cost
Marginal $100 – $75 = $25 $120 - $100 = $20
Benefit
 Microeconomics Lecture Gap Sheets(way)
Part 3 – Economic Systems

3.1 Production Decisions

What to Produce How to Produce For Whom

Need to decide Produce in-house or Create customer

Cos of limited resources outsource Maximise profit
Labour vs capital usage

Example
Iphone 6, iphone 6 plus Contract to Foxconn & Pegatron High end customer

Production Decision Production Decision

(1) What to produce ? (3) For Whom ?

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 Microeconomics Lecture Gap Sheets(way)
3.2 Types of Economy

3 methods to deal with Scarcity in an economy. Command Mixed Free

Economy Economy Economy
Command Economy
Lenin • All economic decisions • Government and • No government
Stalin (allocation & private sectors involves intervention -
Khrushchev
Breszhnev distribution of output) in allocation of resources individual makes free
Mao Zedong made by government choices
Kim Jong-un
China Soviet Union • Land and capital are
North Korea
1949 - 1978 1917 - 1984 • Land and capital are • Land and capital are
government and
government owned private owned privately owned

Disadvantages • Socialist or communist • Government impose • Relies on price to

Advantages
1. Inefficient & bureaucratic states allocate resources and
1. Few people make decisions
2. Likely arbitrary choices taxes and provide
2. Directly address economic
3. Disincentives to workers subsidy to redistribute distribution of output.
goals
income and influence
production and
consumption patterns

Mixed Economy
Free or Market Economy

Advantages Disadvantages Advantages Disadvantages

1. Advantages of both 1. Tend to lean towards 1. Market forces 1. Large firms may dominate (eg
dominant government 2. Efficient use of google, facebook, uber)
command and free economy
resources 2. Limited competition likely
1. Address economic control and less
3. Great inequality likely
objectives towards market forces 4. Conflicting private & social
2. Market forces freedom objectives
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 Microeconomics Lecture Gap Sheets(way)
Part 4 – Production Possibilities Frontier (PPF)

• The economic problem of _________
society’s capacity to produce combination of goods is constrained by its limited
resources.

• If resources and technology are fixed (ie limited resources) to increase the production of one good, we must decrease the
production of something else
we face ____________

• The production possibilities frontier (PPF) is the boundary between those combinations of goods and services that can be
produced and those that cannot.

4.1 Combinations on the frontier

• Production / Productive ___________________
PPF

All available resources are fully utilised A B
15 Production Efficient
C

Can produce more of one good only if we produce ________ of the other Food
D X
10
Unattainable
• Along the PPF, we face choices and ___________ and _____________ cost
Y E
4.2 Combinations inside the frontier 5
• Attainable but Production _____________ Attainable

Not all resources are being utilised F

o Resources misallocated 0 1 2 3 4 5 Clothing
o Unused or unemployed resources

• Can produce more of one good _____________ producing less of the other good
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 Microeconomics Lecture Gap Sheets(way)
PPF
4.3 Combinations outside the frontier A B
15
• Unattainable C Production Efficient
Food

Not __________ resources 10
D X
Unattainable

Y E
5
4.4 Shape of the PPF Curve Attainable

• Bow shaped or concave

F
o Reflects the principle of _________________ 0 1 2 3 4 5 Clothing
opportunity cost.

o Resources are not ______________________ PPF

Food Production Efficient Along PPF

• Downward sloping - All resources are utilised

Movement Along PPF

Downward sloping - Trade off – Opportunity cost
- Due to limited resources
W
Bow Shaped
- Resources are not Unattainable
perfectly adaptable or - Limited production
4.5 Where Resources are Perfectly Substitutable factors
substitutable for Z
production of both goods - Scarcity
o The PPF is a ___________ line.
Attainable Clothing
o The opportunity cost is ____________. - But Not Efficient
Under utilised resources
or misallocated resources

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 Microeconomics Lecture Gap Sheets(way)
4.6 Opportunity Cost is a Ratio PPF
Possibililty
A
Clothing
0
Food
15
A B 1 14
B C 2 12
15
Move Down PPF (Point A to Point F) C D
E
3
4
9
5
Food
Change Change in D F 5 0
10
Food Clothing in Food Clothing Producing more Clothing
Opportunity cost of E
producing clothing 5
A 15 0
B 14 1 1 clothing cost ___ food __________ F
C 12 2 1 clothing cost ___ food opportunity 0 1 2 3 4 5 Clothing
D 9 3 1 clothing cost ___ food cost
E 5 4 1 clothing cost ___ food
F 0 5 1 clothing cost ___ food PPF: Increasing Opportunity Cost
The opportunity cost of
Food producing food ________ as
Move Up PPF (Point F to Point A) more food are produced
Change Change in
Food Clothing in Food Clothing Producing more Food
Opportunity cost of
The opportunity cost of
producing food producing clothing _________
A 15 0 1 food cost ____ clothing as more clothing are produced
B 14 1 1 food cost ____ clothing ___________
C 12 2 1 food cost ____ clothing opportunity
Clothing
D 9 3 1 food cost ____ clothing cost
E 5 4 1 food cost ____ clothing
C to D : Opp cost of 1 clothing = ____ food
F 0 5 D to C : Opp cost of 1 food = ____ clothing

Calculating Opportunity Cost

• It is the ___________ in quantity produced of one good divided by the ___________ in quantity of another good ; or

• Opportunity cost of X = change in quantity of ___ / change in quantity of ___ Food Clothing
A 20 159
• The opportunity cost of the two products are ____________ of each other B 35 88
A
B
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 Microeconomics Lecture Gap Sheets(way)
Past Exam Question

Alphaland, a small country, produces milk and shirts and its production possibilities frontier is shown in the table below.

(i) If the country is currently producing at point B, what is the opportunity cost of producing one additional gallon of milk?
(ii) If the country is currently producing at point C, what is the opportunity cost of producing one additional gallon of milk?
(iii) If the country is currently producing at point D, what is the opportunity cost of producing one additional gallon of milk?
(iv) What do your result in (i), (ii) and (iii) shows ?

(v) If the country production moves from point C to B, what is the opportunity cost of producing one additional shirt?
(vi) If the country production moves from point C to B, what is the opportunity cost of producing 20 additional shirts?

(i) The opportunity cost of producing one additional gallon of milk = shirts

(ii) The opportunity cost of producing one additional gallon of milk = ________________ shirts

(iii) The opportunity cost of producing one additional gallon of milk = ________________ shirts

(iv) The result in (i), (ii) and (iii) shows __________________________________________

(v) The opportunity cost of producing one additional shirt = ______________ gallons of milk

(vi) The opportunity cost of producing 20 additional shirts = ______________ gallons of milk

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 Microeconomics Lecture Gap Sheets(way)

4.7 Allocative Efficiency / Using Resources Efficiently / The Most Preferred Production Combination / The Most Preferred Point
on the PPF

Decision Point
• All points on PPF are production efficient (i.e. all resources are fully utilised)
• But which point on PPF uses resources most efficiently ? How to determine this point ?
o Use the economic decision concept of MB = MC (refer to Part 2)

Marginal Cost
• The marginal cost of producing clothing = opportunity cost of producing clothing
The Marginal Cost (MC) curve is derived from the PPF (in this PPF example)

Move Down PPF (Point A to Point F)

Change Change in
Food Clothing in Food Clothing Producing more Clothing
Opportunity cost of
producing clothing
A 15 0
B 14 1 -1 1 1 clothing cost 1 food Increasing
C 12 2 -2 1 1 clothing cost 2 food opportunity
D 9 3 -3 1 1 clothing cost 3 food cost
E 5 4 -4 1 1 clothing cost 4 food
F 0 5 -5 1 1 clothing cost 5 food

Marginal Cost of Producing Clothing

PPF
As more clothing are produced MC curve
A B
15
Increasing Opportunity Cost
1 2 C of Clothing
Food Marginal
3
D Cost
10
(in terms
4 of food)
E
5

F
12
0 1 2 3 4 5 Clothing 1 2 3 4 5
Clothing
 Microeconomics Lecture Gap Sheets(way)
Marginal Benefit
• Marginal Benefit (MB) curve
o The marginal benefit of a good is the benefit received from consuming one more unit of it.
o Measure marginal benefit by the amount that a person is willing to pay for an additional unit of a good.
o General principle that the more we have of a good, the smaller is the marginal benefit and the less we are willing to
pay for the additional good
PPF
A B
(note : MB curve is NOT derived from PPF) 15
C
Marginal Benefit of Clothing Food
Marginal Benefit of Clothing
D
10
Marginal
Benefit Marginal
(in S$ terms) Benefit E
= (in terms of
food)
5
Willingness
to Pay =
Willingness
to Pay
MB curve MB curve F
0 1 2 3 4 5 Clothing
1 2 3 4 5 1 2 3 4 5
Clothing Clothing

MB and MC Clothing
Marginal
Benefit
(in terms of
food)
Determining Allocative Efficiency

• Occurs only when marginal benefit ___________ marginal cost.

• Producing at the point on the PPF that is preferred above all other points
1 2 3 4 5
Clothing

• When we cannot produce more of any one good without giving up some other good that we value more highly.

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 Microeconomics Lecture Gap Sheets(way)

Part 5 – Shifting of PPF

5.1 Outward Shifting of PPF Outward Shifting of PPF

1) Technological improvement
2) Capital (including human capital) accumulation
Wheat
An economic can produce more if the productive capacity is increased :
1. ________________ improvement
 Better ways of producing goods and services.

2. ________________ accumulation
 Growth of capital resources, which includes human capital. PPF1

Textile

5.2 Inward Shifting of PPF Inward Shifting of PPF

1) Destruction or reduction (eg labour emigration)
of capital (including human capital) accumulation
Wheat
An economic can produce less if the productive capacity is __________ :
1 . Destruction of land and capital
2. Emigration of workers
PPF1

5.3 Bias Shifting of PPF

Textile
• The inward or outward shifting of the PPF needs not always be equal that
affects both products equally. Biased Shift of PPF
• It can be a biased shift that affects one product more than the other. Wheat

Example :
Floods destroy large part of the wheat farms but affected only a relatively
PPF1
small number of textile factories.
The PPF will shift inwards more for wheat as compared to textile.

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Textile
 Microeconomics Lecture Gap Sheets(way)

5.4 PPF and Economic Growth

• The process of PPF shifting out reflects economy growth

USA and China Production in 2020

USA and China Production in 1980

Capital Capital
Goods Goods

USA PPF

USA PPF
China PPF

China PPF

Consumption Goods Consumption Goods

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 Revision Question 1 Microeconomics Lecture Gap Sheets(way)

Consider an economy produces two goods, X and Y. Analyse using the production possibility frontier when
(i) there is an influx of foreign workers into the economy
(ii) an improvement in technology favours production of X only
(iii) a major earthquake occurs in the economy.
Analyse each case separately.

Y Y Y

PPF1 PPF1 PPF1

X X X

Past Exam Question Ethanol Food crops

(barrels per (tons per day)
day)
Brazil produces ethanol from sugar, and the land used to grow sugar can be used to grow food crops. Suppose that
70 and 0
Brazil’s production possibilities for ethanol and food crops are as in the table.
64 and 1
54 and 2
(i) Draw a graph of Brazil’s Production Possibilities Frontier (PPF).
40 and 3
(ii) Explain how your graph in (i) illustrates scarcity.
22 and 4
(iii) Explain how your graph in (i) illustrates trade-off.
0 and 5
(iv) Suppose Brazil is producing on the PPF. If Brazil increases its production of ethanol from 40 barrels per day to 54
barrels per day, what is the opportunity cost of the additional 14 barrels of ethanol?

(ii) PPF indicates scarcity
Production combination outside the PPF are not ____________ because of
__________________________________.

(iii) PPF indicates tradeoff
as production of food crops ___________, the production of ethanol has to ___________.

has to __________ some ethanol in order to increase production of food crops.

(iv) Increase Ethanol from 40 to 54 barrels
must decrease food production from to ______

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 Microeconomics Lecture Gap Sheets(way)
Additional Tutorial Questions

1 An economy produces two goods, car and rice. Illustrate the effects of the following incidents on the production possibility set.
a) There is an influx of workers who are more skilled in producing cars.
b) An earthquake destroys factories and farmlands across the country. (homework)
c) There is an improvement in technology in the production of cars. (homework)
d) Some workers migrates to nearby countries in search of better employment opportunities. (homework)
e) Earthquakes destroys factories and farmlands. At the same time, there is improvement in rice production technology
f) More people prefer to buy car.
_______________________________________

(a) (e) (f)

Car Car
Car

PPF1 PPF1 PPF1

Rice
Rice
Rice

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 Microeconomics Lecture Gap Sheets(way)
Power point Tutorial Questions

Q1 All of the following are examples of normative statements EXCEPT:

(A) Reducing cost should not be done at the expense of inferior quality.
(B) The government must act decisively to reduce pollution.
(C) The company should employ less workers and use more machines in the production.
(D) In this year, the company’s profit increases by 5%.
(E) The market price of car is too high in Singapore.

Q2 Economics is best defined as the study of how people, businesses, governments, and societies _________.
(A) choose abundance over scarcity.
(B) make choices to cope with scarcity.
(C) use their infinite resources.
(D) attain wealth.

Q3 The four main types of resources in a typical economy are _____.

(A) Land, Labour, Capital and Entrepreneurship.
(B) Buildings, Money, Trademarks, Politicians.
(C) Land, Money, Firms and Interest Rates.
(D) None of the above answers are true.

Q4 Which ONE of the following statement is TRUE about the study of Microeconomics?
(A) It includes the analysis of all consumers together in aggregate consumption.
(B) It includes the analysis of all firms together in aggregate production and the analysis of the prices and quantities all products in all markets
(C) It includes the actions of government in implementing policies that will affect the growth and distribution of income in the economy.
(D) It includes the study of the behaviour of an individual consumer in making choices, the behaviour of an individual firm in making price and quantity of
output decision.

Beer Beef
Q5 Australia produces both beer and beef. The land used to build breweries for making beer can also be used to farm cattle. The (millions of barrels (million tonnes per day)
table below shows Australia’s daily production possibilities for beer and beef. per day)
80 and 0
1. Draw Australia’s production possibility frontier (PPF). 75 and 4
70 and 6
2. Calculate the opportunity cost for Australia when it increases the daily production of beer from 60 million barrels to 75 60 and 8
million barrels. 0 and 10

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 Lecture 1 Summary Microeconomics Lecture Gap Sheets(way)

Fundamental Economic Concepts

1) Economics : Cannot satisfy all our wants
Scarcity
Choices
Tradeoff
2) Economic Statement and Economic Analysis
Positive Statement Normative Statement
* Deal with facts, objective * Deal with opinions, subjective
* Can be tested to be true or false
do not have to be correct * Opinion based
cannot be proved or disproved
3) Factors of Production : Labour, land, capital, entreprenuership
4) Opportunity Cost : What must you give up (or sacrifice) to get something
5) Marginal Analysis : MB = MC (Decision point)
6) Production Decisions : (1) What to produce (2) How much to produce (3) Produce for whom ?
7) Types of Economy : (1) Command Economy (2) Mixed Economy (3) Free Economy
The opportunity cost of
producing CDs increases as
more CDs are produced
8) PPF - economic concepts within PPF
Production Efficient on PPF
1 scarcity
attainable and unattainable Downward sloping due
to limited resources
2 choice
decide between two goods (tradeoff) The opportunity cost of
producing pizza increases as
3 opportunity cost
increasing opportunity cost of production Concave shape due to
non-identical resources
more pizza are produced
4 production efficient
points on PPF (resources fully employed) w

5 production inefficient
points inside PPF Z

Movement along PPF
Pts outside PPF

Tradeoff
6 Unemployed resources
points inside PPF
Scarcity

7 Economic growth or decline
productive capabilities changes

Pts inside PPF (Productive Inefficiency)
(changes in technology and factors of production)
shift PPF outward or inward
Under-utilised resources
or misallocated resources
8 Allocative efficiency where MB = MC
Changes in Factors of Production, & Technology Changes PPF
A B
shift PPF inwards or outwards on the respective axis 15
C
9) Opportunity Cost Ratio Computation Wheat
Food
10
D Allocative
Efficiency
Three Methods of Computing Opportunity Cost Ratios PPF1 E
1) PPF (if PPF is given) 5

2) Opportunity cost of X = Qy / Qx F
0 1 2 3 4 5 Clothing

3) Relative price of X = Px / Py PPF2 Food MC

See Lecture 5 & 6 PPF0
MB = MC
Textile

MB 19
Clothing