ECO101-Notes
Introduction and Disclaimer
This note is based on ECO101: Principles of Microeconomics (Fall 2024), University of Toronto, Department of Economics, taught by Professor Loren Brandt.
Textbook: Krugman, P., Wells, R., Au, I., & Parkinson, J. (2021). Microeconomics (4th Canadian ed.). Worth Publishers.
Available at UofTBookStore, you can also borrow this book from UofT Library
This note may contain portions derived from lecture materials copyrighted by Professor Loren Brandt, University of Toronto. For concerns regarding intellectual property rights, please contact me at hi@chrisxn.com.
This note is shared for personal study and non-commercial purposes only. Any user who republishes, redistributes, or modifies this content must also follow the same conditions. Users are fully responsible for any potential legal risks associated with their actions.
Part I. Thinking Like an Economist
Opportunity Cost
Definition: What one forgoes (gives up) by not taking the best alternative action
- Opportunity Cost = explicit cost + implicit cost
- Explicit cost: Price needed for doing this
- Implicit cost: Net value of the best alternative option (Revenue-Cost)
- Opportunity cost of A = Cost of A + (Benefit of B – Cost of B)
- Example: Go swimming instand of hanging out with a friend. -> Oppotunity cost = cost of swimming + benefit of hanging out - cost
Make decisions
Precondition to do sth: If and only if the benefit >= Oppotunity cost (Implicit + Explicit)
If there’re several options, choose the one with smallest Oppotunity cost
Marginal Analysis
Marginal Cost and Benefit
Undertake activity if marginal (additional) benefit exceeds marginal (additional) cost
- Marginal Cost = Total cost (n) - Total cost (n-1)
- Marginal benefit = Total benefit (n) - Total benefit (n-1)
Sunk Cost
Defination: Cost that already happened and cannot be avoided regardless of any action taken
Part II. Gains from Trade
Production Possibilities Frontier (PPF)
The Production Possibilities Frontier (PPF) is a fundamental concept in microeconomics that illustrates the trade-offs an economy faces when allocating limited resources between the production of two goods.
Assumptions
- Scarcity of resources: Resources (land, labor, capital) are limited.
- Constant technology: No improvement or decline in technology.
- Two goods: The economy produces only two types of goods (a simplified model).
- Full efficiency: All resources are fully and efficiently utilized.
- Resource mobility: Resources can shift freely between the two goods.
Characteristics of the PPF
Shape:
- The PPF is typically bowed outwards (concave) due to the law of increasing opportunity costs.
- As production of one good increases, the opportunity cost of producing additional units rises because resources are not equally efficient in producing both goods.
Points on the PPF:
- On the curve: Represents productive efficiency, where all resources are fully utilized.
- Inside the curve: Represents inefficiency (e.g., unemployment or misallocated resources).
- Outside the curve: Represents an unattainable level of production given current resources and technology.
Opportunity Cost:
- Opportunity cost is reflected in the slope of the PPF. Moving from one point to another along the curve shows how much of one good must be sacrificed to produce more of the other good.
Trade
Definition: The exchange of goods and services between parties
Core Idea
- Trade occurs when goods with lower opportunity costs are exchanged for goods with higher opportunity costs.
- The key concept lies in comparing opportunity costs (OC) between trading parties.
Absolute Advantage (Higher efficiency)
- Using fewer resources (Time) than other countries or individuals or produces more of a good with the same resources (Time)
KEY: Whoever can produce goods with the least amount of resources or the fastest speed has an absolute advantage
Comparative advantage (Lower opportunitiy cost)
- Comparative advantage is relative, and even if a country does not have an absolute advantage in all commodities, it can trade in a mutually beneficial way through comparative advantage
KEY: Countries or individuals should focus on producing goods with the lowest opportunity cost and then trade them to achieve the optimal allocation of resources.
Trade Ratio
The trade ratio must satisfy the condition that it lies between the minimum compensation for the exporter and the maximum willingness to pay for the importer, ensuring a mutually beneficial trade.