Economics power concepts

Economics

The study of how scarce resources are allocated to satisfy unlimited wants. Example: Choosing between studying or playing video games.

Opportunity cost

The value of the next best alternative given up when making a choice. Example: Choosing chocolate instead of an apple → lost health benefits of the apple.

Planned economy

Government decides resource allocation, provides public services but may reduce efficiency. Example: Free healthcare ensures treatment for all but innovation may lag.

Classical economics

Markets naturally reach equilibrium; minimal government interference. Example: Adam Smith’s invisible hand.

Keynesian economics

Governments should intervene during recessions to stimulate demand. Example: Public works projects increase spending and jobs.

Modern economic thinking

Blends free markets with selective government intervention to correct failures.

Demand

Quantity consumers are willing and able to buy at different prices. Example: Ice cream sales rise when prices drop.

Law of demand

As price increases, quantity demanded usually falls, ceteris paribus. Example: Luxury handbags sell less as price rises.

Shifts in demand

Occur due to factors other than price (income, tastes, substitutes). Example: Health craze increases fruit demand.

Price elasticity of demand (PED)

Measures how sensitive quantity demanded is to price changes. High PED = responsive; low PED = unresponsive.

Income elasticity of demand (YED)

Measures demand changes with income. Normal goods positive, luxury >1, inferior <0.

Cross elasticity of demand (XED)

Measures demand changes with related goods’ prices. Example: Tea demand rises if coffee price increases.

Supply

Quantity producers are willing and able to sell at different prices. Example: Baker produces more bread when price rises.

Law of supply

As price increases, quantity supplied usually increases, ceteris paribus.

Shifts in supply

Occur due to non-price factors like technology, input costs, taxes. Example: Better machinery increases bread supply.

Price elasticity of supply (PES)

Measures how sensitive quantity supplied is to price changes. High PES = fast response; low PES = slow response.

Factors affecting PES

Production time, spare capacity, availability of inputs. Example: Fast-food burgers = high PES; skyscrapers = low PES.

Market equilibrium

Quantity demanded = quantity supplied; price adjusts via price mechanism.

Allocative efficiency

Resources used where most valued. Example: Enough pizzas for hungry customers at fair price.

Productive efficiency

Goods produced at lowest possible cost.

Market failure

Equilibrium doesn’t maximize social welfare.

Price ceilings

Maximum price to protect consumers. Example: Rent control keeps housing affordable.

Price floors

Minimum price to protect producers. Example: Minimum wage prevents worker exploitation.

Taxes

Reduce negative externalities; can decrease supply. Example: Cigarette tax discourages smoking.

Subsidies

Encourage production of beneficial goods. Example: Solar panel subsidies boost renewable energy.

Regulation and quotas

Limit harmful production or consumption. Example: Fishing quotas prevent overfishing.

Non-price determinants of demand 

Income, tastes, prices of substitutes and complements, population, expectations of future price

Non-price determinants of supply 

Factors that influence supply, including production costs, technology, number of sellers, and expectations of future prices.

Determinants of elasticity of demand

Factors influencing how quantity demanded changes with price, including availability of substitutes, necessity vs luxury, and proportion of income spent.

Determinants of elasticity of aupply

Production time, spare capacity, availability of inputs