economics

Economics as a social science

The study of how people make choices, where researchers cannot run controlled experiments in a lab like in natural sciences.

Ceteris paribus

An assumption that all other outside factors stay the same when studying the relationship between two economic variables.

Positive economic statement

A fact-based claim about the economy that can be tested and proven true or false using evidence.

Normative economic statement

An opinion or value judgment about what ought to happen in the economy, which cannot be proven true or false.

Scarcity

The basic economic problem that human wants are unlimited, but the resources to fulfill them are limited.

Renewable resources

Natural resources that can replace themselves naturally over time, such as solar energy or wind power.

Non-renewable resources

Finite natural resources that run out permanently once used, such as oil, coal, and natural gas.

Opportunity cost

The value of the next best option that you give up when you make a choice.

Free goods

Items that exist in unlimited supply, cost nothing to produce, and have zero opportunity cost, like air.

Economic goods

Items that are limited in supply, take resources to create, and have an opportunity cost.

Production Possibility Frontier (PPF)

A curve showing the maximum amount of two goods an economy can produce when using all its resources efficiently.

Productive efficiency on a PPF

A state shown by any point directly on the PPF curve, meaning all resources are fully and effectively used.

Inefficient resource use on a PPF

A state shown by any point inside the PPF curve, meaning resources are being wasted or underused.

Unattainable production point on a PPF

A level of output shown by any point outside the PPF curve that cannot be reached with current resources.

Causes of an outward shift of the PPF

An increase in the total amount or quality of resources, such as newer technology or a larger workforce.

Consumer goods

Final products bought by households to directly satisfy immediate needs or wants, like food or clothes.

Capital goods

Tools, machinery, and factory buildings used to manufacture other goods and services in the future.

Division of labour

Breaking down a production process into small, simple tasks handled by different workers.

Adam Smith's view on division of labour

He showed that dividing work into specialized tasks makes production much faster and yields far more output, as seen in his pin factory example.

Advantages of specialisation for workers

Workers master specific skills, spend less time switching between jobs, and become more productive.

Disadvantages of specialisation for workers

Doing the same task repeatedly causes boredom, lowers motivation, and makes skills useless if demand changes.

Four main functions of money

Serving as a medium of exchange, a measure of value, a store of value, and a standard for paying back debts later.

Main roles of financial markets

To encourage saving, lend money to buyers and businesses, enable trading, offer share markets, and lower risk in future trading.

Free market economy

An economic system where price signals and private businesses decide what to make, without state control.

Command economy

An economic system where the government owns all resources and decides what to produce and who gets it.

Mixed economy

An economic system where both private businesses and the government share the role of providing goods and services.

Assumption of rational decision making

The idea that buyers always choose options that give them the most satisfaction, while businesses aim to make the highest profit.

Herding behaviour

When consumers copy what a large group of people is doing instead of thinking carefully for themselves.

Consumer inertia

When consumers stick with their old choices or current suppliers simply because switching feels like too much effort.

Framing in economic choices

How options are presented to consumers, which changes their final decisions even if the facts stay the same.

Demand

The amount of a good or service that consumers are willing and able to buy at a given price.

Movement along a demand curve

A change in quantity bought caused only by a change in the price of the item itself.

Shift of a demand curve

A change in quantity bought at every price, caused by non-price factors like income or consumer trends.

Law of diminishing marginal utility

The rule that each extra unit of a good consumed gives less extra satisfaction than the unit before it.

Price elasticity of demand (PED) formula

$$\text{PED} = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}$$

Price elastic demand

A situation where the percentage change in quantity bought is larger than the percentage change in price, so $\text{PED} > 1$.

Price inelastic demand

A situation where the percentage change in quantity bought is smaller than the percentage change in price, so $0 \le \text{PED} < 1$.

Perfectly inelastic demand

A situation where the quantity bought does not change at all when price changes, so $\text{PED} = 0$.

Factors affecting price elasticity of demand

The number of substitutes available, whether the item is a necessity, the share of income spent, and time.

Total revenue formula

$$\text{Total Revenue} = \text{Price} \times \text{Quantity sold}$$

Effect of raising price on total revenue when demand is elastic

Total revenue falls because the drop in quantity bought is bigger than the increase in price.

Effect of raising price on total revenue when demand is inelastic

Total revenue rises because the drop in quantity bought is smaller than the increase in price.

Income elasticity of demand (YED) formula

$$\text{YED} = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in income}}$$

Normal goods vs inferior goods

Normal goods see higher demand as income grows ($\text{YED} > 0$), while inferior goods see lower demand as income grows ($\text{YED} < 0$).

Luxury goods vs necessity goods in YED

Luxury goods are income elastic ($\text{YED} > 1$), whereas necessity goods are income inelastic ($0 < \text{YED} < 1$).

Cross elasticity of demand (XED) formula

$$\text{XED} = \frac{\% \text{ change in quantity demanded of Good A}}{\% \text{ change in price of Good B}}$$

XED values for substitute goods and complementary goods

Substitutes have a positive value ($\text{XED} > 0$), while complements have a negative value ($\text{XED} < 0$).

Supply

The amount of a good or service that producers are willing and able to offer for sale at a given price.

Price elasticity of supply (PES) formula

$$\text{PES} = \frac{\% \text{ change in quantity supplied}}{\% \text{ change in price}}$$

Short run vs long run in supply

In the short run, at least one factor of production cannot be changed; in the long run, all factors can be adjusted.