ECONOMICS FTE 2026

1. Chapter 1: The Basic Economic Problem

• Definition of Economics: The study of how society allocates scarce resources to satisfy unlimited wants.

• The Fundamental Problem: Scarcity

  • Resources are limited, whereas human wants and needs are unlimited.

  • Choice must be made, leading to an opportunity cost.

• Opportunity Cost: The value of the next best alternative forgone when a choice is made.

• Factors of Production (FOP):

  • Land: Natural resources available for production (e.g., minerals, water, land area). Reward: Rent.

  • Labour: Human physical and mental effort used in production. Reward: Wages.

  • Capital: Man-made goods used to produce other goods and services (e.g., machinery, factories). Reward: Interest.

  • Enterprise: The ability to combine FOPs and take risks. Reward: Profit.

• Production Possibility Curve (PPC):

  • Illustrates the maximum potential output combinations of two goods/services an economy can produce given fixed resources and technology.

  • Points on the curve = Productively efficient.

  • Points inside the curve = Inefficient / Unemployed resources.

  • Points outside the curve = Unattainable with current resources.

2. Chapter 2: The Allocation of Resources (Economic Systems)

• Three Key Economic Questions:

  • What to produce?

  • How to produce?

  • For whom to produce?

• Types of Economic Systems:

  • Market Economy (Capitalism):

  • Resource allocation determined by price mechanism (supply and demand).

  • Private ownership of property.

  • Profit motive drives decisions.

  • Planned / Command Economy (Socialism/Communism):

  • Government or central body decides resource allocation.

  • Public ownership of resources.

  • Aimed at social welfare.

  • Mixed Economy:

  • Combines elements of market and planned systems.

  • Both private market forces and government interventions exist.

3. Chapter 3: Demand and Supply

• Demand:

  • The quantity of a good/service consumers are willing and able to purchase at various price levels over a given period.

  • Law of Demand: As price increases, quantity demanded decreases ($P \uparrow \implies Q_d \downarrow$), ceteris paribus.

  • Non-Price Determinants of Demand: Income, prices of related goods (substitutes and complements), tastes/preferences, population size, expectations.

• Supply:

  • The quantity of a good/service producers are willing and able to offer for sale at various price levels over a given period.

  • Law of Supply: As price increases, quantity supplied increases ($P \uparrow \implies Q_s \uparrow$), ceteris paribus.

  • Non-Price Determinants of Supply: Cost of production, technology, government policies (taxes/subsidies), weather conditions, number of suppliers.

• Market Equilibrium:

  • Occurs where Quantity Demanded equals Quantity Supplied ($Q_d = Q_s$).

  • Shortage (Excess Demand): Occurs when market price is below equilibrium price ($P < P_e$).

  • Surplus (Excess Supply): Occurs when market price is above equilibrium price ($P > P_e$).

4. Chapter 4: Elasticity

• Price Elasticity of Demand (PED):

  • Measures the responsiveness of quantity demanded to a change in price.

  • Formula: $\text{PED} = \frac{\% \Delta Q_d}{\% \Delta P}$

  • Elastic Demand ($|\text{PED}| > 1$): Quantity demanded changes by a greater percentage than price.

  • Inelastic Demand ($|\text{PED}| < 1$): Quantity demanded changes by a smaller percentage than price.

  • Determinants of PED: Availability of substitutes, necessity vs. luxury, proportion of income spent, time period.

• Price Elasticity of Supply (PES):

  • Measures the responsiveness of quantity supplied to a change in price.

  • Formula: $\text{PES} = \frac{\% \Delta Q_s}{\% \Delta P}$

  • Determinants of PES: Availability of spare capacity, mobility of factors, time period, storage feasibility.

5. Chapter 5: Government Intervention in Markets

• Reasons for Intervention: Correct market failure, ensure fairness/equity, provide public and merit goods.

• Types of Intervention:

  • Maximum Price (Price Ceiling):

  • Legally imposed price set below equilibrium price to keep essential items affordable.

  • Results in a market shortage.

  • Minimum Price (Price Floor):

  • Legally imposed price set above equilibrium price to protect producers/workers (e.g., minimum wage).

  • Results in a market surplus.

  • Indirect Taxes:

  • Taxes imposed on spending (e.g., GST, VAT, excise duties).

  • Shifts the supply curve upwards/leftwards, raising equilibrium price and lowering quantity traded.

  • Subsidies:

  • Financial grants given by government to producers to encourage production/consumption.

  • Shifts the supply curve downwards/rightwards, lowering equilibrium price and increasing quantity traded.

6. Chapter 6: Money and Banking

• Money: Any item generally accepted as a medium of exchange for goods and services.

• Functions of Money: Medium of exchange, unit of account, store of value, standard for deferred payment.

• Characteristics of Money: Durable, portable, divisible, scarce, acceptable.

• Commercial Banks: Financial institutions that accept deposits, make loans, and offer financial services to individuals and businesses.

• Central Bank: Government institution responsible for managing national currency, money supply, interest rates, and financial stability.

7. Chapter 7: Households and Consumers

er 8: Workers and Labour Markets

• Wage Determination: Influenced by demand for and supply of labour, qualifications, skills, working conditions, and risk.

• Specialisation and Division of Labour:

  • Concentrating on specific production tasks.

  • Advantages: Increased efficiency, higher output, skill development.

  • Disadvantages: Monotony, loss of flexibility, risk of over-dependence.

• Trade Unions: Worker organizations negotiating wages, working conditions, and rights through collective bargaining.

9. Chapter 9: Firms and Production

• Costs of Production:

  • Fixed Costs (FC): Costs independent of output volume (e.g., rent).

  • Variable Costs (VC): Costs that vary directly with output volume (e.g., raw materials).

  • Total Cost (TC): $\text{TC} = \text{FC} + \text{VC}$

  • Average Total Cost (ATC): $\text{ATC} = \frac{\text{TC}}{Q}$

• Revenue and Profit:

  • Total Revenue (TR): $\text{TR} = P \times Q$

  • Profit: $\text{Profit} = \text{TR} - \text{TC}$

• Economies and Diseconomies of Scale:

  • Economies of Scale: Falling average costs as output expands in long run.

  • Diseconomies of Scale: Rising average costs as output expands beyond optimal scale.

10. Chapter 10: Market Structure

• Competitive Markets: Many small firms, homogeneous products, no barriers to entry/exit, price takers.

• Monopoly: Single dominant firm, high barriers to entry, price maker, unique products.

  • Advantages: Economies of scale, funds for research and development.

  • Disadvantages: Higher prices, reduced choice, potential inefficiency.

11. Chapter 11: Government Macroeconomic Objectives

• Key Objectives:

  • Economic Growth: Expansion of real Gross Domestic Product (GDP).

  • Low Unemployment: High employment levels across labour force.

  • Price Stability: Low and stable inflation rate.

  • Balance of Payments Stability: Sustainable exports and imports ratio.

  • Redistribution of Income: Reducing excessive wealth inequality.

12. Chapter 12: Macroeconomic Policies

• Fiscal Policy: Use of taxation ($T$) and government expenditure ($G$) to manage aggregate demand.

• Monetary Policy: Central bank manipulation of interest rates and money supply to influence economic activity.

• Supply-Side Policies: Measures designed to increase productive capacity and potential output of an economy.