ECN REView

Chapter 1 & 2: Introduction to Economics

1. What is Economics?

• The study of how people allocate scarce resources to satisfy unlimited wants.

2. Scarcity

• The limited nature of resources, forcing choices and trade-offs.

3. Microeconomics vs. Macroeconomics

• Micro: Study of individuals and firms.

• Macro: Study of economy-wide phenomena (inflation, GDP, etc.).

4. Rational Behavior

• People make decisions to maximize their benefit given their constraints.

5. Thinking on the Margin

• Comparing marginal benefits (MB) and marginal costs (MC) to make decisions.

6. Trade-offs

• Giving up one thing to get something else.

7. Opportunity Cost

• The next best alternative forgone when making a choice.

8. Trade Makes Everyone Better Off

• Specialization and exchange increase overall wealth.

9. Incentives

• Factors that motivate individuals to act in a certain way.

10. Self-interest vs. Social Interest

• Self-interest: Decisions made for personal gain.

• Social interest: Decisions benefiting society as a whole.

11. Production Possibilities Curve (PPC)

• Shows different combinations of two goods that an economy can produce.

12. Law of Increasing Opportunity Cost

• As production shifts from one good to another, opportunity cost increases.

13. Economic Growth & PPC

• Economic growth shifts PPC outward due to more resources or better technology.

14. Unemployment & PPC

• Unemployment leads to points inside the PPC, meaning resources aren’t fully utilized.

Chapter 4: Demand & Supply

15. Law of Demand

• As price ↓, quantity demanded (Qd) ↑ (inverse relationship).

16. Individual vs. Market Demand

• Individual demand: One consumer’s demand.

• Market demand: Sum of all individual demands.

17. Determinants of Demand (TRIBE)

• Tastes & preferences

• Related goods (substitutes & complements)

• Income (normal & inferior goods)

• Buyers (population size)

• Expectations (future price changes)

18. Law of Supply

• As price ↑, quantity supplied (Qs) ↑ (direct relationship).

19. Determinants of Supply (ROTTEN)

• Resource prices

• Other goods’ prices

• Technology

• Taxes & subsidies

• Expectations of future price changes

• Number of sellers

20. Market Equilibrium

• Where Qd = Qs (no surplus or shortage).

21. Surplus vs. Shortage

• Surplus: Qs > Qd (prices decrease).

• Shortage: Qd > Qs (prices increase).

22. Consumer Surplus

• Difference between what a consumer is willing to pay and what they actually pay.

23. Producer Surplus

• Difference between price received and cost of production.

24. Total Surplus

• Consumer Surplus + Producer Surplus = Total economic benefit.

Chapter 5: Elasticity

25. Price Elasticity of Demand (Ed)

• Formula: %ΔQd ÷ %ΔP

• Interpretation:

  • |Ed| > 1 → Elastic

  • |Ed| < 1 → Inelastic

  • |Ed| = 1 → Unit elastic

26. Determinants of Price Elasticity of Demand

• Availability of substitutes, necessity vs. luxury, time horizon, definition of market.

27. Price Elasticity & Total Revenue

• Elastic demand: P ↑ → TR ↓

• Inelastic demand: P ↑ → TR ↑

28. Income Elasticity of Demand

• Formula: %ΔQd ÷ %ΔIncome

• Normal goods: Ei > 0

• Inferior goods: Ei < 0

29. Cross-Price Elasticity of Demand

• Formula: %ΔQd of Good A ÷ %ΔP of Good B

• Substitutes: Positive value

• Complements: Negative value

30. Price Elasticity of Supply (Es)

• Formula: %ΔQs ÷ %ΔP

• Measures responsiveness of quantity supplied to price changes.

Chapter 22: Consumer Choice

31. Budget Constraint

• The combination of goods a consumer can afford with their income.

32. Indifference Curve

• Shows combinations of two goods that give a consumer the same satisfaction.

33. Optimization

• Rule: Slope of indifference curve = Slope of budget constraint.

34. Substitution & Income Effects

• Substitution effect: When Px ↑, consumers switch to cheaper goods.

• Income effect: When Px ↑, purchasing power ↓, affecting demand.

35. Giffen Goods

• Exception to the Law of Demand (as price ↑, demand also ↑).