Economics - Revision Notes - Jocelyn Blink and Ian Dorton - Second Edition - Oxford 2012

Revision Notes on Economics

Revision – Introductory Concepts

• The Basic Economic Problem:

  • Choices regarding the rationing of scarce resources:

    1. What should be produced (and in what quantities)?

    2. How should things be produced?

    3. Who should things be produced for?

• Factors of Production:

  • Land: Natural resources (e.g., land, lumber, oil) contributing to production; payment = rent.

  • Labour: Human resources used to produce goods/services; payment = wages.

  • Capital: Equipment and factories for production; payment = interest.

  • Entrepreneurship: Risk-taking and managing other factors; payment = profit.

Production Possibilities Curve (PPC)

• PPC Definition: Shows maximum combinations of goods/services produced with resources fully used.

• Points inside the curve indicate inefficient use of resources; points on the curve represent actual output.

• Shifting the PPC:

  • Outward shift indicates improved quantity/quality of resources.

  • Inward shift indicates loss of resources (due to war or disasters).

Key Economic Concepts

• Scarcity: Resources are limited while human wants are unlimited, necessitating allocation decisions.

• Opportunity Cost: The value of the next best alternative sacrificed when making a choice.

• Free Goods: Unlimited in supply, no opportunity cost, no price.

• Utility: Satisfaction or value derived from consuming goods/services.

Economic Growth and Development

• Economic Growth: Increase in national output quantified by GDP.

• Economic Development: Broader concept focusing on improvements in citizens' living standards and freedoms (measured by HDI).

• Sustainable Development: Meets present needs without compromising future generations.

Economic Systems

• Planned Economies: Decisions made centrally by the government (state control).

• Free Market Economies: Market-driven decisions, minimal government intervention; self-regulating.

  • Mixed Economies: Combine elements of both.

Demand and Supply

• Demand: Willingness and ability to purchase at a given price; governed by determinants such as income, tastes, and price of substitutes/complements.

• Supply: Willingness and ability to produce at a given price; shifted by factors like production costs and technology.

Market Equilibrium

• Equilibrium Price/Quantity: Where quantity supplied equals quantity demanded.

• Shifts in Demand/Supply: Changes in determinants can cause shifts, affecting equilibrium prices and quantities.

Elasticity

• Price Elasticity of Demand (PED): Responsiveness of quantity demanded to price changes.

  • Ranges from inelastic (0-1), unit elastic (1), to elastic (>1).

• Cross Elasticity of Demand (XED): Impact on demand for one good based on the price change of another good.

• Income Elasticity of Demand (YED): Change in demand based on consumer income changes.

Government Intervention

• Price Controls: Maximum (ceiling) prices can lead to shortages; minimum (floor) prices can cause surpluses.

• Taxes and Subsidies: Used to influence prices and supply in markets; can correct market failures.

Market Failure

• Public Goods: Non-excludable and non-rivalrous; require government intervention.

• Demerit Goods: Overconsumed; governments may impose taxes to curb consumption.

• Negative Externalities: Costs to third parties not reflected in prices; government may regulate or tax to correct.

• Positive Externalities: Benefits to society not captured in prices; governments may subsidize such activities.

Macro Economic Policies

• Demand-side Policies: Influence overall demand; fiscal and monetary policies used to adjust AD.

  • Expansionary: Increases AD via tax cuts and spending.

  • Contractionary: Reduces AD through tax increases and reduced spending.

• Supply-side Policies: Aim to increase LRAS through education, deregulation, and tax reduction.

National Income and Economic Growth

• National Income Measurement: GDP calculated via output, income, or expenditure methods.

• Multiplier Effect: Highlights how initial spending leads to greater total economic impact.

Trade and Economic Integration

• Free Trade: Unrestricted import/export between countries.

• Protectionism: Trade barriers to protect local industries; various forms such as tariffs and quotas.

• Terms of Trade (TOT): Price of exports relative to imports impacts economic wealth.

Exchange Rates and Balance of Payments

• Exchange Rate: Value of domestic currency against others; determines import/export competitiveness.

• Current Account: Balance of trade in goods/services, net income, and transfers; running deficits or surpluses influences the economy.