Allocative vs. Productive Efficiency
Productive: Producing at lowest cost (on PPF).
Allocative: Best mix of goods for society’s needs.
Can be productive but not allocative efficient.
Positive vs. Normative Statements
Positive: Fact-based, testable (e.g., "Higher wages increase costs").
Normative: Opinion-based, value judgment (e.g., "Minimum wage should be higher").
Positive statements can be proven; normative cannot.
Terms of Trade & Gains from Trade
Trade benefits both parties if opportunity costs differ.
Allows specialization & efficiency.
Mutually agreed trade terms improve outcomes.
Comparative Advantage & Trade
Lower opportunity cost = comparative advantage.
Specialization based on comparative advantage increases total output.
Trade allows both parties to consume beyond their PPF.
Absolute Advantage in Trade
Producing more with the same resources.
Not required for trade, but beneficial.
Comparative advantage is more important for trade.
Importer vs. Exporter in Open Trade
If domestic price < world price, country exports.
If domestic price > world price, country imports.
Trade increases overall efficiency.
Constructing a Demand Curve
Derived from a demand schedule (price & quantity).
Downward sloping (inverse relationship).
Graphs price on Y-axis, quantity on X-axis.
Law of Demand: Price & Quantity Relationship
As price ↑, quantity demanded ↓ (and vice versa).
Due to substitution & income effects.
Explains downward-sloping demand curve.
Movement Along vs. Shift in Demand Curve
Movement: Change in price of the good itself.
Shift: Change in income, preferences, population, expectations, or substitutes/complements.
Example: Increase in income shifts demand for normal goods right.
Demand Determinants & Impact on Demand Curve
Income: Normal goods ↑, inferior goods ↓.
Substitutes & Complements: Price change affects demand.
Consumer preferences & expectations: Future expectations shift demand.
Market Demand from Individual Demand
Sum of all individual demands at each price.
More consumers = higher market demand.
Market demand curve follows same principles as individual demand.
Movement Along vs. Shift in Supply Curve
Shift: Change in input costs, tech, taxes, or expectations.
Example: A tax on production shifts supply left.
Price of a Good & Impact on Complements & Substitutes
Substitutes: Price ↑ for one = Demand ↑ for the other (e.g., Coke vs. Pepsi).
Complements: Price ↑ for one = Demand ↓ for the other (e.g., Cars & Gas).
Helps determine consumer purchasing behavior.
Constructing a Supply Curve
Derived from a supply schedule (price & quantity).
Upward sloping (direct relationship).
Law of Supply: Price & Quantity Relationship
As price ↑, quantity supplied ↑ (and vice versa).
Producers are willing to supply more at higher prices.
Explains upward-sloping supply curve.
Supply Determinants & Impact on Supply Curve
Input Prices: Higher costs shift supply left.
Technology: Improved efficiency shifts supply right.
Taxes & Subsidies: Taxes reduce supply, subsidies increase it.
Market Supply from Individual Firm Supply
Sum of all firms' supply at each price.
More firms = higher market supply.
Follows the same principles as individual supply.
Equilibrium Price & Quantity (Supply & Demand Model)
Intersection of supply and demand curves.
Determines market price and quantity traded.
No surplus or shortage at equilibrium.
Simultaneous Changes in Demand & Supply & Market Equilibrium
Both Increase: Quantity ↑, price effect depends on magnitude.
Both Decrease: Quantity ↓, price effect varies.
Opposite Shifts: One dominates, affecting price or quantity more.
Changes in Demand & Market Equilibrium
Increase in demand → Price & Quantity ↑.
Decrease in demand → Price & Quantity ↓.
Shifts right for positive factors (income, preference), left for negative.
Changes in Supply & Market Equilibrium
Increase in supply → Price ↓, Quantity ↑.
Decrease in supply → Price ↑, Quantity ↓.
Shifts due to input costs, technology, policy, etc.
Price Changes Eliminating Surplus or Shortage
Surplus (Supply > Demand): Price falls until equilibrium is restored.
Shortage (Demand > Supply): Price rises until equilibrium is restored.
Market forces naturally push toward equilibrium.
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