Introduction to Economics: Core Principles and Theories

Definition: Economics is the study of how society manages its scarce resources to satisfy unlimited human wants. It involves key activities: Production, Consumption, Distribution, and Exchange.
Scarcity: The central economic problem. It arises because resources (land, labor, capital, entrepreneurship) are limited, while wants are unlimited.
Opportunity Cost: The value of the next best alternative foregone when a choice is made.
Production Possibility Curve (PPC): A locus of points showing combinations of two goods an economy can produce when resources are fully utilized. Shifts outward with technological improvements or resource growth.

Law of Demand: Ceteris paribus, price and quantity demanded are inversely related. The demand curve slopes downwards from left to right.
Law of Supply: Ceteris paribus, price and quantity supplied are directly related. The supply curve slopes upwards.
Equilibrium Price: The price where quantity demanded equals quantity supplied ( $Q_D = Q_S$ ).
Elasticity:
- Price Elasticity of Demand ( $P_e$ ): Measures responsiveness of quantity demanded to a change in price. $P_e = \frac{\text{\% change in } Q_D}{\text{\% change in } P}$ .
- Income Elasticity ( $Y_e$ ): Responsiveness of demand to changes in income.
- Cross Elasticity: Responsiveness of demand for one good to a price change of another.

Perfect Competition: Many buyers/sellers, homogeneous products, free entry/exit. Firms are "price takers." Equilibrium occurs where $MC = MR = P$ .
Monopoly: Single seller, unique product, high barriers to entry. Firm is a "price maker." Profit maximization occurs where $MC = MR$ , usually earning supernormal profit.
Monopolistic Competition: Many firms, differentiated products, low barriers. Firms compete on quality/brand.
Oligopoly: A few large firms dominate the market. Characterized by mutual interdependence and the Kinked Demand Curve (price rigidity).

Factors of Production: Land (Rent), Labor (Wages), Capital (Interest), and Entrepreneurship (Profit).
Production Function: Technical relationship between inputs and outputs ( $Q = f(L, K)$ ).
Law of Diminishing Returns: In the short run, adding variable units to a fixed factor eventually results in decreasing marginal output.
Total Cost ( $TC$ ): Sum of Total Fixed Costs ( $TFC$ ) and Total Variable Costs ( $TVC$ ). $ATC = \frac{TC}{Q}$ .
Economies of Scale: Advantages gained through large-scale production, leading to lower average costs in the long run.

Socialist (Command) Economy: State ownership of resources; government solves the problem of scarcity through central planning.
Capitalist (Market) Economy: Private ownership; market forces (price mechanism) determine allocation.
Mixed Economy: Combines elements of both private enterprise and government intervention.

Money: A medium of exchange, measure of value, and store of value.
Quantity Theory of Money (Fisher's Equation): $MV = PT$ . A change in the quantity of money leads to a proportionate change in the price level.
Inflation: A persistent increase in the general price level. Types include Demand-Pull (excessive demand) and Cost-Push (rising production costs).
Devaluation: Deliberate reduction in the value of domestic currency to boost exports and reduce imports.

Malthusian Theory: Population grows geometrically while food supply grows arithmetically, leading to a "population trap."
Optimum Population: The population size that yields the highest output per head.
Unemployment: Being willing and able to work but unable to find a job. Forms include Structural (industry decline), Frictional (job transition), and Seasonal.

Phases: Fluctuations in economic activity consisting of Boom (Peak), Recession (Downturn), Depression (Slump), and Recovery (Expansion).