principles of economics summarised notes/ checklist
Historical Context of Economics at Cambridge
Initially, only mathematics was studied at Cambridge (Tripos results published in newspapers).
Introduction of Classics degree; later, the Chancellor Prince Albert promoted physical and moral sciences, encompassing political economy.
Key Figures:
Henry Fawcett: Professor of political economy influenced by J.S. Mill.
Alfred Marshall: Second in class, later a professor at Cambridge; reshaped economics into a technical field to address societal issues.
Marshall's View:
Economics as a toolbox applicable to various problems.
Lecture 1: Introduction to Economics
Transition from political economy (wealth accumulation focus) to modern economics at Cambridge.
Lionel Robbins defined economics as a study of human behavior concerning ends and scarce resources.
Fundamental Questions:
What to produce? How to produce? Who gets the goods?
BEP: Decisions made due to limited resources.
FOP: Factors of production - land, labor, capital, and enterprise.
Core Concepts:
Scarcity leads to trade-offs and opportunity costs (the next best alternative).
Marginal thinking: evaluating costs and benefits regarding marginal changes (marginal benefit vs. marginal cost).
Rational behavior: individuals and firms act to maximize satisfaction and profit, respectively.
Specialization and trade improve societal welfare.
Economic Systems
Capitalist system: Private ownership, price mechanism, profit-driven.
Markets operate without government intervention, except in planned economies, which may experience market failures.
Microeconomics focuses on individuals and firms; macroeconomics studies the economy as a whole.
Ragnar Frisch: Coined micro and macroeconomics terms and contributed to Keynesian economics.
Positive vs. Normative Statements:
Positive: Based on facts.
Normative: Based on opinions.
Economists debate falsifiability and causality in economic theories.
Lecture 2: Demand and Supply
Key Differences:
Quantity Demanded (QD) vs. Demand: QD is a point; demand is a function.
Importance of Models:
Models explain behavior rather than predict; assumptions impact results.
Key Components of Models:
Diagrams and functions.
General relationships vs. specific equations representing variables in economic concepts.
Introductory Laws:
Law of Demand: As price rises, QD falls.
Law of Supply: As price rises, QS increases.
Market Dynamics
Markets are defined by products and geography, analyzed in a time context.
Demand and Supply Model Components
Market Demand:
Collective demand from all consumers.
Influenced by various factors: number of consumers, income levels, tastes, and prices of substitutes/complements.
Shifting demand curve reflects changes in demand determinants.
Market Supply:
Aggregate supply from all producers.
Factors affecting supply: number of sellers, production costs, technology, and regulations.
Demand and Supply Functions
General Function forms:
Demand: QD = F(n, P, Y, T, Ps, Pc).
Supply: QS = F(m, P, P1, λ, R, πO).
Specific Functions can express particular relationships between variables.
Equilibrium in Markets
Equilibrium occurs where demand and supply curves intersect, indicating market price and quantity (P* and Q*).
Equilibrium Function:
Where QD = QS; adjustment to market changes requires recognition of curve shifts.
Example Calculation of P* and Q* through specific functions.
Limitations and Considerations of Models
Real-world complexity typically prevents the assumptions of homogenous products and complete market information.
Changes in demand and supply can alter equilibrium, rendering it ambiguous without specification of shifts.
Analyzing slopes and elasticity provides insights into market responses to changes.
Elasticity Concepts
Definition: Measure of responsiveness of one variable to changes in another.
Types of Elasticity:
Price Elasticity of Demand (PED): Responsiveness of QD to price changes, typically negative (except Giffen goods).
Price Elasticity of Supply (PES): Responsiveness of QS to price changes, generally positive.
Income Elasticity of Demand (YED): Sensitivity of demand relative to income changes — positive for normal goods, negative for inferior goods.
Cross Price Elasticity of Demand (CPED): Responsiveness of demand for one good relative to changes in the price of another.
Elasticity Categories:
Elastic (>1), Inelastic (<1), and Unit Elastic (=1).
Applications of Elasticities
Application examples and implications of elasticities in real-world scenarios.
Consumer Choice and Utility Maximization
Concept of Scarcity: Limited resources vs. unlimited wants leading to decision-making.
Three Core Elements of Consumer Behaviour:
Consumer Preferences.
Budget Constraints.
Decision-Making Under Constraints.
Consumer Preferences Assumptions
Rationality within preferences.
Completeness, non-satiation, and transitivity are essential traits.
Concept of Market Baskets and Non-Satiation.
Utility and Indifference Curves
Utility measures satisfaction derived from consumption.
Utility Functions:
General: U = F(X,Y).
Specific Example: U = 10X + 5Y.
Indifference Curve (IC) theory illustrates consumer satisfaction levels at different consumption bundles.
Properties of Indifference Curves
Characteristics: Higher utility at farther distances from origin, convex shapes, non-intersection.
Indifference Maps and Marginal Rate of Substitution (MRS)
Exploring trade-offs between goods: the MRS defined as the slope of IC.
Diminishing Marginal Utility concept: Loss of willingness to substitute as quantity increases.
Utility and Indifference Curve relation, depicting distinct preferences:
Perfect Substitutes vs. Perfect Complements.
Budget Constraints
Depict consumer limits based on income and product pricing.
Alterations in prices or income impact the budget constraint line.
Shifts in budget lines occur due to price changes and additional income.
Optimizing Consumer Choices
Defining optimal consumption points along the budget constraint and IC through tangency analysis.
Marginal utility comparisons guide rational decisions.
Effects of Price and Income Changes on Demand
How shifts in budget lines and ICs relate to overall market demand adjustments in response to price changes.
The Concept of Producer Costs
Acknowledging the various costs firms encounter, including fixed and variable costs.
Short-run vs. long-run understanding regarding input flexibility and cost structures.
Long-run Costs and Production Decisions
Different production functions and the Cobb-Douglas model.
Examining aspects of returns to scale and the role administrative aspects in production economics.
Isoquants and MRTS
Measuring substitutes in production through isoquants and marginal rates.
Depicting the role of production technology and the effects of changing input ratios.
Cost Minimization in Production
Understanding the interaction between isoquants and isocosts for effective pricing strategies.
Firms’ budget constraints as they relate to running costs versus output delivery.
Equilibrium in Long-run Strategies
Describing the adjustment of firms to reach profit maximization based on market activities.
Assessing the performance of firms under increasing outputs.
Competitive Markets and Efficiency
The nature of market equilibrium and implications for consumer and producer surplus.
Evaluating how free markets allocate goods efficiently.
Market Equilibrium Assessment
Evaluating welfare effects and the presence of deadweight loss under varying market structures.
Profit Maximization in Perfect Competition
Firm strategies: determining output levels to maximize profit in competitive environments.
Long-run Economic Efficiency in Perfect Competition
Understanding how normal profit levels balance out in competitive markets over time.
Economics of Demand Shifts and Tax Policies
Impact on equilibrium levels due to changes in demand and supply curves.
Effects of Income Changes on Consumer Behavior
Financial implications of shifts in budget constraints and resulting demand elasticity.
Macroeconomic Policy Goals
Distinguishing between microeconomic and macroeconomic assessments.
GDP Calculation and Measurement
Methods of calculating GDP and distinguishing nominal vs. real GDP.
Inflation and Growth Measurement
Methods to interpret changes in GDP related to inflation and economic growth.
Trends in Economic Thought
Historical context of macroeconomic thought evolution, including key theorists and concepts.
Classical Economic Theory
Defined attributes of classical economic models and its implications for contemporary economics.
Money Supply and Inflation under Classical Framework
Exploring relationships between money supply growth and economic stability.
Fiscal Policies Affecting Money Supply
Understanding how variations in government expenditure impact economic frameworks.
The Role of Money in Open Economies
Evaluating how money supply interacts with international trade dynamics.
Exchange Rate Models and Trade Balances
Relationship dynamics influencing currency valuation and trade volumes.
Understanding Money in the Economy
Exploring mechanisms through which money facilitates economic systems.
Price Level Influences on Money Dynamics
Analyzing price levels in relation to currency value and purchasing power.
The Quantity Theory of Money
Positioning money supply as a central factor influencing inflation rates.
Inflation Measurement and Its Implications
Distinguishing between the types of inflation and their economic impacts.
Keynesian Economics and the IS-LM Framework
Understanding Keynesian approaches in managing economic equilibrium through expenditure analysis.
Fiscal and Monetary Policies' Interplay
Examining the dynamic responses to fiscal actions in managing economic outputs.
IS-LM Model Derivation and Applications
Consolidating theoretical frameworks within Keynesian micro-foundational economic models.
Seminar Insights on Economic Assessments
Practical applications of lectures through seminars focusing on demands and supply interventions.
Understanding Inflation Tax Impacts
Evaluating how inflation affects different socioeconomic groups within the economy.
Comprehensive Analysis of Monetary Policies
Scrutinizing unfolding effects of policies within various economic models.
Role of Central Banks in Economic Stewardship
Insights on how central banks influence economic stability and financial systems.
Mechanisms of Monetary Policy Overview
Delineating specific frameworks applied by central banks to influence economic environments.
Historical Context: The Great Depression
Analyzing economic downturns and policy missteps based on historical data and original analyses.
Understanding Macroeconomic Policy Impacts
Analyzing how various economic policies affect overall economic conditions and performance metrics.
Distinguishing Between Economic Policies
Classifications and effectiveness of different macroeconomic policies.
Fluctuations in Economic Variables
Understanding the interconnections between economic shocks and market performance across various frameworks.
Projections and Laughing Curve Dynamics
Hinging insights from past performances to dabble in future projections across diverse economic scenarios.
Trade-Offs in Economic Theory
Scrutinizing real-world ties between fiscal shifts and monetary rationales.
Economic Graphical Representations
Translating linear data into visual analytics of economic relations and trends.
Monopolistic Market Structures Overview
Detailed insights into monopolistic dynamics interplaying with economic theoretical frameworks.
Interventionist Economic Policies
Examining strategic approaches to managing monopolistic constructs through economic interventions.
Monopolistic Competition Dynamics
Dissecting competitive pricing strategies as they relate to market predictions.
Price Determination Mechanisms in Monopolies
Understanding pricing mechanisms dictating monopolistic behaviors in stable markets.
Price Controls and Market Welfare
Analyzing the consequences of government-imposed maximum prices and their economic ramifications.
Quotas and Their Supply Effects
Evaluating the implications of government quotas on market equilibrium and prices.
Costs of Market Failure and Externalities
Identifying significant areas of economic inefficiency attributable to external factors.
Economic Disparities and Inequalities
Understanding their roots and implications within broader economic contexts.
The Role of Labour Markets
Insight into how labour market forces shape economic outcomes and productivity levels.
Wage Inequality and Disparities
Exploring which factors contribute to pervasive wage differentials across various segments of the workforce.
Labour Statistics and Definitions
Rigorously defining and quantifying the labour pool dynamics.
Deconstructing Job Markets
Recognizing key challenges and solutions in searching for employment opportunities.
The Phillips Curve Dynamics
Evaluating how inflationary expectations intertwine with wage negotiations and economic policy strategies.
Introduction to Open Economies
Establishing parameters for evaluating international trade's impact on domestic economies and currencies.
Foreign Exchange Market Analysis
Unpacking the dynamics shaping currency exchange rates in open economies.