Economics Notes
Active Recall Method
Active recall involves actively testing yourself to recall information, moving it to long-term memory.
Answer questions multiple times, comparing attempts to identify improvements and areas needing review.
The Economic Problem
Scarcity: Limited resources, unlimited wants.
Opportunity Cost: Next best alternative foregone.
Factors of Production: Land, labor, capital, entrepreneurship.
Production Possibility Frontier (PPF): Boundary of possible output combinations; points inside indicate underutilization, points on indicate efficiency, and points outside indicate unattainable levels with current resources.
PPF can shift outward with technological advancements or increased in resources, and inward with a decrease in resources or technology.
Markets and Economies
Law of Demand: Price down, demand up, (ceteris paribus).
Price Elasticity of Demand (PED): Responsiveness of quantity demanded to price changes.
Market Equilibrium: Intersection of supply-demand curves.
Externalities: Third-party effects on transactions.
Fiscal Policy: Government spending and taxation.
Inflation: General rise in prices.
Economic Objectives
Common objectives are economic growth, price stability, full employment, income equality, balance of payments, environmental sustainability, efficient resource allocation, and income redistribution.
Economic Growth: Increase in national output.
Price Stability:Avoiding excessive price fluctuations.
Full Employment: Maximized employment without inflation.
Balance of payments: Balance between imports, exports.
Behavioural Economics
Study of human behavior and its impact on economic decisions.
Key concepts: bounded rationality, endowment effect, loss aversion, framing, anchoring, nudges, status quo bias, and social proof.
Competitive Markets: Demand
Demand: Desire and ability to buy.
Law of Demand: Price decrease, demand increase.
Factors affecting demand: income, preferences, substitutes, complements.
Price Elasticity of Demand (PED): responsiveness to price changes.
Income Elasticity of Demand (YED): Sensitivity to income changes; negative YED indicates inferior good.
Cross-Price Elasticity of Demand: Impact of price changes of one good on the demand for another; used to identify complementary and substitute goods.
Competitive Markets: Supply
Supply: Quantity of goods offered.
Law of Supply: Price increase, supply increase.
Factors influencing supply: production costs, technology.
Price Elasticity of Supply (PES): Responsiveness to price changes.
Market Equilibrium: Where supply equals demand.
Price and Resource Allocation
Prices signal and incentivize resource use through supply and demand interactions.
Consumer Surplus: Benefit exceeding price paid.
Producer Surplus: Revenue exceeding production cost.
Subsidies: Financial support from the government to encourage production or consumption.
Indirect Taxes: Taxes on goods and services that increase production costs and decrease supply.
Demand and Supply (Oil, Housing, Transport)
Factors affecting demand and supply, the role of elasticity, and the impact of government interventions.
Business Economics: Production and Productivity
Production: Creation of goods and services using land, labor, capital, and entrepreneurship.
Productivity: Output per unit of input.
Specialization: Focusing on specific tasks to increase efficiency.
Economies of Scale: Cost reductions with increased output.
Costs of a Firm
Includes explicit costs (direct monetary payments), implicit costs (opportunity costs), fixed costs, variable costs, and marginal costs.
Business Economics: Diminishing Returns and Economies of Scale
Law of Diminishing Returns: Output decline with input increase.
Economies of Scale: Cost reductions with expansion.
Diseconomies of Scale: Costs increase with expansion.
Long Run Average Cost Cost per unit long term
Business Economics: Returns and Revenue
Returns to Scale: Output changes with inputs
Revenue of a firm:Income from sales
Formula for Revenue:
Business Economics: Objectives and Business Growth
Firm Objectives
Profit Maximization adjusts pricing and production levels.
Expand operations or size to have cost efficiency
Market Structures: Perfect Competition
Many buyers and sellers with homogenous products and free entry/exit.
Firms are price takers and compete through price and quality.
Market Structures: Barriers to Entry
Obstacles preventing new firms from entering a market, including natural advantages, economies of scale, legal barriers, patents, and brand loyalty.
Market Structures: Monopolies
Single seller with high barriers to entry, setting prices where marginal revenue equals marginal cost.
Market Structures: Price Discrimination
Charging different prices for the same goods based on consumer willingness to pay.
Market Structures: Oligopolies
Few large firms dominate with mutual interdependence, often leading to collusion and price leadership.
Market Structures: Monopolistic Competition
Many firms with differentiated products and low barriers to entry, competing on non-price factors.
Market Structures: Contestability
Ease of market entry and exit, characterized by low sunk costs and hit-and-run competition.
Market Failure: Externalities
Spillover effects of activities on third parties, leading to social costs and benefits.
Market Failure: Merit and Demerit Goods
Merit goods have positive externalities (e.g., education) while demerit goods have negative externalities (e.g., tobacco).
Market Failure: Public Goods
Shared benefits, non-exclusive access.
Government provision or subsidy.
Market Failure: Imperfect Information
Incomplete knowledge about products, leading to adverse selection and moral hazard.
Market Failure: Inequity
Unequal distribution of earnings and wealth, leading to social unrest.
Market Failure: Immobile Factors of Production
Factors that cannot move easily, which distort labor market efficiency and affect wages.
Government Intervention: Taxation
Government revenue collection through direct and indirect taxes.
Government Intervention: Subsidies
Financial assistance to lower production/consumption costs; can may lead to market distortion,.
Government Intervention: Price Controls
Government-set limits on prices, leading to shortages or surpluses.
Government Intervention: Buffer Stocks
Stockpiles to stabilize prices by buying excess supply and selling during shortages.
Government Intervention: State Provision
Goods provided by the government, funded by taxpayer money.
Government Intervention: Privatization, Regulation, Deregulation
Transfer of public to private, setting rules for market behavior, removing government control from markets.
Goal is Efficiency, consumer welfare, innovation
Government Intervention: Competition Policy
Regulations to promote competition and prevent unfair practices.
Government Intervention: Other Methods
Methods like industrial policies, subsidies, tariffs etc.
Government Intervention: Government Failure
Policies have unintended consequences due to subsidy dependence, regulatory capture that distorts the market leading to Reduced welfare, economic inefficiency.
Labor Markets: Demand
The need for employees that is influenced by many factors such as wages and/or technology
Labor Markets: Supply
Factors such as wages and education influence the amount of employees
Labor Markets: Wages
Skills, education, and market demand are the determinants
Higher skill sets can often lead to a raise in wages
Labor Markets: Trade Unions
Protect workers' rights and negotiate by collective bargaining.
Labor Markets: Discrimination
Unfair treatment based on characteristics that can lead to lowered wages.
Labor Markets: Imperfections
Market inefficiencies, distortions, failures with the goal of market efficiency, welfare, equity
Labor Markets: Minimum, Maximum, & Living Wages
Minimum Wage: a wage floor. Purpose is to protect workers, ensure standards.
Measurement of Economic Growth
Measuring Economic Growth
Increase in nation's output
Measuring Instability
What is Inflation
The Balance of Payments Trade
Exports: Goods leaving
Imports: Goods entering
Global Economy Development
Sustainable Development: Managing pollution