Economics Summary Notes
Economics Summary Notes Chapter 1: •Ten Lessons from economics: How people make decisions
How people interact
How the economy as a whole works
1. People face trade-offs (EG. Guns or butter, efficiency or equity) 2. The cost of something is what you give up to get it (EG. Opportunity cost of whether to go to uni) 3. Rational people think at the margin (EG. Compare marginal benefits and marginal costs) 4. People respond to incentives (EG. Tax on petrol encourages people to drive more efficient cars) 5. Trade can make everyone better off (EG. Specialisation through trade) 6. Markets are usually a good way to organize economic activity (EG. Invisible hand guides desirable market outcomes) 7. Governments can sometimes improve market outcomes (EG. Market failure, externality, market power) 8. A country’s standard of living depends on productivity 9. Prices rise when the government prints too much money 10. Society faces a short-term trade-off between inflation and unemployment (EG. Explained by Phillips curve)
Chapter 2: •Positive statements: Professor, data, facts, how the world is •Normative statements: Beliefs, values, how the world should be •Microeconomics: Study of how households and firms make decisions •Macroeconomics: Study of economy wide phenomena (EG. inflation and employment) •Circular flow diagram: Shows how dollars flow through markets among households and firms •Production Possibilities Frontier (PPF): Shows various combinations of output between two goods
Chapter 3: •Absolute advantage: Producer that requires less inputs to produce •Comparative advantage: Comparison between competitors of opportunity cost
Chapter 4: •Market: Group of buyers + sellers of a good •Competitive market: Many buyers and sellers (negative influence on price) •QD: Amount of a good buyers are willing and able to purchase •Law of demand: QD of good falls when price rises (with other things constant) •Demand schedule: Table showing relationship between P and QD •Market demand: Sum of all individual demands •Shifts in demand curve: ↓=Shift to left, ↑=Shift to right -Income: ↑QD=↑Income (normal good), ↑QD=↓Income (inferior good, EG. Public transport) -Prices of related goods: ↓P=↑QD of another good -Tastes: ↑Tastes=↑QD -Expectations -No. of buyers: ↑QD=↑P (Price represents movement along demand curve) •QS: Amount of a good sellers are willing and able to sell •Law of supply: ↑QS=↑P •Supply schedule: Table showing relationship between P and QS •Supply curve: Graph of relationship between P and QS •Market supply: Sum of all suppliers and sellers •Shifts in supply curve: ↓=Shift to left, ↑=Shift to right -Input prices: ↑Input prices=↓Profits=↓QS (EG. Wages) -Technology: ↑Tech=↑Productivity=↓Costs=↑QS -Expectations -No. of sellers: ↑Sellers=↑QS (Price represents movement along supply curve) •Equilibrium: Supply and demand curve are in balance •Equilibrium price: Price that balances supply and demand •Equilibrium quantity: Balance in QS and QD •Surplus: QS is more than QD (respond by cutting prices) •Shortage: QD is more than QS (respond by increasing prices) •Law of supply and demand: Price of any good adjusts to bring supply and demand back into balance
How people interact
How the economy as a whole works
1. People face trade-offs (EG. Guns or butter, efficiency or equity) 2. The cost of something is what you give up to get it (EG. Opportunity cost of whether to go to uni) 3. Rational people think at the margin (EG. Compare marginal benefits and marginal costs) 4. People respond to incentives (EG. Tax on petrol encourages people to drive more efficient cars) 5. Trade can make everyone better off (EG. Specialisation through trade) 6. Markets are usually a good way to organize economic activity (EG. Invisible hand guides desirable market outcomes) 7. Governments can sometimes improve market outcomes (EG. Market failure, externality, market power) 8. A country’s standard of living depends on productivity 9. Prices rise when the government prints too much money 10. Society faces a short-term trade-off between inflation and unemployment (EG. Explained by Phillips curve)
Chapter 2: •Positive statements: Professor, data, facts, how the world is •Normative statements: Beliefs, values, how the world should be •Microeconomics: Study of how households and firms make decisions •Macroeconomics: Study of economy wide phenomena (EG. inflation and employment) •Circular flow diagram: Shows how dollars flow through markets among households and firms •Production Possibilities Frontier (PPF): Shows various combinations of output between two goods
Chapter 3: •Absolute advantage: Producer that requires less inputs to produce •Comparative advantage: Comparison between competitors of opportunity cost
Chapter 4: •Market: Group of buyers + sellers of a good •Competitive market: Many buyers and sellers (negative influence on price) •QD: Amount of a good buyers are willing and able to purchase •Law of demand: QD of good falls when price rises (with other things constant) •Demand schedule: Table showing relationship between P and QD •Market demand: Sum of all individual demands •Shifts in demand curve: ↓=Shift to left, ↑=Shift to right -Income: ↑QD=↑Income (normal good), ↑QD=↓Income (inferior good, EG. Public transport) -Prices of related goods: ↓P=↑QD of another good -Tastes: ↑Tastes=↑QD -Expectations -No. of buyers: ↑QD=↑P (Price represents movement along demand curve) •QS: Amount of a good sellers are willing and able to sell •Law of supply: ↑QS=↑P •Supply schedule: Table showing relationship between P and QS •Supply curve: Graph of relationship between P and QS •Market supply: Sum of all suppliers and sellers •Shifts in supply curve: ↓=Shift to left, ↑=Shift to right -Input prices: ↑Input prices=↓Profits=↓QS (EG. Wages) -Technology: ↑Tech=↑Productivity=↓Costs=↑QS -Expectations -No. of sellers: ↑Sellers=↑QS (Price represents movement along supply curve) •Equilibrium: Supply and demand curve are in balance •Equilibrium price: Price that balances supply and demand •Equilibrium quantity: Balance in QS and QD •Surplus: QS is more than QD (respond by cutting prices) •Shortage: QD is more than QS (respond by increasing prices) •Law of supply and demand: Price of any good adjusts to bring supply and demand back into balance
