Economics
Table of Contents
Economics ........................................................................................................................ 1
Chapter 1 ......................................................................................................................... 3
1.1 What do economists study? ................................................................................................ 3
1.2 Different economic systems ................................................................................................ 8
Chapter 2 ....................................................................................................................... 14
2.1 Demand ........................................................................................................................... 14
2.2 Supply .............................................................................................................................. 18
2.3 Output determination ...................................................................................................... 21
2.4 Elasticity .......................................................................................................................... 26
Chapter 3 ....................................................................................................................... 37
3.1 Control of prices ............................................................................................................... 37
Chapter 15...................................................................................................................... 39
15.1 An overview of Key macroeconomic issues...................................................................... 39
15.2 Measuring national income and output ........................................................................... 41
15.3 The business cycle .......................................................................................................... 43
15.4 The circular flow of income ............................................................................................. 46
Appendix calculating GDP ...................................................................................................... 49
15.5 Unemployment .............................................................................................................. 53
Chapter 15...................................................................................................................... 57
15.6 Inflation ......................................................................................................................... 57
15.7 The open economy ......................................................................................................... 62
Chapter 20...................................................................................................................... 68
20.4 The labour market and aggregrate supply ....................................................................... 68
20.1 The AD/AS model ........................................................................................................... 71
Chapter 6 ....................................................................................................................... 72
6.1 the short-run theory of production ................................................................................... 72
6.2 costs in the short run ........................................................................................................ 73
6.3the long run theory of production ...................................................................................... 75
6.4 costs in the long run ......................................................................................................... 79
6.5 revenue ........................................................................................................................... 81
6.6 profit maximization .......................................................................................................... 84
,Chapter 7 ....................................................................................................................... 87
7.1 alternative market structures ........................................................................................... 87
7.2 perfect competition .......................................................................................................... 88
,Chapter 1
1.1 What do economists study?
Production The transformation of inputs into outputs by firms in order to earn
profit (or to meet some other objective).
Consumption The act of using goods and services to satisfy wants. This will
normally involve purchasing the goods and services.
Factors of production (or resources) The inputs into the production of goods and
services; labour, land and raw materials, and capital.
Factors of production:
Human resources labour. The labour force is limited in number, but also in skills. This
limits the productivity of labour; i.e. the amount labour can produce.
Natural resources land and raw materials. The world’s land area is limited, as are its raw
materials.
Manufactured capital. Capital consists of all those inputs that have themselves had
resources to be produced. The world has a limited stock of factories, machines,
transportation and other equipment. The productivity of this capital is
limited by the current state of technology.
Scarcity is the excess of human wants over what can actually be produced. Because of
scarcity, various choices have to be made between alternatives. Wants are unlimited.
Labour All forms of human input, both physical and mental, into current
production.
Land and raw Inputs into production that are provided by nature; e.g. unimproved land
materials and mineral deposits in the ground.
Capital All inputs into production that have themselves been produced; e.g.
factories, machines and tools.
Scarcity The excess of human wants over what can actually be produced to fulfil
these wants.
Demand is related to wants. If every good and service were free, people would simply demand
whatever they wanted. In total, such wants are likely to be virtually boundless, perhaps only
limited by people’s imaginations. Supply, on the other hand, is limited. It is related to
resources. The amount that firms can supply depends on the resources and technology
available.
Given the problem of scarcity – that human wants exceed what can actually be produced –
potential demands will exceed potential supplies.
Aggregate=Total
Macroeconomics The branch of economics that studies economic aggregates (grand
totals); e.g. the overall level of prices, output and employment in
the economy.
, Aggregate demand The total level of spending in the economy.
Aggregate supply The total amount of output in the economy.
Microeconomics The branch of economics that studies individual units; e.g.
households, firms and industries. It studies the interrelationships
between these units in determining the pattern of production and
distribution of goods and services.
Inflation A general rise in the level of prices throughout the economy
(Annual) Rate of The percentage increase in the level of prices over a 12-month
inflation period.
Balance of trade Exports of goods and services minus imports of goods and services.
If exports exceed imports, there is a ‘balance of trade surplus’ (a
positive figure). If imports exceed exports, there is a ‘balance of
trade deficit’ (a negative figure).
Recession A period where national output falls for two or more successive
quarters.
Unemployment The number of people of working age who are actively looking for
work but are currently without a job. (Note that there is much
debate as to who should officially be counted as unemployed.)
Demand-side policy Government policy designed to alter the level of aggregate demand,
and thereby the level of output, employment and prices.
Supply-side policy Government policy that attempts to alter the level of aggregate
supply directly.
The opportunity cost of any activity is the sacrifice made to do it. It is the best thing that could
have been done as an alternative.
Opportunity costs The cost of any activity measured in terms of the best alternative
forgone.
Rational choices Choices that involve weighing up the benefit of any activity against
its opportunity cost so that the decision maker successfully
maximises their objective: i.e. happiness or profits.
Marginal costs The additional cost of doing a little bit more (or 1 unit more if a unit
can be measured) of an activity.
Marginal benefits The additional benefits of doing a little bit more (or 1 unit more if a
unit can be measured) of an activity.
Rational decision Doing more of an activity if its marginal benefit exceeds its marginal
making cost and doing less if its marginal cost exceeds its marginal benefit.
Economic efficiency A situation where each good is produced at the minimum cost and
where individual people and firms get the maximum benefit from
their resources.
Productive efficiency A situation where firms are producing the maximum output for a
given amount of inputs, or producing a given output at the least
cost.
Table of Contents
Economics ........................................................................................................................ 1
Chapter 1 ......................................................................................................................... 3
1.1 What do economists study? ................................................................................................ 3
1.2 Different economic systems ................................................................................................ 8
Chapter 2 ....................................................................................................................... 14
2.1 Demand ........................................................................................................................... 14
2.2 Supply .............................................................................................................................. 18
2.3 Output determination ...................................................................................................... 21
2.4 Elasticity .......................................................................................................................... 26
Chapter 3 ....................................................................................................................... 37
3.1 Control of prices ............................................................................................................... 37
Chapter 15...................................................................................................................... 39
15.1 An overview of Key macroeconomic issues...................................................................... 39
15.2 Measuring national income and output ........................................................................... 41
15.3 The business cycle .......................................................................................................... 43
15.4 The circular flow of income ............................................................................................. 46
Appendix calculating GDP ...................................................................................................... 49
15.5 Unemployment .............................................................................................................. 53
Chapter 15...................................................................................................................... 57
15.6 Inflation ......................................................................................................................... 57
15.7 The open economy ......................................................................................................... 62
Chapter 20...................................................................................................................... 68
20.4 The labour market and aggregrate supply ....................................................................... 68
20.1 The AD/AS model ........................................................................................................... 71
Chapter 6 ....................................................................................................................... 72
6.1 the short-run theory of production ................................................................................... 72
6.2 costs in the short run ........................................................................................................ 73
6.3the long run theory of production ...................................................................................... 75
6.4 costs in the long run ......................................................................................................... 79
6.5 revenue ........................................................................................................................... 81
6.6 profit maximization .......................................................................................................... 84
,Chapter 7 ....................................................................................................................... 87
7.1 alternative market structures ........................................................................................... 87
7.2 perfect competition .......................................................................................................... 88
,Chapter 1
1.1 What do economists study?
Production The transformation of inputs into outputs by firms in order to earn
profit (or to meet some other objective).
Consumption The act of using goods and services to satisfy wants. This will
normally involve purchasing the goods and services.
Factors of production (or resources) The inputs into the production of goods and
services; labour, land and raw materials, and capital.
Factors of production:
Human resources labour. The labour force is limited in number, but also in skills. This
limits the productivity of labour; i.e. the amount labour can produce.
Natural resources land and raw materials. The world’s land area is limited, as are its raw
materials.
Manufactured capital. Capital consists of all those inputs that have themselves had
resources to be produced. The world has a limited stock of factories, machines,
transportation and other equipment. The productivity of this capital is
limited by the current state of technology.
Scarcity is the excess of human wants over what can actually be produced. Because of
scarcity, various choices have to be made between alternatives. Wants are unlimited.
Labour All forms of human input, both physical and mental, into current
production.
Land and raw Inputs into production that are provided by nature; e.g. unimproved land
materials and mineral deposits in the ground.
Capital All inputs into production that have themselves been produced; e.g.
factories, machines and tools.
Scarcity The excess of human wants over what can actually be produced to fulfil
these wants.
Demand is related to wants. If every good and service were free, people would simply demand
whatever they wanted. In total, such wants are likely to be virtually boundless, perhaps only
limited by people’s imaginations. Supply, on the other hand, is limited. It is related to
resources. The amount that firms can supply depends on the resources and technology
available.
Given the problem of scarcity – that human wants exceed what can actually be produced –
potential demands will exceed potential supplies.
Aggregate=Total
Macroeconomics The branch of economics that studies economic aggregates (grand
totals); e.g. the overall level of prices, output and employment in
the economy.
, Aggregate demand The total level of spending in the economy.
Aggregate supply The total amount of output in the economy.
Microeconomics The branch of economics that studies individual units; e.g.
households, firms and industries. It studies the interrelationships
between these units in determining the pattern of production and
distribution of goods and services.
Inflation A general rise in the level of prices throughout the economy
(Annual) Rate of The percentage increase in the level of prices over a 12-month
inflation period.
Balance of trade Exports of goods and services minus imports of goods and services.
If exports exceed imports, there is a ‘balance of trade surplus’ (a
positive figure). If imports exceed exports, there is a ‘balance of
trade deficit’ (a negative figure).
Recession A period where national output falls for two or more successive
quarters.
Unemployment The number of people of working age who are actively looking for
work but are currently without a job. (Note that there is much
debate as to who should officially be counted as unemployed.)
Demand-side policy Government policy designed to alter the level of aggregate demand,
and thereby the level of output, employment and prices.
Supply-side policy Government policy that attempts to alter the level of aggregate
supply directly.
The opportunity cost of any activity is the sacrifice made to do it. It is the best thing that could
have been done as an alternative.
Opportunity costs The cost of any activity measured in terms of the best alternative
forgone.
Rational choices Choices that involve weighing up the benefit of any activity against
its opportunity cost so that the decision maker successfully
maximises their objective: i.e. happiness or profits.
Marginal costs The additional cost of doing a little bit more (or 1 unit more if a unit
can be measured) of an activity.
Marginal benefits The additional benefits of doing a little bit more (or 1 unit more if a
unit can be measured) of an activity.
Rational decision Doing more of an activity if its marginal benefit exceeds its marginal
making cost and doing less if its marginal cost exceeds its marginal benefit.
Economic efficiency A situation where each good is produced at the minimum cost and
where individual people and firms get the maximum benefit from
their resources.
Productive efficiency A situation where firms are producing the maximum output for a
given amount of inputs, or producing a given output at the least
cost.
