ECONOMICS
Contents
ECONOMICS................................................................................................................ 1
CHAPTER 1: ECONOMICS......................................................................................... 3
Definition “economics” + identify 3 key reasons to study economics..................3
Understand the difference between micro – and macroeconomics......................4
CHAPTER 2: SCARCITY AND CHOICE........................................................................5
The Economic Problem......................................................................................... 5
Scarcity, choice in a one-person economy...........................................................6
Scarcity and choice in an economy of 2 or more..................................................6
Production Possibility Frontier (PPF).....................................................................6
Exercises.............................................................................................................. 7
CHAPTER 3 & 4: DEMAND AND SUPPLY.................................................................11
Firms and households: the basic decision-making units.....................................11
Input markets and output markets: the circular flow.........................................12
Demand in product/output markets...................................................................12
Supply in product/output markets......................................................................14
Market Equilibrium............................................................................................. 15
CHAPTER 5: ELASTICITY......................................................................................... 17
Price Elasticity of Demand.................................................................................. 17
Calculating Elasticities........................................................................................ 18
The Determinants of Demand Elasticity.............................................................20
Other Important Elasticities................................................................................20
CHAPTER 6: DECISIONS OF CONSUMERS...............................................................23
Household choice in output market....................................................................23
The basis of choice: utility..................................................................................25
Income & Substitution Effects............................................................................ 26
Household choice in input market......................................................................27
CHAPTER 7: THE PRODUCTION PROCESS: THE BEHAVIOUR OF PROFIT-MAXIMIZING
FIRMS.................................................................................................................... 29
The Behaviour of Proft-Maximizing Firms...........................................................29
The Production Process...................................................................................... 30
1
, Choice of Technology......................................................................................... 31
CHAPTER 8: SHORT RUN COSTS AND OUTPUT DECISIONS....................................31
Costs in the Short Run........................................................................................ 31
Output Decisions: Revenues, Costs and Profit Maximization..............................34
CHAPTER 12 – 15: MARKET ORGANIZATIONS........................................................36
Perfect vs Imperfect Markets..............................................................................36
Characteristics by Different Market Organizations.............................................36
Oligopoly............................................................................................................ 42
Monopolistic Competition...................................................................................45
CHAPTER 21: NATIONAL OUTPUT AND INCOME.....................................................49
Introduction........................................................................................................ 49
Gross Domestic Product..................................................................................... 50
Calculating GDP.................................................................................................. 53
Limitations of the GDP Concept..........................................................................55
CHAPTER 22: UNEMPLOYMENT AND INFLATION....................................................56
Employment....................................................................................................... 56
Inflation.............................................................................................................. 59
Long Term Growth.............................................................................................. 61
CHAPTER 24 & 25: DECISIONS OF GOVERNMENTS................................................61
What is Monetary Policy?................................................................................... 61
Why Manage Money Supply?..............................................................................62
How to Influence The Money Supply?.................................................................63
What is Fiscal Policy........................................................................................... 65
Who Manages the Fiscal Policy...........................................................................66
CHAPTER 33 & 34: BALANCE OF PAYMENT............................................................67
The Balance of Payments...................................................................................67
Equilibrium Output in an Open Economy............................................................69
The Open Economy with Flexible Exchange Rates.............................................69
An Interdependent World Economy....................................................................70
2
,CHAPTER 1: ECONOMICS
Definition “economics” + identify 3 key reasons to study
economics
ECONOMICS -> The study of how individuals and societies choose to use the
scarce resources that nature and previous generations have provided
Human wants are unlimited but resources are not:
This is the economic problem (between the wants and resources)
The human wants can be individual (=clothes, water, food, basic
education) or collective (=fire department, social security)
3 main reasons on why you should study economics:
1) To learn a way of thinking
Three fundamental concepts: Opportunity cost, Marginalism and the
working efficient markets -> helps us a way of thinking and to make a
decision.
Opportunity Costs
The full “cost” of a decision includes what we give up by not making
the best alternative choice / The best alternative that we forgo, or give
up when we make a choice or a decision
Marginalism
The process of analysing the additional or incremental costs or benefits
arising from a choice or decision / only weigh the costs and benefits
that arise from the decision itself
Efficient Markets – No Free Lunch
Profit opportunities are always eliminated almost instantaneously in
efficient markets – because others see it quickly and wants to have
them too
2) To understand society
To see that past and present economic decisions have an enormous
influence on the character of life in a society.
Industrial Revolution – discipline of economics began to take place /
increase in productivity, new technologies & development
“E” Revolution – impact on virtual life (buy and sell products, way we
get news, communicate, teach and take class)
3
, The study of economics is an essential part of the study of society.
3) To be an informed citizen
Understanding what happens in a recession and what the government
can and cannot do to help.
To be an informed citizen requires a basic understanding of
economics.
Understand the difference between micro – and macroeconomics
MICROECONOMICS: the branch of economics that examines the functioning
of individual industries and the behaviour of individual decision-making-units,
that is firms and households.
- WHO? Individual industries, firms and households
- Firms’ choice: what to produce and how much to charge
- Households’ choice: what and how much to buy
- Explains why economy produces the goods and services it does & who
gets the goods and services that are produced
MACROECONOMICS: the branch of economics that examines the economic
behaviour of aggregates – income, employment, output – on a national scale
- WHO? The economy as a whole
- Examine the factors that determine national output or national product
Microeconomics looks at the individual unit – the household, the firm, the
industry. It sees and examines the “trees”.
Macroeconomics looks at the whole, the aggregate. It sees and analyses the
“forest”.
MESO ECONOMICS: between the micro and macroeconomics, when it affects
for example more households and industries or a certain sector.
4
Contents
ECONOMICS................................................................................................................ 1
CHAPTER 1: ECONOMICS......................................................................................... 3
Definition “economics” + identify 3 key reasons to study economics..................3
Understand the difference between micro – and macroeconomics......................4
CHAPTER 2: SCARCITY AND CHOICE........................................................................5
The Economic Problem......................................................................................... 5
Scarcity, choice in a one-person economy...........................................................6
Scarcity and choice in an economy of 2 or more..................................................6
Production Possibility Frontier (PPF).....................................................................6
Exercises.............................................................................................................. 7
CHAPTER 3 & 4: DEMAND AND SUPPLY.................................................................11
Firms and households: the basic decision-making units.....................................11
Input markets and output markets: the circular flow.........................................12
Demand in product/output markets...................................................................12
Supply in product/output markets......................................................................14
Market Equilibrium............................................................................................. 15
CHAPTER 5: ELASTICITY......................................................................................... 17
Price Elasticity of Demand.................................................................................. 17
Calculating Elasticities........................................................................................ 18
The Determinants of Demand Elasticity.............................................................20
Other Important Elasticities................................................................................20
CHAPTER 6: DECISIONS OF CONSUMERS...............................................................23
Household choice in output market....................................................................23
The basis of choice: utility..................................................................................25
Income & Substitution Effects............................................................................ 26
Household choice in input market......................................................................27
CHAPTER 7: THE PRODUCTION PROCESS: THE BEHAVIOUR OF PROFIT-MAXIMIZING
FIRMS.................................................................................................................... 29
The Behaviour of Proft-Maximizing Firms...........................................................29
The Production Process...................................................................................... 30
1
, Choice of Technology......................................................................................... 31
CHAPTER 8: SHORT RUN COSTS AND OUTPUT DECISIONS....................................31
Costs in the Short Run........................................................................................ 31
Output Decisions: Revenues, Costs and Profit Maximization..............................34
CHAPTER 12 – 15: MARKET ORGANIZATIONS........................................................36
Perfect vs Imperfect Markets..............................................................................36
Characteristics by Different Market Organizations.............................................36
Oligopoly............................................................................................................ 42
Monopolistic Competition...................................................................................45
CHAPTER 21: NATIONAL OUTPUT AND INCOME.....................................................49
Introduction........................................................................................................ 49
Gross Domestic Product..................................................................................... 50
Calculating GDP.................................................................................................. 53
Limitations of the GDP Concept..........................................................................55
CHAPTER 22: UNEMPLOYMENT AND INFLATION....................................................56
Employment....................................................................................................... 56
Inflation.............................................................................................................. 59
Long Term Growth.............................................................................................. 61
CHAPTER 24 & 25: DECISIONS OF GOVERNMENTS................................................61
What is Monetary Policy?................................................................................... 61
Why Manage Money Supply?..............................................................................62
How to Influence The Money Supply?.................................................................63
What is Fiscal Policy........................................................................................... 65
Who Manages the Fiscal Policy...........................................................................66
CHAPTER 33 & 34: BALANCE OF PAYMENT............................................................67
The Balance of Payments...................................................................................67
Equilibrium Output in an Open Economy............................................................69
The Open Economy with Flexible Exchange Rates.............................................69
An Interdependent World Economy....................................................................70
2
,CHAPTER 1: ECONOMICS
Definition “economics” + identify 3 key reasons to study
economics
ECONOMICS -> The study of how individuals and societies choose to use the
scarce resources that nature and previous generations have provided
Human wants are unlimited but resources are not:
This is the economic problem (between the wants and resources)
The human wants can be individual (=clothes, water, food, basic
education) or collective (=fire department, social security)
3 main reasons on why you should study economics:
1) To learn a way of thinking
Three fundamental concepts: Opportunity cost, Marginalism and the
working efficient markets -> helps us a way of thinking and to make a
decision.
Opportunity Costs
The full “cost” of a decision includes what we give up by not making
the best alternative choice / The best alternative that we forgo, or give
up when we make a choice or a decision
Marginalism
The process of analysing the additional or incremental costs or benefits
arising from a choice or decision / only weigh the costs and benefits
that arise from the decision itself
Efficient Markets – No Free Lunch
Profit opportunities are always eliminated almost instantaneously in
efficient markets – because others see it quickly and wants to have
them too
2) To understand society
To see that past and present economic decisions have an enormous
influence on the character of life in a society.
Industrial Revolution – discipline of economics began to take place /
increase in productivity, new technologies & development
“E” Revolution – impact on virtual life (buy and sell products, way we
get news, communicate, teach and take class)
3
, The study of economics is an essential part of the study of society.
3) To be an informed citizen
Understanding what happens in a recession and what the government
can and cannot do to help.
To be an informed citizen requires a basic understanding of
economics.
Understand the difference between micro – and macroeconomics
MICROECONOMICS: the branch of economics that examines the functioning
of individual industries and the behaviour of individual decision-making-units,
that is firms and households.
- WHO? Individual industries, firms and households
- Firms’ choice: what to produce and how much to charge
- Households’ choice: what and how much to buy
- Explains why economy produces the goods and services it does & who
gets the goods and services that are produced
MACROECONOMICS: the branch of economics that examines the economic
behaviour of aggregates – income, employment, output – on a national scale
- WHO? The economy as a whole
- Examine the factors that determine national output or national product
Microeconomics looks at the individual unit – the household, the firm, the
industry. It sees and examines the “trees”.
Macroeconomics looks at the whole, the aggregate. It sees and analyses the
“forest”.
MESO ECONOMICS: between the micro and macroeconomics, when it affects
for example more households and industries or a certain sector.
4
