2023
Summary Economics
FIRST YEAR BACHELOR
SUMMARY OF LECTURES AND BOOK
,Lecture 1: Demand and Supply
Chapter 1: First Principles
Economy System for coordinating society’s productive inputs
Market Economy Economy in which decisions about production/consumption are made by
individual actors
Invisible Hand Idea that individual pursuit of self-interest leads to efficient results for
society as a whole
Market Growth Growing ability of an economy to produce goods and services
Market Failure When individual pursuit of self-interest leads to bad results for society
Economic Principles:
Individual
Choices must be made because resources are scarce
Opportunity cost of something what has to be given up to get it that is its real cost
How many decisions are made at the margin, where the cost of doing a little bit more or less is
compared with the benefit of doing more or less.
People respond to incentives and exploit opportunities to make themselves better off
Interaction
There are gains from trade.
Because individuals respond to incentives, markets move towards equilibrium.
Resources should be used as efficiently as possible to achieve society’s goals.
Because people exploit gains from trade, markets usually lead to efficiency.
When markets do not reach efficiency, government interventions can improve social welfare
Economy Wide
One person’s spending is another person’s income.
Overall spending sometimes gets out of line with economies productive capacity.
Too much spending leads to inflation
Too little spending leads to a recession
Government policies can change spending
,Chapter 2: Economic Models: Trade-offs and Trade
Production Possibility Frontier (PPF):
Displays the trade-offs firms have to make when choosing between the production of two goods.
In the Production Possibility Frontier, the opportunity cost can be increasing (most realistic) or
constant, meaning that the function can have a constant negative slope or an increasing negative slope.
In the Production Possibility Frontier, the opportunity cost can be increasing (most realistic) or
constant, meaning that the function can have a constant negative slope or an increasing negative slope.
The Production Possibility Frontier shifts to the outside in when market growth occurs because more
products can be produced at any quantity of another product.
Increase in factors of production (resources used to produce goods that are not used up in the
process; human, physical capital, land)
Opportunity Cost What has to be given up in order to get / achieve something true cost
Comparative Advantage Good or service can be produced at a lower opportunity cost then
competitors.
Absolute Advantage Being able to produce more output per input.
Rule of trade Trade between two parties only occurs when the opportunity cost of producing
something domestically is higher than the price it is being sold at.
Positive Economics: Economic analysis that describes the way the economy actually works.
Normative Economics: Economic analysis that provides prescriptions about the way the economy
should work, there are differing opinions and usually no right or wrong answer.
Chapter 3: Supply and Demand
, Supply and Demand: A model of a Competitive market
Competitive Market A market in which there are many buyers and seller of the same good or
service, none of whom can influence the price at which the good or service is sold. (meaning they are
all price takers) Many markets are competitive.
Supply and Demand Model A model showing how supply and demand behave at different levels
of prices.
Five key elements in this model:
1) The demand curve
2) The supply curve
3) The set of factors that cause the demand curve to shift and the set of factors that cause
the supply curve to shift.
4) The market equilibrium, which includes the equilibrium price and equilibrium quantity.
5) The way the market equilibrium changes when the supply curve or demand curve shifts.
The Demand Curve
Demand Schedule: Expression/table of quantity demanded at given price levels that can be used to
model the demand curve. Shows how much of a good or service consumers will want to buy at
different prices.
Law of Demand: The higher prices become, the less of a product is demanded by consumers
Demand Curve: A graphical representation of the demand schedule. Shows relationship of price and
demand.
EXAMPLE:
Where was the demand curves in ’63 (before
the Rolling Stones got famous) compared to
the demand curve in ’64?
A. The demand in ’63 was to the left of demand
in ’64
B. The demand in ’63 was to the right of
demand in ’64
C. The demand in ’63 was to the same as the
demand in ‘64
The effect of an increase or decrease in
demand
Change in demand at any given level of price Shift of demand curve
o An increase in demand leads to a rightward shift of the demand: the quantity demanded
rises for any given price.
o A decrease in demand leads to a leftward shift: the quantity demanded falls for any given
price.
Change in quantity demanded due to a change in price Movement along demand curve
EXAMPLE:
Summary Economics
FIRST YEAR BACHELOR
SUMMARY OF LECTURES AND BOOK
,Lecture 1: Demand and Supply
Chapter 1: First Principles
Economy System for coordinating society’s productive inputs
Market Economy Economy in which decisions about production/consumption are made by
individual actors
Invisible Hand Idea that individual pursuit of self-interest leads to efficient results for
society as a whole
Market Growth Growing ability of an economy to produce goods and services
Market Failure When individual pursuit of self-interest leads to bad results for society
Economic Principles:
Individual
Choices must be made because resources are scarce
Opportunity cost of something what has to be given up to get it that is its real cost
How many decisions are made at the margin, where the cost of doing a little bit more or less is
compared with the benefit of doing more or less.
People respond to incentives and exploit opportunities to make themselves better off
Interaction
There are gains from trade.
Because individuals respond to incentives, markets move towards equilibrium.
Resources should be used as efficiently as possible to achieve society’s goals.
Because people exploit gains from trade, markets usually lead to efficiency.
When markets do not reach efficiency, government interventions can improve social welfare
Economy Wide
One person’s spending is another person’s income.
Overall spending sometimes gets out of line with economies productive capacity.
Too much spending leads to inflation
Too little spending leads to a recession
Government policies can change spending
,Chapter 2: Economic Models: Trade-offs and Trade
Production Possibility Frontier (PPF):
Displays the trade-offs firms have to make when choosing between the production of two goods.
In the Production Possibility Frontier, the opportunity cost can be increasing (most realistic) or
constant, meaning that the function can have a constant negative slope or an increasing negative slope.
In the Production Possibility Frontier, the opportunity cost can be increasing (most realistic) or
constant, meaning that the function can have a constant negative slope or an increasing negative slope.
The Production Possibility Frontier shifts to the outside in when market growth occurs because more
products can be produced at any quantity of another product.
Increase in factors of production (resources used to produce goods that are not used up in the
process; human, physical capital, land)
Opportunity Cost What has to be given up in order to get / achieve something true cost
Comparative Advantage Good or service can be produced at a lower opportunity cost then
competitors.
Absolute Advantage Being able to produce more output per input.
Rule of trade Trade between two parties only occurs when the opportunity cost of producing
something domestically is higher than the price it is being sold at.
Positive Economics: Economic analysis that describes the way the economy actually works.
Normative Economics: Economic analysis that provides prescriptions about the way the economy
should work, there are differing opinions and usually no right or wrong answer.
Chapter 3: Supply and Demand
, Supply and Demand: A model of a Competitive market
Competitive Market A market in which there are many buyers and seller of the same good or
service, none of whom can influence the price at which the good or service is sold. (meaning they are
all price takers) Many markets are competitive.
Supply and Demand Model A model showing how supply and demand behave at different levels
of prices.
Five key elements in this model:
1) The demand curve
2) The supply curve
3) The set of factors that cause the demand curve to shift and the set of factors that cause
the supply curve to shift.
4) The market equilibrium, which includes the equilibrium price and equilibrium quantity.
5) The way the market equilibrium changes when the supply curve or demand curve shifts.
The Demand Curve
Demand Schedule: Expression/table of quantity demanded at given price levels that can be used to
model the demand curve. Shows how much of a good or service consumers will want to buy at
different prices.
Law of Demand: The higher prices become, the less of a product is demanded by consumers
Demand Curve: A graphical representation of the demand schedule. Shows relationship of price and
demand.
EXAMPLE:
Where was the demand curves in ’63 (before
the Rolling Stones got famous) compared to
the demand curve in ’64?
A. The demand in ’63 was to the left of demand
in ’64
B. The demand in ’63 was to the right of
demand in ’64
C. The demand in ’63 was to the same as the
demand in ‘64
The effect of an increase or decrease in
demand
Change in demand at any given level of price Shift of demand curve
o An increase in demand leads to a rightward shift of the demand: the quantity demanded
rises for any given price.
o A decrease in demand leads to a leftward shift: the quantity demanded falls for any given
price.
Change in quantity demanded due to a change in price Movement along demand curve
EXAMPLE:
