Key words
Positive analysis
is descriptive and states how the world is
Normative analysis
is prescriptive and states how the world should be
Comparative advantage
The producer ho gives up less of other goods to produce X has the smaller opportunity costs of
producing X and us said to have a comparative advantage in producing it.
Opportunity costs
The cost of something is what you have to give up to get it (including how to spend time)
Trade-off
To get one thing we usually have to give up something else - n breakfast for free
Incentive
how people get what they want, or need, especially when other people want or need the same
thing
policy actions: (progressive) income tax, eco-taxes, subsidies
laws: you get punished if you do not stick to the law (jail, fines)
markets: buy goods and sell them for higher prices → market reaches equilibrium
Model
purposeful representations of (parts of) the economic system and simplify reality in order to
improve our understanding of it
typically a reduced number of system elements and assumptions
about their internal relationships
Macroeconomics
study of economy-wide phenomena (like a nations GDP reaction on policies)
Microeconomics
study of households and firms decisions and interaction in markets (like tax effects on individuals
behaviour to buy certain goods
Marginal change
describe small incremental adjustments to an existing plan of actions.
Productivity
the amount of goods and services produced from each hour of a workers’ life
The higher the amount of goods and services produced, the higher the living standard in a
corresponding economy.
Market
a group of buyers and sellers of a particular good or service, characterised by type of good and
degree of competition
Competitive market
many buyers and sellers, each having a negligible impact on the market outcome (on the price)
(price takers), all goods are the same
Price taker
1
, sellers and buyers that have no influence on the price (e.g. in a perfectly competitive sellers can’t
increase prices without loosing customers and not decrease without making less profit) - opposite
of price setters (e.g. in monopoly)
Law of demand
if the price of a good rises, ceteris paribus (other things are equal), the quantity demanded falls
and rise versa - the quantity demanded is negatively related to the price
Normal good
a good in which, ceteris paribus, an increase in income leads to a decrease in demand (shift of
demand curve to the right)
Inferior good
a good which, ceteris paribus, an increase in income leads to a decrease in demand (shift of
demand curve to the left)
Substitutes
two goods for which an increase in the price of one leads to an increase in the demand for the
other (e.g. butter and magarine)
Complements
two goods for which an increase in the price of one leads to a decrease in the demand for the other
(e.g. computers and software)
Law of supply
if the price of a good rises, ceteris paribus, the quantity of the good rises - the quantity supplied is
positively related to the price
Individual supply curve
relationship between the price of a good and the quantity supplied by an individual/ a firm shown in
a graph
Individual demand curve
the relationship between the price of a good and the quantity demanded shown in form of a graph;
(usually) downwards sloped
Market supply curve
horizontal sum of all individual supply curves for a particular good or service
Market demand curve
horizontal sum of all individual demand curves for a particular good or service - relationship
between the price of a good and the overall quantity demanded, ceteris paribus
Market equilibrium
point where supply and demand curves intersects - supplied and demanded quantities are equal.
point marks equilibrium quantity and equilibrium price (only price where sellers have no incentive to
change their price)
Price elasticity of demand
measure of how much the quantity demanded of a good responds to a change in the price of that
good
availability of close substitutes leads to higher elasticity, necessities are less elastic than luxuries,
dependent on definition of market and onetime horizon
(Quantity of water does not change because of price change)
Δ quantity supplied [%]/ Δ price [%]
Price elasticity of supply
2
Positive analysis
is descriptive and states how the world is
Normative analysis
is prescriptive and states how the world should be
Comparative advantage
The producer ho gives up less of other goods to produce X has the smaller opportunity costs of
producing X and us said to have a comparative advantage in producing it.
Opportunity costs
The cost of something is what you have to give up to get it (including how to spend time)
Trade-off
To get one thing we usually have to give up something else - n breakfast for free
Incentive
how people get what they want, or need, especially when other people want or need the same
thing
policy actions: (progressive) income tax, eco-taxes, subsidies
laws: you get punished if you do not stick to the law (jail, fines)
markets: buy goods and sell them for higher prices → market reaches equilibrium
Model
purposeful representations of (parts of) the economic system and simplify reality in order to
improve our understanding of it
typically a reduced number of system elements and assumptions
about their internal relationships
Macroeconomics
study of economy-wide phenomena (like a nations GDP reaction on policies)
Microeconomics
study of households and firms decisions and interaction in markets (like tax effects on individuals
behaviour to buy certain goods
Marginal change
describe small incremental adjustments to an existing plan of actions.
Productivity
the amount of goods and services produced from each hour of a workers’ life
The higher the amount of goods and services produced, the higher the living standard in a
corresponding economy.
Market
a group of buyers and sellers of a particular good or service, characterised by type of good and
degree of competition
Competitive market
many buyers and sellers, each having a negligible impact on the market outcome (on the price)
(price takers), all goods are the same
Price taker
1
, sellers and buyers that have no influence on the price (e.g. in a perfectly competitive sellers can’t
increase prices without loosing customers and not decrease without making less profit) - opposite
of price setters (e.g. in monopoly)
Law of demand
if the price of a good rises, ceteris paribus (other things are equal), the quantity demanded falls
and rise versa - the quantity demanded is negatively related to the price
Normal good
a good in which, ceteris paribus, an increase in income leads to a decrease in demand (shift of
demand curve to the right)
Inferior good
a good which, ceteris paribus, an increase in income leads to a decrease in demand (shift of
demand curve to the left)
Substitutes
two goods for which an increase in the price of one leads to an increase in the demand for the
other (e.g. butter and magarine)
Complements
two goods for which an increase in the price of one leads to a decrease in the demand for the other
(e.g. computers and software)
Law of supply
if the price of a good rises, ceteris paribus, the quantity of the good rises - the quantity supplied is
positively related to the price
Individual supply curve
relationship between the price of a good and the quantity supplied by an individual/ a firm shown in
a graph
Individual demand curve
the relationship between the price of a good and the quantity demanded shown in form of a graph;
(usually) downwards sloped
Market supply curve
horizontal sum of all individual supply curves for a particular good or service
Market demand curve
horizontal sum of all individual demand curves for a particular good or service - relationship
between the price of a good and the overall quantity demanded, ceteris paribus
Market equilibrium
point where supply and demand curves intersects - supplied and demanded quantities are equal.
point marks equilibrium quantity and equilibrium price (only price where sellers have no incentive to
change their price)
Price elasticity of demand
measure of how much the quantity demanded of a good responds to a change in the price of that
good
availability of close substitutes leads to higher elasticity, necessities are less elastic than luxuries,
dependent on definition of market and onetime horizon
(Quantity of water does not change because of price change)
Δ quantity supplied [%]/ Δ price [%]
Price elasticity of supply
2
