Economics Revision Notes
Lecture 1- Introduction
Economics: study of the choices people and societies make to attain their unlimited
wants, given their scarce resources.
Market: A group of buyers and sellers of a good or service and the institution or
arrangement by which they come together to trade.
Scarcity: where unlimited wants exceed the limited resources available to fulfill
Trade-off: where producing more of one good or service means producing less of
another good or service, because of scarcity.
The opportunity cost of any production or consumption activity is the value of ‘next
best’ alternative that must be given up to engage in that activity.
The true cost of ‘something’ in economic terms is its ‘opportunity cost’ (i.e. what
you give up to get it!)
Centrally planned economy: government decides how economic resources will be
Market economy: decisions of households and firms interacting in markets
determine the allocation of economic resources.
Mixed economy: where most economic decisions result from the interaction of
buyers and sellers in markets, but in which the government plays a significant role
in the allocation of resources.
Consumer sovereignty is a central feature of market economies and occurs
because firms must produce goods and services that meet the wants of the
consumers, in order to be successful.
Productive efficiency: where a good or service is produced using the least amount
Allocative efficiency: production reflects consumer preferences, resources are
allocated to their best uses, and every good or service is produced up to the point
where the last unit provides a marginal benefit to consumers equal to the marginal
cost of producing it.
Dynamic efficiency: Occurs when new technology and innovation are adopted over
Production possibility frontier: A curve showing the maximum attainable
combinations of two products that may be produced with available resources.
Lecture 2- Demand and Supply
Quantity demanded: The amount of a good or service that a consumer is willing
and able to buy at a given price.
As the price falls, the quantity of a good or service demanded increases Holding everything else constant, when the price of a product falls, the quantity
demanded will increase, and when the price of a product rises, the quantity
demanded will decrease.
Change in quantity demanded that results from a change in price, making the good
or service more or less expensive relative to other goods and services (holding
constant the effect of the price change on consumer purchasing power).
The five most important variables are:
1. Prices of related goods (substitutes and compliments)
2. Income (normal good Vs. inferior good)
4. Population and demographics
5. Expected future prices
Quantity supplied: the amount of a good or service that a firm is willing and able to
supply at a given price.
As the price falls, the quantity of the good or service supplied decreases
Holding everything else constant increases in the price of a product cause increases
in the quantity supplied, and decreases in price cause decreases in the quantity
The five most important variables are:
1. Prices of inputs
2. Technological change
3. Prices of substitutes in production
4. Expected future prices
5. Number of firms in the market
Market equilibrium is when quantity demanded equals quantity supplied.
Shortage: A situation in which the quantity demanded is greater than the quantity
Surplus: A situation in which the quantity supplied is greater than the quantity
Lecture 3- Elasticity
Responsiveness in one dependent variable Y to changes in another independent
variable X, ceteris paribus.
(% change in Y) / (% change in X) = (ΔY/Y) / (ΔX/X) Demand is elastic if the elasticity is larger than one in absolute value
Demand is inelastic if the elasticity is less than one in absolute value
Unitary elastic if the elasticity is one in absolute value
Perfectly elastic if the elasticity is infinity in absolute value
Perfectly inelastic if the elasticity is zero
The flatter demand curve means that demand elasticity will be higher generally.
What determines price elasticity of demand?
Availability of close substitutes (electricity vs Big Mac)
The length of time involved
Necessities vs. luxuries (i.e. discretionary goods) (milk vs restaurants)
Definition of the market
Share of expenditure on the good in the consumer’s budget
Total revenue is the amount paid by buyers and received by sellers of a good.
The elasticity of supply will always be positive as price and quantity supplied always
move in the same direction
Availability of resources
Flexibility and mobility of inputs
Lecture 4- Economic Efficiency
Consumer surplus: The difference between the highest price a consumer is willing
to pay and the price the consumer actually pays.
Producer surplus: The difference between the lowest price a firm would have been
willing to accept and the price it actually receives.
Marginal benefit: The additional benefit to a consumer from consuming one more
unit of a good or service. Marginal cost: The additional cost to a firm from producing one more unit of a
good or service.
Equilibrium in a competitive market results in the economically efficient level of
output where MB = MC.
Economic surplus: The sum of consumer surplus and producer surplus.
Deadweight loss: The reduction in economic surplus resulting from a market not
being in competitive equilibrium.
Price floor: A legally determined minimum price that sellers may receive.
Price ceiling: A legally determined maximum price that sellers may receive.
Taxes finance government activities.
Taxes on goods and services affect market equilibrium and result in a decline in
Taxes reduce consumer surplus and reduce producer surplus and result in a
Taxes reduce the production of goods and services.
Tax creates a deadweight loss by reducing the quantity exchanged and the gains
The size of the deadweight loss depends on elasticities.
If sellers or buyers can more flexibly adjust to the adverse changes in price, then
the deadweight loss is larger (as more gains from trade will be lost).
The deadweight loss is larger if demand and/or supply are more price-elastic.
Lecture 5- Labour Markets and International Trade
The demand for labour is a derived demand: derived from the demand for the
good or service the factor produces.
The labour demand curve is downward sloping and shows the relationship between
the wage rate and quantity of labour demanded.
The marginal product of labour is the additional output a firm produces as a result
of hiring one more worker.
MP = ΔQ/ΔL
Because of the law of diminishing returns, MP declines as a firm hires more
The marginal revenue is the additional revenue firm receives as a result of
producing an additional unit of output.
MR = ΔTR/ΔQ
The labour supply curve shows the relationship between the wage rate and
quantity of labour supplied.
The labour supply curve for most people is upward sloping.
At very high wage levels the labour supply curve for an individual may become
Tariff: a tax on imported goods- Government collects tariff revenue.
Quota: a limit on the amount of import Lecture 6- Market Failure and Government Intervention
Output produced at a minimum average cost (productive efficiency)
Economic problem of how to produce is addressed.
Output produced where marginal benefit to society equals the marginal c