Chapter 1 : What is Economics?
Our inability to satisfy all our wants is called scarcity.
Because we face scarcity, we must make choices.
The choices we make depend on the incentives we face.
An incentive is a reward that encourages an action or a penalty that discourages an action.
Economics is the social science that studies the choices that individuals, businesses,
governments, and entire societies make as they cope with scarcity and the incentives that
influence and reconcile those choices.
Economics divides in to main parts:
• Microeconomics - the study of choices that individuals and businesses make, the way
those choices interact in markets, and the influence of governments.
• Macroeconomics - the study of the performance of the national and global economies.
What, how, and for whom goods and services get produced?
Factors of production
• Labour (human capital)
Who gets the goods and services depends on the incomes that people earn.
• Land earns rent.
• Labour earns wages.
• Capital earns interest.
• Entrepreneurship earns profit.
Efficiency is achieved when the available resources are used to produce goods and services:
1. At the lowest possible price and
2. In quantities that give the greatest possible benefit.
Equity is fairness, but economists have a variety of views about what is fair.
Four topics that generate discussion and that illustrate tension between self-interest and social
interest are • Globalization - the expansion of international trade, borrowing and lending, and
• The information-age economy
• Global warming
• Economic instability
Six key ideas define the economic way of thinking:
• A choice is a tradeoff.
• People make rational choices by comparing benefits and costs.
• Benefit is what you gain from something.
• (Opportunity)Cost is what you must give up to get something.
• Most choices are “how-much” choices made at the margin.
• Choices respond to incentives.
Chapter 2: The Economic Problem
The production possibilities frontier (PPF) is the boundary between those combinations of
goods and services that can be produced and those that cannot.
We achieve production efficiency if we cannot produce more of one good without producing
less of some other good.
Points on the frontier are efficient. Points inside the frontier is inefficient.
The marginal cost of a good or service is the opportunity cost of producing one more unit of it.
The marginal benefit of a good or service is the benefit received from consuming one more
unit of it.
The expansion of production possibilities—and increase in the standard of living—is called
Two key factors influence economic growth:
• Technological change
• Capital accumulation
Technological change is the development of new goods and of better ways of producing
goods and services.
Capital accumulation is the growth of capital resources, which includes human capital. Chapter 3: Demand and Supply
The quantity demanded of a good or service is the amount that consumers plan to buy during
a particular time period, and at a particular price.
The law of demand states:
Other things remaining the same, the higher the price of a good, the smaller is the quantity
demanded; and the lower the price of a good, the larger is the quantity demanded.
The law of demand results from
• Substitution effect
• Income effect
When the relative price (opportunity cost) of a good or service rises, people seek substitutes for
it, so the quantity demanded of the good or service decreases.
When the price of a good or service rises relative to income, people cannot afford all the things
they previously bought, so the quantity demanded of the good or service decreases.
A rise in the price, other things remaining the same, brings a decrease in the quantity demanded
and a movement up along the demand curve.
A fall in the price, other things remaining the same, brings an increase in the quantity demanded
and a movement down along the demand curve.
When demand increases, the demand curve shifts rightward.
When demand decreases, the demand curve shifts leftward.
Six main factors that change demand are:
• The prices of related goods
• Expected future prices
• Expected future income and credit
Movement Along the Demand Curve
When the price of the good changes and everything else remains the same, the quantity
demanded changes and there is a movement along the demand curve.
A Shift of the Demand Curve If the price remains the same but one of the other same but one of the other influences on
buyers’ plans changes, demand changes and the demand curve shifts.
The law of supply states:
Other things remaining the same, the higher the price of a good, the greater is the quantity
supplied; and the lower the price of a good, the smaller is the quantity supplied.
The five main factors that change supply of a good are:
• The prices of factors of production
• The prices of related goods produced
• Expected future prices
• The number of suppliers
• State of nature
Movement Along the Supply Curve
When the price of the good changes and other changes and other influences on sellers’ plans
remain the same, the quantity supplied changes and there is a movement along the supply
A Shift of the Supply Curve
If the price remains the same but some other same but some other influence on sellers’ plans
changes, supply changes and the supply curve shifts.
Equilibrium is a situation in which opposing forces balance each other. Equilibrium in a market
occurs when the price balances the plans of buyers and sellers.
The equilibrium price is the price at which the quantity demanded equals the quantity supplied.
The equilibrium quantity is the quantity bought and sold at the equilibrium price.
• Price regulates buying and selling plans.
• Price adjusts when plans don’t match.
At any price above the equilibrium price, a surplus forces the price down.
At any price below the equilibrium price, a shortage forces the price up.
At the equilibrium price, buyers’ plans and sellers’ plans agree and the price doesn’t change
until some event changes either demand or supply. Chapter 4: Elasticity
The price elasticity of demand is a units-free measure of the responsiveness of the quantity
demanded of a good to a change in its price when all other influences on buying plans remain
Percentage change in quantity demanded
Percentage change in price
Demand can be inelastic, unit elastic, or elastic, and can range from zero to infinity.
If the quantity demanded doesn't change when the price changes, the price elasticity of demand
is zero and the good as a perfectly inelastic demand. (The demand curve is vertical)
The price elasticity of demand equals 1 and the good has unit elastic demand.
If the percentage change in the quantity demanded is smaller than the percentage change in
• the price elasticity of demand is less than 1 and the good has inelastic demand.
If the percentage change in the quantity demanded is greater than the percentage change in
• the price elasticity of demand is greater than 1 and the good has elastic demand.
Cross Elasticity of Demand
The cross elasticity of demand is a measure of the responsiveness of demand for a g