ECONOMICS REVIEWER
CHAPTER 1: INTRODUCTION TO ECONOMICS
I. Introduction
Economics is the study of scarcity and its effects on resource allocation, production, and societal
welfare. It intersects with various disciplines such as political science, mathematics, sociology,
law, and business. The primary goal is to determine the most efficient use of resources to
achieve individual and societal objectives.
Key Areas of Concern in Economics:
Production and employment
Investment and savings
Government taxation and spending policies
International trade and regulation
Urbanization and environmental issues
II. Decision-Making in Economics
Decision-making involves selecting the best alternative by analyzing costs and benefits.
Five Steps of Economic Decision-Making:
1. Define the problem
2. Identify possible alternatives
3. Develop criteria and a ranking system
4. Evaluate alternatives against the criteria
5. Make a decision
III. Significance of Studying Economics
Understand markets and how they function
Analyze supply and demand factors
Assess the impact of government policies on the economy
Gain insights into economic growth and global trade
IV. Economic Systems
An economic system determines how resources are distributed and goods are produced within a
society.
Types of Economic Systems:
1. Command Economy – The government controls all economic decisions.
2. Market Economy – Private ownership and market forces determine production and
pricing.
3. Mixed Economy – A blend of private enterprise and government regulation.
V. Key Economic Decision-Making Tools
Demand and Supply Analysis – Understanding how market demand influences pricing.
Cost Structures – Assessing production costs and profitability.
Law of Diminishing Marginal Utility – Examining declining satisfaction from
consumption.
Economies of Scale – Understanding cost advantages from large-scale production.
VI. Important Terms
Scarcity – Limited resources versus unlimited wants.
Taxation – Government-imposed financial obligations.
Inflation – The general rise in prices over time.
Exchange Rates – The value of one currency relative to another.
Interest Rates – The cost of borrowing money.
Economic Growth – The increase in goods and services over time.
Markets – Where buyers and sellers exchange goods and services.
CHAPTER 2: DEMAND, SUPPLY, AND EQUILIBRIUM
I. Introduction
Demand and supply determine the price and quantity of goods in a market. Equilibrium is the
point where the quantity demanded equals the quantity supplied.
II. The Law of Demand and Supply
Higher supply + constant demand → Lower prices
Lower supply + constant demand → Higher prices
Higher demand + constant supply → Higher prices
Lower demand + constant supply → Lower prices
III. The Demand and Supply Curves
Demand Curve: Downward sloping; shifts based on consumer preferences, income, and
substitute goods.
Supply Curve: Upward sloping; shifts based on production costs and technological
advancements.
IV. Market Equilibrium
Equilibrium occurs when supply meets demand, leading to stable prices and quantities.
V. Factors Affecting Demand and Supply
Demand Influencers: Consumer income, tastes, expectations, and price of related
goods.
Supply Influencers: Production costs, technology, government policies, and number of
sellers.
CHAPTER 3: ELASTICITY
Elasticity measures how sensitive one variable is to a change in another.
Types of Elasticity:
1. Price Elasticity of Demand – Consumer response to price changes.
2. Price Elasticity of Supply – Producer response to price changes.
3. Income Elasticity of Demand – How consumer spending changes with income.
4. Cross Elasticity of Demand – How the demand for one product changes due to the price
change of another.
Elasticity Coefficient Formula:
Interpreting Elasticity:
Elastic (>1): Demand/supply changes significantly with price changes.
Inelastic (<1): Demand/supply changes minimally with price changes.
Unitary Elastic (=1): Proportional change in demand/supply with price change.
CHAPTER 4: BASIC ECONOMIC PRINCIPLES
I. Fundamental Concepts
Scarcity: Limited resources versus unlimited wants.
Opportunity Cost: The value of the next best alternative forgone.
Supply and Demand: Key forces driving market prices and resource allocation.
Economic Efficiency: Optimal resource allocation with minimal waste.
Comparative Advantage: Specialization and trade to maximize efficiency.
Diminishing Marginal Utility: Reduced satisfaction from consuming additional units.
II. Rational Choice & Trade-Offs
Rational consumers and producers seek to maximize benefits while minimizing costs.
Trade-offs occur when choosing between different options.
CHAPTER 5: CONSUMER AND PRODUCER BEHAVIOR
I. Consumer and Producer Behavior
Consumers aim to maximize satisfaction through purchasing decisions.
Producers aim to maximize profit by optimizing production and pricing strategies.
II. Utility Maximization & Cost of Production
Consumers allocate their budget to get the highest satisfaction.
Firms analyze costs (fixed and variable) to set competitive prices and maximize profits.
III. Market Structure & Market Power
Types of Market Structures:
1. Perfect Competition: Many sellers, identical products, price-takers.
2. Monopolistic Competition: Many sellers, differentiated products.
3. Oligopoly: Few dominant firms control the market.
4. Monopoly: A single seller dominates, with significant market power.
IV. Competitive Markets
Large number of buyers and sellers.
No single firm can influence prices.
Free entry and exit of firms.
Perfect information and homogeneity of products.
V. Conclusion
Understanding economic principles helps individuals and businesses make informed decisions.
Consumer and producer behavior, elasticity, and market structures shape market outcomes.
Mastering these concepts is crucial for analyzing economic policies and market dynamics
effectively.
