Scarcity: limited resources v unlimited wants Implications: elastic = compete on price, inelastic = price can be increased w/o

Resources: land, labour, entrepreneurship, capital losing many customers

Efficiency: optimal use of resources, no misallocation —---------------------------------------------------------------------------------------------------------
Opportunity cost: next best alternative forgone Short run: at least one input is fixed, long run: all inputs are varied
Specialisation: focused production for efficiency Productivity: output per worker
PPF: a model that visualised trade-offs and resource allocation Law of diminishing returns: adding more variable input to a fixed input
Micro: examines individual behaviour, firm decisions, specific markets increases output only up to a point; beyond- marginal returns decline
Macro: looks at aggregate indicators (GDP, inflation, national employment) SRCC relationships: MC<ATC, ATC ↓, MC>ATC, ATC ↑
Economic objectives: maximise resource efficiency, maintain low LRCC: formed by connecting lowest pt.s of multiple SR ATC curves, reflects
unemployment, improve living standards, ensure price stability, keep interest firms ability to adjust all inputs
rates + housing prices affordable EOS (ATC ↓ as output ↑): specialisation, spreading overheads, multi-stage
Explicit cost: direct monetary costs production | DOS (ATC ↑ as output ↓): management inefficiencies. Worker
Implicit costs: non-monetary costs alienation, complex production processes
Market is efficiency = producers responding to profit incentives + consumers
TC = TFC + TVC
buying what they value
AFC = TFC / Q

AVC = TVC / Q

AVC = TVC / Q

ATC = TC / Q; AFC + AVC

PPF outward shift: increase in resources, technological advances, improved
education, new resources discovered MC = ΔTC / ΔQ
PPF inward shift: resources lost (disasters, war), decline in labour, destruction
infrastructure, recession/decline Avg. productivity = Q / L
—---------------------------------------------------------------------------------------------------------
Demand curve, downward sloping: income effect (higher prices reduce Marginal productivity = ΔQ / ΔL
purchasing power), substitution effect (consumers switch to cheaper alternatives)
| supply curve, upward sloping
Change in quantity demanded/supplied: movement along the curve to price
AFC ↓ Output ↑ Spreading FC over more units
change
Changes in demand (shifts): income changes, prices of
AVC ↑ Output ↑ Reflects rising VC
substitutes/complements, consumer preferences, expectations, no. of buyers
Changes in supply (shifts): input costs, technology, weather/conditions, no. of ATC U-shaped AFC + AVC
sellers, price of related goods
Equilibrium=QS=QS=equilibrium price= market clears MC J-shaped Intersects ATC and AVC at their min pt.
Disequilibrium= shortage=QD>QS=upward pressure on price,
surplus=QS>QD=downward pressure on price —---------------------------------------------------------------------------------------------------------
Market failure: free market fails to allocate resources efficiently, leading to a loss
Increase in Decrease in Increase in Decrease in in economic and social welfare
demand demand supply supply Perfect competition assumptions: many buyers+sellers, homogeneous
products, no barriers to entry, perfect info., perfect mobility of resources
Higher P + Q Lower P + Q Lower P, higher Higher P, lower Market failure causes: imperfect knowledge (unaware/mislead), differentiated
Q Q
goods (distorted value perception), resource immobility (geography, skills),
Price ceiling: legal maximum price (rent control) market power (monopoly, oligopoly, collusion, price fixing, abnormal profits,
Direct effects: shortages (below equilibrium) market manipulation), inadequate provision (merit+demerit goods, public goods-
Indirect effects: decline in product quality, black markets, non-price rationing, nonexcludability + nonrivalry), external costs (pollution, traffic), inequality
reduced future supply (income, wealth, opportunity)
Price floor: legal minimum price (minimum wage) Correcting market failure: state provision, assigning resource ownership to
Direct effects: surplus (above equilibrium) prevent overuse, tax, subsidy, regulation (privatisation and nationalisation), bans,
Indirect effects: reduced non-wage benefits, less training, lower literacy income redistribution
—-------------------------------------------------------------------------------------------------------- —---------------------------------------------------------------------------------------------------------
GDP: market value of all final goods and services produced within a country in a
Type Formula Sign Elasticity Examples
given period | measures current production only, excludes transfer payments and
2nd-hand goods, uses market prices, focuses on final goods to avoid double
PED %ΔQ/%ΔP Always -ve > elastic Apples (el)
< inelastic Petrol (inel) counting
GNP: GDP + Net Primary Income from Rest of the World (NPIRW)
XED %ΔQx/%ΔP +ve sub ↑ cl sub Apl v org NPIRW > 0, GNP > GDP
y -ve com ↓ cl com Tea v sug Calculating GDP: expenditure (GDP=C+I+G+X-M), income
(GDP=COE+NOS+D+IBTS), value-added (sale-purchases; W+R+I+P)
YED %ΔQ/%ΔY +ve normal >1 luxury Apl (lux),
-ve inferior 0-1 need cigs (inf)
Price elasticity determinants: substitutability (more, more elastic), definition
(narrowly defined, more elastic), income proportion (bigger, more elastic), luxury
(elastic) v. needs (inelastic), time (longer, more elastic)

Elastic demand Price ↑ Revenue ↓

ΔQ < ΔP Price ↓ Revenue ↑

Inelastic demand Price ↑ Revenue ↑

ΔQ > ΔP Price ↓ Revenue ↓

GDP limitations: income distribution/poverty, environment down, non-market
transactions (unpaid work), underground economy
 —---------------------------------------------------------------------------------------------------------
Growth rate How fast GDP (+ newGDP - oldGDP /
LRAS: vertical, reflects potential GDP, unaffected by inflation
components change) oldGDP X 100
SRAS: upward sloping, reflects actual GDP, affected by inflation & resource
Nominal GDP Measures output using usage
current prices SR dynamics: sticky wages (don't quickly adjust- real wages fluctuate),
unanticipated inflation (inflation increases, real wages decreases, labour demand
Real GDP Adjusts inflation, shows Nominal GDP - inflation increases, unemployment decreases) (inflation decreases, real wages increases,
High prod v high prices true output growth ‘’ / GDP deflator x 100 labour demand decreases, unemployment increases)
SRAS shifts: leftward (higher production costs; deflationary gap), rightward
GDP per capita Same GDP ≠ same GDP / population (lowers costs, better technology, higher productively; inflationary gap)
living standards Stagflation: cause= supply shock, result= high inflation + low GDP, difficult to
resolve with standard policies
Currency conversion GDP comparison in common currency Fiscal policy: government spending and taxation; used to stimulate AD during
recessions; tax cuts- more consumption, infrastructure spending- more
Purchasing power Adjusts GDP to reflect cost of living investment, welfare programs- support demand
parity (PPP) Compares price of standard basket of goods
Monetary policy: interest rate + exchange rate + money supply; controlled by
Comparison of income + consumption globally
central banks, adjusts interest rates to influence borrowing/spending, lower IR-
—--------------------------------------------------------------------------------------------------------- higher AD, higher IR- lower AD
Inflation: the general increase in prices across an economy | +ve (money value↓)
-ve (deflation; money value ↑)
Hyperinflation: caused by excessive money printing, leads to extreme currency
value loss
High inflation= currency depreciation (lower purchasing power), reduced
international competitiveness (exports decline), lower savings rates
(spending/investing in assets), loss for creditors (debt repaid with less valuable
money), higher taxes (nominal income rises, increasing tax burden), financial
uncertainty (discourages investment)
CPI: measures the average change in prices of a fixed basket of goods and
services purchased by households

—---------------------------------------------------------------------------------------------------------
Money: defined by its functions, not by its physical form; includes anything
generally accepted as payment for goods+services+debts
Money functions: medium of exchange (used to buy goods and services), unit
of account (standard for pricing and valuing items), store of value (maintains
value over time; can be saved and used later), standard of deferred payment
(used to settle future obligations)
Money evolution: autarky (no trade; self-sufficient families), barter system
CPI limitations: only measures urban areas, hard to adjust for quality changes, (direct exchange of goods; requires double coincidence of wants), commodity
new products take time to be included, substitution bias money (items like gold, shells or whale teeth), fiat money (coins and paper
Real interest rate (inflation adjusted) = nominal interest rate (inflation not money declared legal tender by governments), electronic fund transfers (digital
adjusted) - inflation | inflation rises unexpectedly, real IR= -ve (lenders lose, transactions replacing physical cash)
borrowers win) | deflation increases real burden of debt (borrowers lose) Money demand: holding money- reasons: transactions (daily purchases and
—--------------------------------------------------------------------------------------------------------- payments), precautionary (emergencies or unexpected needs), speculative
Unemployment: occurs when people who are willing and able to work cannot (investment decisions and portfolio management)
find a job; lost jobs + actively seeking jobs
Unemployment causes: high unemployment benefits, rigid labour laws,
geographic immobility, currency unions (reduce transaction costs), discrimination
Unemployment impacts: lower GDP (↓ labour used- ↓ output), higher govt
spending (↑ welfare, ↓ tax revenue), personal costs (↓ income, ↓ living standards)
Labour force = employed + unemployed
Unemployment rate = (unemployed / labour force) x 100
Labour force participation rate = (labour force / working age population) x 100
Measurement limitations: underemployment (working part-time but wanting
full-time), discouraged workers (stopped looking for working but still want a job)
Types of unemployment:
-frictional: short-term, transitional, job switching, recent graduates
-structural: decrease in aggregate demand of the skills, technology advances,
trade changes, location changes, factory closures, automation Monetary control instruments:
-cyclical: recessions, fall in demand- job loss - rediscount rate: interest changed to commercial banks borrowing from the
Normal level/natural rate of unemployment: healthy (frictional+structural, NOT central bank; higher rate- less borrowing- lower money supply
cyclical), avoids high inflation -open market operations: buying/selling government securities; selling bonds
Minimum wage: the minimum amount workers are allowed to be paid by (reduces money supply); buying bonds (increases money supply)
employers; min wage > equilibrium wage: labour supply > labour demand = -reserve requirements: minimum reserves banks must hold; higher reserve
surplus of labour = unemployment requirement- less lending- lower money supply
—---------------------------------------------------------------------------------------------------------
AD: total demand for goods+services; relationship between price level and GDP
SRAS: output firms are willing to produce at different inflation rates
LRAS: vertical line representing potential GDP
AD slopes down: wealth effect (↓ inflation,↑ real wealth, ↑ consumption), interest
rate effect (↓ inflation, ↓ interest rate,↑investment), exchange rate effect (↓
inflation, stronger currency, ↑ exports)
AD shifts: increase= ↑GDP(elements), ↓unemployment, decrease= recession,
↑unemployment | causes: consumer+business confidence, foreign GDP
changes, exchange rate fluctuations, fiscal+monetary policy