ECO NOTES

INTRO TO ECON

The study of human behavior in relation to scarce resources.

Positive vs. Normative Economics:

• Positive Economics: Focuses on objective statements that can be tested and

validated (e.g., "An increase in the minimum wage will lead to higher
unemployment").
• Normative Economics: Deals with subjective statements and value judgments
(e.g., "The government should increase the minimum wages)

The basic economic problem is humans’ unlimited wants and needs to scarce
resources.

Microeconomics vs. Macroeconomics

• Microeconomics: The study of individual economic units, such as households and

firms, and how they make decisions regarding resource allocation. It focuses on
concepts like supply and demand, price determination, and consumer behavior.

• Macroeconomics: The study of the economy as a whole. It examines aggregate

indicators such as national income, unemployment rates, inflation, and economic
growth. Macroeconomics looks at how different sectors of the economy interact and the
effects of government policies.

Demand: The willingness and ability of consumers to purchase a good or service at a

given price. Demand reflects both wants and purchasing power.

Maslow’s Hierarchy of Needs categorizes human needs into 5 categories: physiological,

social, self-esteem, safety and self-realization.

Opportunity Cost

• Definition: Opportunity cost is the value of the next best alternative that is foregone
when a choice is made. It represents the benefits that could have been gained from
choosing a different option. If you choose to spend time studying instead of working, the
opportunity cost is the income you could have earned during that time.

Production Possibility Frontier (PPF)

• Illustration: The PPF is a graphical representation that shows the maximum possible
output combinations of two goods or services that can be produced with available
resources and technology.

• Interpretation:

1. Points on the curve indicate efficient production levels.

2. Points inside the curve indicate underutilization of resources.
3. Points outside the curve are unattainable with current resources.

• Shifts in the PPF: Can occur due to changes in resources, technology, or policies,
indicating growth or decline in production capacity.

Different Economic Systems

1. Traditional Economy

• Description: Based on customs, traditions, and beliefs. Production methods are

often passed down through generations.
• Advantages: Stability, predictability, and sustainability.
• Disadvantages: Limited innovation, low productivity, and vulnerability to external
shocks.

2. Command (Planned) Economy

• Description: Central authority (usually the government) makes all economic

decisions regarding production and distribution.
• Advantages: Can quickly mobilize resources, reduce inequality, and provide for
public goods.
• Disadvantages: Lack of consumer choice, inefficiencies, and potential for
government overreach.
3. Market Economy

• Description: Economic decisions are made by individuals and businesses based

on supply and demand. Prices are determined in free markets.
• Advantages: Greater efficiency, consumer choice, and innovation.
• Disadvantages: Inequality, potential for market failures, and lack of public goods.

4. Mixed Economy

• Description: Combines elements of market and command economies. Both the

government and private sector play significant roles.
• Advantages: Balances economic efficiency with social welfare.
• Disadvantages: Possible conflicts between government intervention and market
forces.

DEMAND

The demand curve is a downward-sloping graph that illustrates the relationship between
price and quantity demanded. The curve typically slopes down from left to right,
reflecting that as price decreases, quantity demanded increases.

Demand vs. Quantity Demanded

• Demand: Refers to the entire relationship between price and quantity demanded,
represented by the demand curve.

• Quantity Demanded: Refers to the specific amount of a good or service consumers are
willing to buy at a particular price.

Movement vs. Shift in Demand Curve

• Movement Along the Demand Curve: Caused by a change in the price of the good. For
example, a decrease in price leads to an increase in quantity demanded, resulting in a
movement down the demand curve.

• Shift in the Demand Curve: Occurs due to changes in factors other than price (e.g.,
consumer income, tastes, prices of related goods). A shift to the right indicates an
increase in demand, while a shift to the left indicates a decrease.
SUPPLY CURVE

• Movement Along the Supply Curve: Caused by a change in the price of the good,
leading to a change in the quantity supplied.
• Shift in the Supply Curve: Occurs due to changes in factors other than price (e.g.,
production costs, technology). A shift to the right indicates an increase in supply,
while a shift to the left indicates a decrease.

ELASTICITY

1. Definition

Elasticity measures the responsiveness of one variable to changes in another

variable. It quantifies how much one factor (like quantity demanded) changes in
response to changes in another factor (like price).

2. Types of Elasticity

A. Price Elasticity of Demand (PED)

• Definition: The responsiveness of quantity demanded to a change in

price.

• Formula:

PED=% change in quantity demanded% ÷ change in price

• Interpretation:

• Elastic (PED > 1): Demand is highly responsive to price changes.

• Inelastic (PED < 1): Demand is less responsive to price changes.

• Unitary Elastic (PED = 1): Proportional change in demand.

• Determinants of PED:

1. Availability of substitutes.

2. Necessity vs. luxury.

3. Proportion of income spent on the good.

4. Time period for adjustment.

B. Price Elasticity of Supply (PES)

• Definition: The responsiveness of quantity supplied to a change in price.

• Formula:

PES=% change in quantity supplied ÷ % change in price

• Interpretation:

• Elastic (PES > 1): Supply responds significantly to price changes.

• Inelastic (PES < 1): Supply responds less to price changes.

• Determinants of PES:

1. Time period (short-run vs. long-run).

2. Availability of resources.

3. Flexibility of production processes.

C. Income Elasticity of Demand (YED)

• Definition: The responsiveness of quantity demanded to changes in

consumer income.

• Formula: YED=% change in quantity demanded ÷ % change in income

• Types:

• Normal goods (YED > 0): Demand increases with income.

• Inferior goods (YED < 0): Demand decreases with income.

 D. Cross-Price Elasticity of Demand (XED)

• Definition: The responsiveness of the demand for one good to a change

in the price of another good.

• Formula: XED=% change in quantity demanded of Good A% ÷

change in price of Good B%

• Interpretation:

• Substitutes (XED > 0): Demand for one good rises when the
other’s price increases.

• Complements (XED < 0): Demand for one good falls when the
other’s price increases.

3. Applications of Elasticity

• Pricing strategies: Businesses use PED to set prices optimally.

• Taxation: Governments consider elasticity to predict tax revenue and its effects
on consumption.
• Resource allocation: Understanding PES helps in planning production.
• Economic policy: Elasticity analysis aids in policymaking and welfare
distribution.

4. Elasticity Coefficients Table

Type Coefficient Range Example

PED >1,<1,=1>1,<1,=1 Fuel (inelastic), Luxury goods (elastic)

PES >1,<1,=1>1,<1,=1 Agricultural goods (inelastic)

YED >0,<0>0,<0 Electronics (normal), Generic brands (inferior)

Type Coefficient Range Example

XED >0,<0>0,<0 Coke & Pepsi (substitutes), Cars & Fuel (complements)

5. Key Graphical Representations

• Perfectly Inelastic: Vertical curve (PED=0 PED=0).

• Perfectly Elastic: Horizontal curve (PED=∞ PED=∞).
• Unitary Elastic: Curved downward slope (PED=1 PED=1).

Total revenue is affected by elasticity. If demand is elastic, a price decrease leads to an

increase in total revenue. If demand is inelastic, a price decrease leads to a decrease in
total revenue.

Indifference curve

An indifference curve is a graphical representation that shows different

combinations of two goods that provide the same level of satisfaction or utility
to consumer.

• Downward sloping
• Do not intersect
• Curves that are far from the origin represent higher levels of utility.

Budget line

The budget line represents all possible combinations of two goods that are consumer
can purchase within a given income, given the prices of goods. It shows the trade-off
between the two goods within a consumers budget constraint.

Consumer equilibrium

It occurs at the point where the highest indifference curve is tangent to the budget line.
At this point the consumer maximizes the utility given their budget.
Income and substitute effect on price changes:

Income effect: the change in quantity demanded resulting from a change in the
consumers real income due to a change of a price in good. If the price decreases the
consumer feels richer and may buy more of the good.

Substitute effect: the change in quantity demanded resulting from a change in the
price of good making it more or less attractive relative to substitute goods. If the price of
a good decreases it becomes cheaper compared to its substitutes leading to an
increase in quantity demanded.

Utility

The satisfaction a person receives from consuming a good or service. Cardinal utility
states that utility is measurable although the units which we assign an amount of utility
are relative. Total utility is the sum of satisfaction that an individual gains from
consuming a given amount of goods or services in an economy. Marginal utility is the
additional satisfaction gained from each extra unit of consumption. Law of diminishing
marginal utility states the less you have something, the more satisfaction you gain from
each additional unit you consume. Disutility is a negative utility. Average utility is
calculated by taking the total utility and dividing it by the number of units consumption.
Relationship: Marginal utility influences average utility; as more units are consumed,
marginal utility typically decreases due to the law of diminishing marginal utility.
Consumer equilibrium will be reached when the consumer is able to gain the maximum
utility from the money they have available. Consumer equilibrium will be the point where
the customer achieves the highest marginal utility and the highest weighted marginal
utility which means the consumer will get the highest possible satisfaction with their
budget they have.

1. 1. Accounting and Economic Cost Concepts

A. Cost Concepts

1. Accounting Costs

• Definition: Explicit costs incurred by a business in monetary terms.

 • Examples: Salaries, rent, utilities, raw materials.

• Used for: Financial reporting and tax purposes.

2. Economic Costs

• Definition: The total cost of choosing one option over the next best
alternative. Includes both explicit and implicit costs.

• Formula: Economic Cost=Explicit Cost+Implicit Cost

3. Explicit Costs

• Costs directly paid out in monetary terms.

• Examples: Wages, machinery, utilities.

4. Implicit Costs

• Opportunity costs of using owned resources instead of renting/selling

them.

• Examples: Forgone rent, interest, or salary if working elsewhere.

B. Short-Run vs. Long-Run Costs

1. Short-Run Costs

• Fixed Costs (FC): Do not change with output (e.g., rent).

• Variable Costs (VC): Change with output (e.g., raw materials).

• Total Cost (TC):TC=FC+VCTC=FC+VC

• Average Cost (AC):AC=TCQAC=QTC

2. Long-Run Costs

• All costs become variable in the long run.

 • Firms can adjust scale to achieve economies of scale or
face diseconomies of scale.

2. Revenues

A. Total Revenue (TR)

• Definition: The total income from selling a good or service.

• Formula:TR=P×QTR=P×QWhere PP = Price per unit, QQ = Quantity sold.

B. Average Revenue (AR)

• Definition: Revenue per unit sold.

• Formula:AR=TRQAR=QTR

C. Marginal Revenue (MR)

• Definition: Additional revenue generated by selling one more unit of

output.

• Formula:MR=ΔTRΔQMR=ΔQΔTR

3. Profit Concepts

A. Accounting Profit

• Definition: The difference between total revenue and explicit costs.

• Formula:Accounting Profit=TR−Explicit CostsAccounting Profit=TR−Explici

t Costs

B. Economic Profit

• Definition: The difference between total revenue and economic costs.

• Formula:Economic Profit=TR−(Explicit Costs+Implicit Costs)Economic Pro

fit=TR−(Explicit Costs+Implicit Costs)
C. Normal Profit

• Definition: The level of profit that covers implicit costs; economic profit =
0.

4. Profit Maximization

A. Conditions for Profit Maximization

27. Short Run:

Profit is maximized where:MR=MCMR=MC

• MR > MC: Increase output to maximize profit.

• MR < MC: Reduce output to avoid loss.

28. Long Run:

Firms adjust scale to achieve profit maximization based on market competition.

B. Types of Market Structures

29. Perfect Competition:

• Firms produce where P=MC=MRP=MC=MR.

• Normal profits in the long run.

30. Monopoly:

• Firms maximize profit where MR=MCMR=MC, but

price P>MCP>MC.

31. Oligopoly:

• Profit maximization depends on strategic behavior and

interdependence.

5. Graphical Representations
Cost and Revenue Curves

• TR Curve: Upward sloping; depends on price and quantity.

• AR and MR Curves:

• In perfect competition: Horizontal (price = AR = MR).

• In imperfect competition: Downward sloping (MR < AR).

Profit Maximization in Perfect Competition

• Profit-maximizing output where P=MCP=MC.

• Short-run profits/losses depend on ATC vs. Price.

Profit Maximization in Monopoly

• MR curve lies below AR.

• Profit maximization where MR=MCMR=MC.

• Price determined from the demand curve.

1. 1. Definition of GDP

• Gross Domestic Product (GDP): The total monetary value of all final
goods and services produced within a country’s borders during a specific
time period.

• Key Features:

• Measures production within a country.

• Includes only final goods and services (avoids double-counting).

• Measured in monetary terms.

2. Components of GDP
GDP can be calculated using the Expenditure Approach:

GDP=C+I+G+(X−M)GDP=C+I+G+(X−M)

Where:

• C = Consumption: Household spending on goods and services.

• I = Investment: Spending on capital goods, inventories, and residential

construction.

• G = Government Spending: Expenditures on goods and services by the

government.

• (X−M)(X−M) = Net Exports: Exports (X) minus Imports (M).

3. Methods of Measuring GDP

A. Expenditure Approach

• Focuses on total spending on final goods and services.

• Formula:GDP=C+I+G+(X−M)GDP=C+I+G+(X−M)

B. Income Approach

• Adds up all incomes earned in the production process.

• Formula:GDP=Wages+Rent+Interest+Profits+Taxes−SubsidiesGDP=Wag
es+Rent+Interest+Profits+Taxes−Subsidies

C. Production (Value-Added) Approach

• Measures GDP by summing the value added at each stage of production.

• Formula:GDP=Value of Output−Value of Intermediate GoodsGDP=Value o

f Output−Value of Intermediate Goods

4. Types of GDP
A. Nominal GDP

• GDP measured at current prices.

• Does not account for inflation.

B. Real GDP

• GDP adjusted for inflation.

• Measures actual output.

• Formula:Real GDP=Nominal GDPPrice Index×100Real GDP=Price Index

Nominal GDP×100

C. Per Capita GDP

• GDP per person; an indicator of standard of living.

• Formula:Per Capita GDP=GDPPopulationPer Capita GDP=PopulationGD

P

5. GDP Growth Rate

• Measures the percentage change in GDP from one period to another.

• Formula:Growth Rate=GDPcurrent−GDPpreviousGDPprevious×100Growt
h Rate=GDPpreviousGDPcurrent−GDPprevious×100

6. Limitations of GDP as a Measure

A. Does Not Account for:

22. Non-market activities: Household labor, volunteer work.

23. Informal economy: Black market or unreported transactions.

24. Environmental degradation: GDP growth may occur at the expense of the
environment.
25. Income inequality: Does not show the distribution of income.

26. Quality of life: Ignores health, education, and leisure.

B. Overemphasis on Output

• Focus on economic growth rather than well-being or sustainability.

7. Alternatives to GDP

28. Gross National Product (GNP): Includes income from abroad.

29. Human Development Index (HDI): Measures quality of life.

30. Green GDP: Adjusts for environmental costs.

31. Happiness Index: Accounts for well-being and satisfaction.

8. Importance of GDP

32. Economic Health Indicator: Measures economic activity and growth.

33. Policy Making: Used to guide fiscal and monetary policies.

34. Investment Decisions: Attracts foreign and domestic investment.

35. Global Comparisons: Used to compare the size of economies.

These notes should help you understand GDP and its various aspects comprehensively.
Let me know if you'd like examples or deeper insights into any section!

1. 1. Definition of GDP

0. Gross Domestic Product (GDP): The total monetary value of all final
goods and services produced within a country’s borders during a specific time period.

1. Key Features:
 • Measures production within a country.

• Includes only final goods and services (avoids double-counting).

• Measured in monetary terms.

2. Components of GDP

GDP can be calculated using the Expenditure Approach:

GDP=C+I+G+(X−M)GDP=C+I+G+(X−M)

Where:

2. C = Consumption: Household spending on goods and services.

3. I = Investment: Spending on capital goods, inventories, and residential

construction.

4. G = Government Spending: Expenditures on goods and services by the

government.

5. (X−M)(X−M) = Net Exports: Exports (X) minus Imports (M).

3. Methods of Measuring GDP

A. Expenditure Approach

6. Focuses on total spending on final goods and services.

7. Formula:GDP=C+I+G+(X−M)GDP=C+I+G+(X−M)

B. Income Approach

8. Adds up all incomes earned in the production process.

9. Formula:GDP=Wages+Rent+Interest+Profits+Taxes−SubsidiesGDP=Wag
es+Rent+Interest+Profits+Taxes−Subsidies
C. Production (Value-Added) Approach

10. Measures GDP by summing the value added at each stage of production.

11. Formula:GDP=Value of Output−Value of Intermediate GoodsGDP=Value o

f Output−Value of Intermediate Goods

4. Types of GDP

A. Nominal GDP

12. GDP measured at current prices.

13. Does not account for inflation.

B. Real GDP

14. GDP adjusted for inflation.

15. Measures actual output.

16. Formula:Real GDP=Nominal GDPPrice Index×100Real GDP=Price Index

Nominal GDP×100

C. Per Capita GDP

17. GDP per person; an indicator of standard of living.

18. Formula:Per Capita GDP=GDPPopulationPer Capita GDP=PopulationGD

P

5. GDP Growth Rate

19. Measures the percentage change in GDP from one period to another.

20. Formula:Growth Rate=GDPcurrent−GDPpreviousGDPprevious×100Growt

h Rate=GDPpreviousGDPcurrent−GDPprevious×100
6. Limitations of GDP as a Measure

A. Does Not Account for:

• Non-market activities: Household labor, volunteer work.

• Informal economy: Black market or unreported transactions.
• Environmental degradation: GDP growth may occur at the expense of the
environment.
• Income inequality: Does not show the distribution of income.

Quality of life: Ignores health, education, and leisure.

B. Overemphasis on Output

21. Focus on economic growth rather than well-being or sustainability.

7. Alternatives to GDP

2. Gross National Product (GNP): Includes income from abroad.

3. Human Development Index (HDI): Measures quality of life.
4. Green GDP: Adjusts for environmental costs.
5. Happiness Index: Accounts for well-being and satisfaction.

Importance of GDP

6. Economic Health Indicator: Measures economic activity and growth.

7. Policy Making: Used to guide fiscal and monetary policies.
8. Investment Decisions: Attracts foreign and domestic investment.
9. Global Comparisons: Used to compare the size of economies.