Economics

Annotations:

• Studies the ways in which society decides what to produce, how to produce them, who to produce them for and how to apportion them. We are all economic agents and economic activity is what we do to make a living

1. Assumptions: people behave rationally at all times and always seek to improve their circumstances
   1. Producers: maximize their profits
   2. Consumers: maximize their benefits from their income
   3. Governments: maximize the welfare of their populations
2. Economic systems
   1. Centrally planned (command)

      Annotations:

      • decisions and choices about resource allocation are made by the government Only the government can make fair and proper provision for all members of society
   2. Free market

      Annotations:

      • decisions and choices about resource allocation are left to market forces of supply and demand, and the workings of the price mechanism
   3. Mixed
3. Scarcity of resource: human wants exceed what can be actually produced
4. Production possibility frontier
   1. Opportunity cost: the cost of an item measured in terms of the alternatives forgone
5. Absolute advantage vs. comparative advantage
6. Market: buyers and sellers come together to exchange goods/services. Goods/services has a price if it is both useful and scarce
7. Marginal utility: the extra satisfaction gained by the consumption of one additional unit of goods/services

   Annotations:

   • consumers use marginal utility to decide to or not to buy one additional unit of goods/services

1. National income (net national product): the sum of all incomes which arise as a result of economic activity, that is from the production of domestically owned goods/services
   1. Gross domestic product: the total value of income/ production from economic activities within a country in a given period
   2. Gross national product: = GDP + net property income from abroad
   3. Purposes: measure the living standard in a country, compare wealth between countries; measure the improvements; assist the government in economic planning
   4. Determine national income
2. Inflation & unemployment
3. Policies
4. Government intervention and income distribution

1. Demand: the quantity of goods/services that potential purchasers would be willing and able to buy, or attempt to buy, at any possible price
   1. Factors: price, income, price of substitute goods, tastes and fashion, expectations of future price changes, distribution of income
   2. Substitute goods (goods that are alternatives to each other)/ Complements goods (goods that tend to be bought and used together)
2. Supply: the quantity of goods/services that existing suppliers or would-be suppliers would want to produce for the market at a given price
   1. Factors: cost of making, prices of other goods, expectation of price changes, changes in technology, other factors
3. The equilibrium price: the price at which market supply and market demand quantities are in balance
   1. Price mechanism
4. Demand-supply analysis
   1. Elasticity of demand and supply
      1. X elasticity of Y: the responsiveness in the Y of a good to a change in the X = %change in Y/ %change in X
5. Cost/revenue/productivity
   1. A firm will maximize its profits when marginal cost equals marginal revenue MC = MR