Section 1: Basic Economic Concepts
• What is Economics?:
o Economics is the study of how individuals, businesses, and governments
make choices about allocating limited resources to satisfy their wants
and needs.
o Microeconomics: Focuses on the behavior of individual consumers and
firms, and how they interact in markets.
o Macroeconomics: Looks at the economy as a whole, focusing on
aggregate measures like GDP, unemployment, and inflation.
• Scarcity and Opportunity Cost:
o Scarcity: The basic economic problem of having limited resources but
unlimited wants.
o Opportunity Cost: The cost of the next best alternative that is given up
when a decision is made.
o Every choice has a trade-off, where something is gained and something is
lost.
• Factors of Production:
o Land: Natural resources used in production (e.g., water, minerals).
o Labor: Human effort used to produce goods and services.
o Capital: Man-made resources used in production (e.g., machinery,
buildings).
o Entrepreneurship: The ability to combine land, labor, and capital to
create goods and services.
Section 2: Supply and Demand
• Law of Demand:
o As the price of a good or service decreases, the quantity demanded
increases, and vice versa.
o Demand Curve: A downward-sloping curve that shows the relationship
between price and quantity demanded.
o Determinants of Demand: Income, tastes and preferences, prices of
related goods (substitutes and complements), future expectations, and
population changes.
• Law of Supply:
o As the price of a good or service increases, the quantity supplied
increases, and vice versa.
o Supply Curve: An upward-sloping curve that shows the relationship
between price and quantity supplied.
o Determinants of Supply: Production costs, technology, prices of related
goods, taxes and subsidies, and expectations of future prices.
• Market Equilibrium:
o The point where the quantity demanded equals the quantity supplied,
known as the equilibrium price or market-clearing price.
o Surplus: Occurs when the quantity supplied exceeds the quantity
demanded (price above equilibrium).
o Shortage: Occurs when the quantity demanded exceeds the quantity
supplied (price below equilibrium).
Section 3: Elasticity of Demand and Supply
• Price Elasticity of Demand (PED):
o Measures how sensitive the quantity demanded is to a change in price.
o Elastic Demand: When a small change in price leads to a large change in
quantity demanded (e.g., luxury goods).
o Inelastic Demand: When a change in price leads to little or no change in
quantity demanded (e.g., necessities like insulin).
o PED Formula: % Change in Quantity Demanded ÷ % Change in Price.
▪ If PED > 1, demand is elastic.
▪ If PED < 1, demand is inelastic.
• Price Elasticity of Supply (PES):
o Measures how sensitive the quantity supplied is to a change in price.
o Elastic Supply: Producers can increase output quickly when prices rise
(e.g., manufactured goods).
o Inelastic Supply: Supply is difficult to change in response to price
changes (e.g., agriculture, due to growing cycles).
o PES Formula: % Change in Quantity Supplied ÷ % Change in Price.
• Determinants of Elasticity:
o For demand: Availability of substitutes, time horizon, proportion of
income spent on the good.
o For supply: Flexibility of production, availability of inputs, and time.
Section 4: Market Structures
• Perfect Competition:
o A market structure with many buyers and sellers, where no single
participant can influence the price.
o Characteristics:
▪ Homogeneous products (all goods are the same).
▪ Free entry and exit from the market.
▪ Full information about prices and products.
▪ Example: Agriculture markets.
• Monopoly:
o A market with only one seller, who controls the price of the product.
o Characteristics:
▪ Unique product with no close substitutes.
▪ High barriers to entry prevent other firms from entering the market.
▪ Example: Utility companies.
o Natural Monopoly: A type of monopoly where a single firm can provide
goods or services at a lower cost than two or more firms (e.g., water
supply).
• Oligopoly:
o A market structure with a few large firms dominating the market.
o Characteristics:
▪ Interdependence between firms (decisions by one firm affect
others).
▪ Non-price competition (firms often compete through advertising or
product differentiation rather than price).
▪ Example: Automobile industry.
• Monopolistic Competition:
o A market structure where many firms sell similar but not identical
products.
o Characteristics:
▪ Product differentiation (firms try to make their product stand out).
▪ Some control over pricing.
▪ Example: Restaurants, clothing brands.
Section 5: Macroeconomic Indicators
• Gross Domestic Product (GDP):
o The total value of all goods and services produced within a country over a
specific period, usually a year.
o Nominal GDP: Measured using current prices, not adjusted for inflation.
o Real GDP: Adjusted for inflation, providing a more accurate measure of
economic growth.
o GDP per capita: GDP divided by the population, used to compare living
standards between countries.
• Unemployment:
o The percentage of the labor force that is actively looking for work but is
unable to find a job.
o Types of Unemployment:
▪ Frictional Unemployment: Short-term unemployment due to the
normal turnover in the labor market (e.g., people changing jobs).
▪ Structural Unemployment: Occurs when there’s a mismatch
between the skills workers have and the skills needed for available
jobs.
▪ Cyclical Unemployment: Results from downturns in the business
cycle, such as during a recession.
• Inflation:
o A general increase in prices and fall in the purchasing power of money.
o Consumer Price Index (CPI): Measures the average change over time in
the prices paid by consumers for a market basket of goods and services.
o Hyperinflation: Extremely rapid or out-of-control inflation, often leading
to a collapse in the currency.
o Deflation: A decrease in the general price level of goods and services,
which can lead to reduced economic activity and higher unemployment.
