Introduction to Micro and Macroeconomics
1. Introduction to Economics
1.1. Basic Concepts
1.1.1. Production Possibilities Frontier (PPF)
PPF: Represents the efficient allocation of resources to produce two goods. Points on the PPF are efficient, points inside are inefficient, and points outside are unattainable.
Efficient: Maximum output is produced with available resources.
Opportunity Cost: The value of the next best alternative forgone when making a choice.
1.1.2. Scarcity and Choice
Scarcity: Unlimited wants and needs but limited resources.
Shortage: A temporary situation where demand exceeds supply at a given price.
1.1.3. Economic Systems
Mixed Economy: An economy that combines elements of market and command economies.
1.2. Microeconomics vs. Macroeconomics
Microeconomics: Studies the behavior of individual economic agents (households, firms) and markets.
Macroeconomics: Studies the economy as a whole, including inflation, unemployment, and GDP.
2. Supply and Demand
2.1. Demand
Law of Demand: As price increases, quantity demanded decreases (inverse relationship).
Factors Affecting Demand:
- Price of the good
- Price of related goods (substitutes and complements)
- Income
- Tastes and preferences
- Consumer expectations
2.2. Supply
Law of Supply: As price increases, quantity supplied increases (direct relationship).
Factors Affecting Supply:
- Price of the good
- Cost of production (inputs)
- Technology
- Producer expectations
- Number of sellers
2.3. Market Equilibrium
Equilibrium Price: The price at which quantity demanded equals quantity supplied.
Equilibrium Quantity: The quantity bought and sold at the equilibrium price.
3. Elasticity
3.1. Price Elasticity of Demand
Price Elasticity of Demand: Measures the responsiveness of quantity demanded to a change in price.
Elastic Demand: A small change in price leads to a large change in quantity demanded.
Inelastic Demand: A large change in price leads to a small change in quantity demanded.
3.2. Income Elasticity of Demand
Income Elasticity of Demand: Measures the responsiveness of quantity demanded to a change in income.
Normal Good: Income elasticity is positive (demand increases as income increases).
Inferior Good: Income elasticity is negative (demand decreases as income increases).
3.3. Cross-Price Elasticity of Demand
Cross-Price Elasticity of Demand: Measures the responsiveness of quantity demanded of one good to a change in the price of another good.
Substitute Goods: Cross-price elasticity is positive (demand for one good increases as the price of the other good increases).
Complement Goods: Cross-price elasticity is negative (demand for one good decreases as the price of the other good increases).
4. Production and Costs
4.1. Production Function
Production Function: Shows the relationship between inputs (labor, capital) and output.
Marginal Product: The additional output produced by one more unit of input.
Law of Diminishing Marginal Returns: As more of a variable input is added to a fixed input, the marginal product of the variable input eventually decreases.
4.2. Costs of Production
Fixed Costs: Costs that do not vary with output.
Variable Costs: Costs that vary with output.
Total Costs: Fixed costs plus variable costs.
Average Costs: Total costs divided by output.
Marginal Costs: The additional cost of producing one more unit of output.
5. Market Structures
5.1. Perfect Competition
Perfect Competition: Many buyers and sellers, homogeneous products, free entry and exit, perfect information.
Price Taker: Firms in perfect competition have no control over price.
5.2. Monopoly
Monopoly: One seller, no close substitutes, barriers to entry.
Price Maker: Monopolies have significant control over price.
5.3. Monopolistic Competition
Monopolistic Competition: Many buyers and sellers, differentiated products, free entry and exit.
5.4. Oligopoly
Oligopoly: Few sellers, interdependent firms.
6. Factor Markets
6.1. Labor Market
Demand for Labor: Derived demand based on the marginal product of labor.
Supply of Labor: Determined by individuals’ trade-off between work and leisure.
6.2. Capital Market
Demand for Capital: Based on the marginal product of capital.
Supply of Capital: Determined by savings and investment decisions.
7. Market Failure and Government Intervention
7.1. Externalities
Externality: A cost or benefit imposed on a third party not involved in the transaction.
Negative Externality: A cost imposed on a third party (e.g., pollution).
Positive Externality: A benefit imposed on a third party (e.g., education).
7.2. Public Goods
Public Good: Non-rivalrous (one person’s consumption doesn’t diminish another’s) and non-excludable (difficult to prevent people from consuming).
7.3. Government Policies
Taxes and Subsidies: Can be used to correct externalities.
Regulations: Can be used to address market failures.
8. Macroeconomic Indicators
8.1. Gross Domestic Product (GDP)
GDP: The market value of all final goods and services produced within a country in a given period.
8.2. Inflation
Inflation: A general increase in the price level.
8.3. Unemployment
Unemployment: The percentage of the labor force that is actively seeking work but cannot find it.
9. Macroeconomic Models
9.1. Aggregate Demand and Aggregate Supply
Aggregate Demand (AD): The total demand for goods and services in the economy.
Aggregate Supply (AS): The total supply of goods and services in the economy.
9.2. Fiscal Policy
Fiscal Policy: Government spending and taxation policies.
9.3. Monetary Policy
Monetary Policy: Central bank policies that influence the money supply and interest rates.
10. International Economics
10.1. Exchange Rates
Exchange Rate: The price of one currency in terms of another.
10.2. Balance of Payments
Balance of Payments: A record of a country’s transactions with the rest of the world.
10.3. Trade Policy
Trade Policy: Government policies that affect international trade (e.g., tariffs, quotas).