Economics 101: Key Concepts and Market Analysis
Opportunity Cost
Opportunity Cost: The next best alternative foregone when a decision is made. It is the real cost of any decision and represents the other good or service that could have been produced with the same resources. The slope of the Production Possibility Curve (PPC) represents the opportunity cost.
Scarcity
Scarcity: Describes the condition of limited resources relative to unlimited wants.
Assumptions of the PPC
Assumptions of the PPC:
- Production of only two goods
- Fixed resources
- Given level
Economics Basics: Supply, Demand, and Consumer Behavior
Economics Basics
Core Concepts
Reservation Price: The price at which a person would be indifferent between doing x and not doing x.
Opportunity Cost: The value of all that must be sacrificed to do x.
4 Pitfalls to Avoid
- Ignoring Implicit Costs
- Failing to ignore sunk costs
- Failure to understand the average-marginal distinction
Marginal Cost: The cost of doing an additional unit of activity.
Marginal Benefit: The benefit of an additional unit of activity.
Cost-Benefit Rule: Keep increasing the activity as long
Read MoreBalance of Payments & Trade Blocs: Economics Guide
Balance of Payments (BOP)
BOP records economic transactions between residents of one country and all other countries.
Current Account
Relates to income and payment flows.
- Trade in goods (X-M): X (credit) represents exports, M (debit) represents imports.
- Trade in services (X-M)
- Income from investment
- Current transfers: No exchange of goods and services.
Current Account Surplus (abcd > 0)
Inflow of money from export revenue, trade in services, investment income, and incoming transfers is larger than the
Read MoreUnderstanding Final Accounts: A Comprehensive Guide
What Do Final Accounts Contain?
The Trading Account
This account shows how the gross profit of a business is calculated. It uses the following formula:
Gross Profit = Sales Revenue – Cost of Goods Sold
Note that:
- Gross profit does not take into account overheads.
- Only the cost of goods sold is calculated; inventory is not included.
- In a manufacturing business, direct labor and manufacturing costs are also deducted to obtain gross profit.
The Profit and Loss Account
The profit and loss account shows how net
Read MoreMarket Structures in Economics: Perfect Competition, Monopoly, and Oligopoly
Short-Run vs. Long-Run Periods
The short-run period is defined as the time during which at least one factor of production is fixed. The long-run period is when all factors of production are variable.
Key Formulas
TR = P x Q
AR = TR / Q
MR = change in TR / change in Q
MC = change in TC / change in Q
TC = TVC + TFC
TC = ATC x Q
ATC = TC – TFC
AC = TC / Q
AFC = TFC / Q
AVC = TVC / Q
ATC = TC / q
Shut down point: MC = AVC
Break-even point: MC = TC
Profit Maximisation: MC = MR
Revenue maximisation: MR = 0
Profit = TR
Macroeconomics and Monetary Policy
Macroeconomics Basics
Aggregate Supply
1. Define aggregate supply.
Aggregate Supply: The total supply of all goods and services in the macroeconomy.
Aggregate supply is positively related to the price level.
2. Explain why the AS curve is upward sloping.
- Aggregate Supply is positively related to the price level.
- An increase in firms’ resources, increased productivity in workers, and resource prices going down.
Potential GDP
3. Define and explain potential GDP.
- What the economy can produce if all resources