ECONOMICS 250130 — COMPLETE STUDY NOTES
(CHAPTERS 1–11)
CHAPTER 1: INTRODUCTION TO ECONOMICS
Key Concepts:
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Scarcity: The condition in which human wants exceed the available resources. All
economies must find ways to allocate resources efficiently.
Opportunity Cost: The cost of the next best alternative foregone when making a
choice. It represents real economic cost.
Choice and Prioritization: Economic agents (individuals, firms, governments) must
make choices due to scarcity.
Factors of Production:
1. Land: Natural resources. Reward: Rent
2. Labour: Human effort in production. Reward: Wages
3. Capital: Man-made goods used in production. Reward: Interest
4. Entrepreneurship: Coordination and risk-taking. Reward: Profit
Production Possibility Frontier (PPF):
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A curve that shows all combinations of two goods that an economy can produce
using available resources and technology.
Assumptions:
o Only two goods produced
o Fixed resources and technology
o Resources fully and efficiently employed
Shape: Bowed outwards due to increasing opportunity cost.
Graph Description:
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Axes: Quantity of Good A (X-axis) and Good B (Y-axis)
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Any point on the curve = efficient
Inside the curve = underutilization
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Outside = unattainable with current resources
Formula:
CHAPTER 2: DEMAND AND SUPPLY
Demand:
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The quantity of a good that consumers are willing and able to buy at various prices
during a certain period.
Law of Demand:
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Downward Sloping Demand Curve due to:
o Income effect
o Substitution effect
o Diminishing marginal utility
Determinants of Demand:
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Consumer income
Tastes and preferences
Prices of related goods (substitutes and complements)
Expectations
Number of buyers
Supply:
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The quantity of a good that producers are willing and able to sell at different prices.
Law of Supply:
Determinants of Supply:
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Input prices
Technology
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Expectations
Government taxes and subsidies
Number of sellers
Equilibrium:
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Where Q_d = Q_s
Graph Description:
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Demand (D): downward sloping
Supply (S): upward sloping
Equilibrium price: intersection of D and S
Surplus: price above equilibrium → Q_s > Q_d
Shortage: price below equilibrium → Q_d > Q_s
Formulas:
CHAPTER 3: ELASTICITY
Price Elasticity of Demand (PED):
Types:
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PED > 1: Elastic
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PED < 1: Inelastic
PED = 1: Unit elastic
PED = 0: Perfectly inelastic
PED = ∞: Perfectly elastic
Determinants of PED:
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Availability of substitutes
Proportion of income
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Necessity vs luxury
Time period
Income Elasticity of Demand (YED):
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YED > 0 → Normal goods
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YED < 0 → Inferior goods
Cross Elasticity of Demand (XED):
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XED > 0 → Substitutes
XED < 0 → Complements
Price Elasticity of Supply (PES):
Graph Descriptions:
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Elastic D/S: flatter curve
Inelastic D/S: steeper curve
Unit elastic: curved line from origin
CHAPTER 4: MARKET EFFICIENCY
Consumer Surplus (CS):
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The additional benefit consumers receive when they pay less than what they are
willing to pay.
Area between the demand curve and the price line, up to the equilibrium quantity.
Producer Surplus (PS):
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The extra earnings producers receive when the market price is higher than the
minimum they are willing to accept.
Area between the price line and the supply curve, up to the equilibrium quantity.
Total Surplus (TS):
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Combined benefit to society (CS + PS). Maximized at market equilibrium in
competitive markets.
Deadweight Loss (DWL):
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Occurs when market equilibrium is not achieved (due to taxes, price controls,
externalities).
Graph Description:
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X-axis: Quantity; Y-axis: Price
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Downward-sloping demand curve (D)
Upward-sloping supply curve (S)
Equilibrium at D = S
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CS: triangle above P* and below D
PS: triangle below P* and above S
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TS: area between D and S from 0 to Q*
DWL: triangle created by under or overproduction
CHAPTER 5: GOVERNMENT INTERVENTION
Price Controls:
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Price Ceiling (Max Price): Set below equilibrium; causes shortages.
o Example: Rent control
Price Floor (Min Price): Set above equilibrium; causes surpluses.
o Example: Minimum wage
Graph Description:
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Price ceiling: Horizontal line below equilibrium. Qd > Qs → shortage
Price floor: Horizontal line above equilibrium. Qs > Qd → surplus
Taxes:
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Imposed on producers or consumers.
Shifts the supply (or demand) curve left.
Buyers pay more; sellers receive less.
Leads to a decrease in equilibrium quantity.
Subsidies:
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Government payments to producers or consumers.
Shifts supply curve right (increases quantity, lowers price).
Tax Incidence Formula:
Deadweight Loss from Tax:
Externalities:
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Costs or benefits not reflected in market price.
Negative Externality (e.g., pollution):
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MSC > MPC
Overproduction
Solution: taxes, regulations
Positive Externality (e.g., vaccination):
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MSB > MPB
Underproduction
Solution: subsidies, public provision
Graph Description:
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Negative: MSC above supply; optimal output left of market output
Positive: MSB above demand; optimal output right of market output
DWL: triangle between social and private curves
CHAPTER 6: PRODUCTION AND COSTS
Short Run:
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At least one input fixed (e.g., capital)
Law of Diminishing Marginal Returns applies
Long Run:
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All inputs are variable
Firms can change scale of production
Productivity Measures:
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TP = Total Product
MP rises initially, then falls
MP = AP at AP’s maximum
Costs in the Short Run:
Graph Description:
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U-shaped ATC, AVC, and MC curves
MC cuts ATC and AVC at their minimum points
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AFC declines as output increases
Long Run Costs:
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Economies of Scale: LRATC ↓ as output ↑
Diseconomies of Scale: LRATC ↑ as output ↑
Constant Returns to Scale: LRATC stays the same as output changes
Graph Description:
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LRATC: U-shaped envelope curve
Shows minimum cost per unit at each scale of production
CHAPTER 7: PERFECT COMPETITION
Characteristics:
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Many firms and buyers
Homogeneous (identical) products
Free entry and exit
Perfect knowledge
Firms are price takers (cannot set price)
Revenue Relationships:
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AR = MR = Price (horizontal line)
Profit Maximization Rule:
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If MR > MC → produce more
If MR < MC → produce less
Short-Run Outcomes:
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Profit: P > ATC
Loss: P < ATC
Shutdown: P < AVC
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Produce even at loss if P > AVC to cover fixed costs
Long-Run Adjustments:
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Entry/exit of firms drive profit to zero
Firms operate at minimum ATC
Only normal profit earned
Efficiency:
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Allocative Efficiency: P = MC → optimal output level for society
Productive Efficiency: P = minimum ATC → lowest cost of production
Graph Description:
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Market price = horizontal line (MR)
Firm’s ATC and MC curves determine profitability
Profit/loss shown by the vertical gap between P and ATC at Q*
CHAPTER 8: MONOPOLY
Definition:
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A market with a single seller who controls the entire supply of a unique product with
no close substitutes.
The firm is a price maker.
Sources of Monopoly Power:
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Legal barriers (patents, licenses)
Control of essential resources
Economies of scale (natural monopoly)
Demand Curve:
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The monopoly faces the market demand curve directly; it is downward sloping.
Revenue Relationships:
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MR < Price due to the downward-sloping demand
Profit Maximization:
Graph Description:
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Downward-sloping demand curve (D)
MR lies below D
U-shaped ATC and upward-sloping MC
Price set on D at Q*; cost from ATC at Q*
Profit = (P - ATC) × Q*
DWL = triangle between D and MC beyond Q*
Inefficiencies:
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Allocative Inefficiency: P > MC
Productive Inefficiency: Not producing at lowest ATC
Price Discrimination:
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Charging different prices for the same good based on willingness to pay
Increases monopoly profits and may reduce DWL
CHAPTER 9: MONOPOLISTIC COMPETITION
Definition:
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A market structure with many firms selling similar but differentiated products.
Each firm has some market power.
Characteristics:
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Many firms
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Product differentiation
Free entry and exit
Downward-sloping demand curve
Short Run:
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Firms can make supernormal profits or losses
Long Run:
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Entry/exit erodes supernormal profit
Demand curve becomes tangent to ATC
Only normal profit in long run
Graph Description:
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D and MR are downward-sloping
U-shaped ATC and upward-sloping MC
Profit area: between D and ATC at Q*
In long run: D is tangent to ATC → zero economic profit
Efficiency:
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Allocative Inefficiency: P > MC
Productive Inefficiency: Not at minimum ATC
Product Variety:
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Benefit to consumers; trade-off with efficiency
CHAPTER 10: OLIGOPOLY
Definition:
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A market dominated by a few large firms.
Each firm is interdependent and strategic.
Characteristics:
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Few firms
High barriers to entry
Products may be identical or differentiated
Firms influence price and output
Key Concepts:
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Interdependence: One firm's decisions affect others
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Strategic Behaviour: Firms anticipate rival responses
Kinked Demand Curve Model:
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Assumes price rigidity
If a firm raises price, others don’t → elastic above kink
If a firm lowers price, others follow → inelastic below kink
Result: MR curve has a vertical gap → stable prices
Collusion & Cartels:
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Firms agree to limit competition (e.g., OPEC)
Illegal in many countries
Game Theory:
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Payoff Matrix: Shows outcomes for different strategies
Nash Equilibrium: No firm has incentive to change strategy alone
Graph Description:
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Kinked demand with a discontinuous MR curve
Price and quantity are stable in gap of MR
CHAPTER 11: NATIONAL INCOME AND THE ECONOMY
Circular Flow of Income:
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Illustrates flow of goods/services and income between households and firms
Includes injections (investment, govt spending, exports) and leakages (savings,
taxes, imports)
Methods of Measuring National Income:
1. Output Method: Value added at each production stage
2. Income Method: Sum of incomes (wages, rent, interest, profit)
3. Expenditure Method:
a. C: Consumption
b. I: Investment
c. G: Government Spending
d. X: Exports
e. M: Imports
Real vs Nominal GDP:
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Nominal GDP: Measured at current prices
Real GDP: Adjusted for inflation
Multiplier Effect:
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Change in spending leads to greater change in income/output
MPC = Marginal Propensity to Consume
Limitations of GDP as a Measure of Welfare:
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Ignores:
o Income distribution
o Non-market activities
o Environmental degradation
o Underground economy
Graph Description:
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Circular flow diagram shows injections and leakages
Equilibrium when: Injections = Leakages