Microeconomics Chapters 4 – 6
1. Scarcity: The situation where the limited resources available are unable to satisfy the
unlimited human wants.
2. Choice: Because resources are scarce, they have alternative uses. Therefore, individuals
and societies must make choices among the alternative uses so as to maximise the use of
resources to achieve the highest possible level of satisfaction.
3. Opportunity Cost: Opportunity costs measure the cost of making a choice, in terms of the
next best alternative foregone
4. Law of Increasing Opportunity Cost: As more of a particular good is produced, larger and
larger quantities of the alternative good must be sacrificed, ie. the opportunity cost of its
production rises.
5. Production Possibility Curve
The PPC shows all the different maximum
Consumer Goods (units)
attainable combination of goods and services
that can be produced in an economy, when all
U
available resources are fully and efficiently used
at a given state of technology
A
A: Full employment of resources
I
I: Inefficient combination as resources are not
fully employed or used inefficiently
Capital Goods (units) U: Unattainable
6. Economic Growth: Economic Growth is defined as the expansion or increase in an
economy’s level of output of Gross Domestic Product (GDP) over time.
7. Demand: Demand refers to the different quantities of a product consumers are willing and
able to buy at each possible price during a given period of time, ceteris paribus.
8. Derived vs Final Demand
9. Competitive vs Complementary Demand
10. Determinants of Demand:
a. P: Change in Price of related goods
b. T: Change in Tastes and references
c. I: Change in Consumer Income
d. D: Demographics
e. E: Change in Consumers’ Expectations
11. Supply: Supply refers to the various quantities of a good a producer is willing and able to
offer for sale at a given set of prices over a period of time in a given market, ceteris paribus.
12. Determinants of Supply:
a. C: Change in Cost of production
b. P: Change in Price of related goods
c. P: Change in number of Producers
d. S: Supply Shocks
e. E: Change in sellers’ price Expectations
13. Market Equilibrium: The market equilibrium price and quantity is the price and quantity
exchanged where the quantity demanded equals the quantity supplied, ceteris paribus.
Sequence for description of Demand-Supply related graphs
1. Change in Factor
2. Change in Producer/Consumer’s willingness and ability
3. Shift in Demand/Supply Curve
4. Change in Price and Quantity
5. Equilibrium Price and Quantity
6. Change in Total Revenue/Expenditure
Chapter 7
1. Elasticity: The degree of responsiveness of quantity demanded/supplied to changes in
one of its related variables, ceteris paribus.
2. PED: Price Elasticity of Demand measures the degree of responsiveness of quantity
demanded of a good to a change in its price, ceteris paribus.
3. Determinants of PED:
a. S: Availability(number and closeness) of Substitutes
b. N: Necessity
c. I: Proportion of Income
d. T: Time period
4. Total Revenue = Unit Price X Quantity Sold
5. PES: Price Elasticity of Supply measures the degree of responsiveness of quantity supplied
of a commodity to a change in its own price, ceteris paribus.
6. Determinants of PES:
a. S: Existence of Spare capacity
b. N: Nature of production (factor mobility, production period)
c. I: Ease of accumulating Inventory or stock
d. T: Time period
7. Total Expenditure by consumers = Total revenue by producers
8. YED: Income elasticity of demand measures the degree of responsiveness of demand to a
change in the income of consumers, ceteris paribus.
9. Determinants of YED:
a. Nature of goods
b. Level of income or affluence of consumers (According to Engel’s law, the same
good might be considered an inferior, normal or luxury good depending on the
income level of the consumer)
10. CED: Cross Elasticity of Demand measures the degree of responsiveness of demand for a
product to a change in the price of another good, ceteris paribus.
11. Limitations of Elasticity Concepts:
a. Ceteris Paribus Assumption
b. Ignores cost-side of the profit equation
c. Informational problem
d. Ignores supply side of market
Chapter 8
1. Consumer surplus (in the form of satisfaction): The difference between the price that
buyers are willing and able to pay (ie max amount) for the good and the actual price paid.
2. Producer surplus (in the form of earnings): The difference between what a producer is
willing and able to put up for sale (ie min amount received) for a good, and the actual
price charged and amount he receives.
3. Specific Tax: A fixed amount of tax per unit of a good; results in parallel shift of supply
curve.
4. Ad Valorem Tax: A percentage of the sale price of a commodity; results in a pivotal shift
of the supply curve.
5. Tax Incidence: The division of a tax between consumers and producers
6. Subsidy: A per unit subsidy is a fixed amount of money given to the producers for each
unit they sell.
7. Price Floor: A legally established minimum price above the market equilibrium price.
8. Price Ceiling: A legally established maximum price below the market equilibrium price.
9. Black market: Market where sellers ignore the government’s price restrictions and sell
illegally at whatever price equates demand and supply.
Macroeconomics Chapter 9
1. Full employment: Situation where everyone in the labour force is able to find a job.
2. Labour force: Those in the working population of legal working age and are willing and
able to work or find employment.
3. Unemployment: Percentage of those in the labour force who are without work but are
willing and able to take up employment.
4. Cyclical unemployment: demand deficient unemployment (recession/economic
downturn)
5. Structural unemployment: mismatch of skills
6. Frictional unemployment: lack of perfect information concerning job availability (search
unemployment)
7. Inflation: Sustained increase in the general price level in an economy
a. Demand-pull inflation: inflation arising from excessive aggregate demand or total
spending in the economy
b. Cost-push inflation: inflation driven by soaring production or business costs
8. Inflation rate (%) =
𝑪𝑷𝑰 𝒇𝒐𝒓 𝒀𝒆𝒂𝒓 𝟐−𝑪𝑷𝑰 𝒇𝒐𝒓 𝒀𝒆𝒂𝒓 𝟏
𝑪𝑷𝑰 𝒇𝒐𝒓 𝒀𝒆𝒂𝒓 𝟏
𝑿 𝟏𝟎𝟎%
9. Balance of Payments: A set of official accounts kept by the government to record and
track all international monetary transactions between the residents of the country and
the rest of the world during a specified time period, usually one year.
10. Current account: trade flow (X - M)
11. Financial account: International investments
Chapter 10:
1. GDP: Gross Domestic Product is the market value of all final goods and services produced
within the geographical boundaries of an economy in a given period of time.
2. GNP: Gross National Product is the market value of all final goods and services newly
produced anywhere in the world from resources belonging to residents or nationals of a
country in a given period of time.
3. Factor Income from Abroad (FIFA) – Factor Income Paid Abroad (FIPA)
= Net Factor Income from Abroad (NFIA)
4. GNP = GDP + NFI
5. Real: Real GNP/GDP is GNP/GDP measured at constant prices or base year prices. It is
GNP/GDP with the effects of inflation being removed.
𝑵𝒐𝒎𝒊𝒄𝒂𝒍 𝑮𝑫𝑷
6. Real NI/GDP = 𝑮𝑫𝑷 𝑷𝒓𝒊𝒄𝒆 𝑫𝒆𝒇𝒍𝒂𝒕𝒐𝒓 X 100%
7. Growth in Real NI (% change) ≈ Nominal NI (% change) – Inflation rate (%)
𝑹𝒆𝒂𝒍 𝑮𝑫𝑷
8. Real GDP per capita = 𝒑𝒐𝒑𝒖𝒍𝒂𝒕𝒊𝒐𝒏
9. Purchasing Power Parity: PPP refers to the number of currency units required to
purchase an amount of goods and services equivalent to what can be bought with one
unit of currency of the base country.
10. Limitations of using NI to compare SOL of living over TIME and SPACE
Material aspects
Non-material aspects
Over TIME
Real NI per capita measured in
domestic currency
Changes in general price level
Changes in population
Changes in composition of NI
Changes in distribution of NI
Externalities
Disamenities
Over SPACE
Real NI per capita measured in
US$, at PPP
Different currencies used
Differences in population
Differences in composition of NI
Differences in distribution of NI
Differences in the size of the nonmonetised sector
Differences in the availability and
reliability of data
Externalities
Disamenities
Chapter 11
1.
2.
3.
4.
Keynesian Model: AE = C + I + G + (X - M)
Withdrawal = Savings + Taxes + Imports
Injections = Investment + Government + Exports
Consumption = autonomous + b(multiplier)Y
∆𝐶
5. Marginal Propensity to Consume: MPC = ∆𝑌
𝑝𝑟𝑜𝑓𝑖𝑡
6. Marginal Efficiency of Investment: MEI = 𝑖𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑋 100%
∆𝑌
7. Multiplier: k = ∆𝐽
1
8. k = 1−𝑀𝑃𝐶 =
1
=
1−𝑏
1
=
𝑀𝑃𝑊
1
𝑤