The foundation of economics how many of each person’s wants are to

Scarcity: there is not enough resources to meet be satisfied. On a broad level we need to
people’s want, because people’s wants are decide whether everyone is going to have
unlimited and resources are limited a more or less equal share of what is
Tradeoff: the exchange of one thing for produced or whether some will have more
another of more or less equal value, than others.
especially to effect a compromise Ceteris paribus Other things being constant
Opportunity cost is the value of the next best Normative statement
alternative that must be given up in order to obtain Opinion or value judgment that (because i
something else. t is not a statement of fact) cannot be pro
A production possibility curve (PPC) shows the ved or disproved.
maximum level of output combination that an Positive statement objective statement
country can produce using all of resources in a that cannot be proved or disproved.
period of time （Given the available resources and Circular flow of income A model showing the
the available technology ） flow of resources from consumers
(households) to firms, and the flow of
Characteristics of enterprise:
products from firms to consumers, as well
Who is willing to take risks
as money flows consisting of consumers’
Who has the ability to organize other resources.
income arising from the sale of their
The income of enterprise is profit. resources and firms’ revenues arising from
Land: land comprises all naturally occurring the sale of their products.
resources as well as geographic land, the Leakages:
income of land is rent income that escapes an economy or syste
Labor: human efforts used to produce goods and m in the context of a circular flow of incom
service. The income of labor is wage. e model, including savings, tax revenue
Capital: man-made physical goods used to produce and imports
goods and service. The income of capital is interest Injections
Capital goods (same with capital) income that enters an economy or system
Consumergoods: in the context of a circular flow of income
goods that are bought and used in satisfac model, including investment, government
tion of human wants, as clothing, food, or spending, exports
appliances, and are not utilized in any furt investment Includes spending by firms or
her production (contrasted with capital g the government on capital goods (i.e.
oods) buildings, machinery, equipment, etc.)
Efficiency: achieved when production is at the lowest and all spending on new construction
lost or maximum output is produced using all the (housing and other buildings).
resources Government spending Spending undertaken
Inefficiency: : achieved when production is at the by the government, for example, spending
cost higher than the lowest lost or output lower than on resources to build infrastructure
maximum output is produced because the resources Exports
are not fully used. Exports are the goods and services produc
Economic growth: a sustained increase in ed in one country and purchased by reside
production of goods and service in an economy over nts of another country.
a certain period of time Imports
What to produce? Because of scarcity of resources, Imports are the goods and services produc
decisions have to be made on what kinds of goods ed in another country and purchased by re
and service need to be produced and how many of sidents of one country.
them need to be produced.
How to produce we need to consider how Demand and Supply
resources are used so that the best Demand is the quantities of a product that
outcome arises. purchasers are willing and able to buy at various
For whom to produce: Because we cannot prices per period of time, all other things being
satisfy all the wants of all the population, equal.
decisions have to be taken concerning
Quantity demanded is the quantities of a product price inelastic demand Relatively low
that purchasers are willing and able to buy at a responsiveness of demand to changes in price; PED
certain price per period of time, all other things (price elasticity of demand) < 1. See price elasticity of
being equal. demand.
The law of demand: when the price of a certain
good increases, quantity demanded for the good perfectly elastic demand Refers to a price elasticity
falls, ceteris paribus, vice versa. of demand value of infinity, and arises in the case of
Supply is the quantities of a product that sellers are a horizontal demand curve indicating that any
willing and able to sell at various prices per period quantity can be bought at that price; see price
of time, all other things being equal. elasticity of demand.
Quantity supplied: is the quantities of a product that
sellers are willing and able to sell at a certain price perfectly inelastic demand Refers to a price
per period of time, all other things being equal. elasticity of demand value of zero, and arises in the
The law of supply: when the price of a certain good case of a vertical demand curve indicating that any
increases, quantity supplied for the good increases, amount can be sold at that price; see price elasticity
ceteris paribus, vice versa. of demand.
Equilibrium price: the price that equates quantity
supplied with quantity demanded (there is no revenues The payments that firms receive when
tendency to change at the price) they sell their goods and services.
Equilibrium quantity: the quantity supplied and
quantity demanded at the equilibrium price (there is Price elasticity of supply: A measure of the
no tendency to change at the quantity） responsiveness of the quantity of a good supplied to
Market disequilibrium: excess demand (shortage) or changes in its price, given by the percentage change
excess supply (surplus) exists and as a result price in quantity supplied divided by the percentage
and quantity will change as a result of market forces change in price. In general, if there is a large
excess demand (shortage) quantity demanded is responsiveness of quantity supplied (PES > 1), supply
larger than quantity supplied at a certain price is referred to as being elastic; if there is a small
excess supply (surplus quantity supplied is larger responsiveness (PES < 1), supply is inelastic.
than quantity demanded at a certain price price elastic supply Relatively high responsiveness of
Ceteris paribus Other things being constant quantity supplied to changes in price; PES (price
elasticity of supply) > 1. See price elasticity of supply.
Elasticities
Price elasticity of demand: A measure of the price inelastic supply Relatively low responsiveness
responsiveness of the quantity of a good demanded of supply to changes in price; PES (price elasticity of
to changes in its price, given by the percentage supply) < 1. See price elasticity of supply.
change in quantity demanded divided by the
percentage change in price. In general, if there is a perfectly elastic supply Refers to a price elasticity of
large responsiveness of quantity demanded (PED > supply value of infinity, and arises in the case of a
1), demand is referred to as being elastic; if there is a horizontal supply curve indicating that any amount
small responsiveness can be sold at that price; see price elasticity of
supply.
elastic Refers to a high responsiveness of a variable
(such as quantity demanded) to a change in another perfectly inelastic supply Refers to a price elasticity
variable (such as price or income); see various of supply value of zero, and arises in the case of a
elasticities. vertical supply curve; see price elasticity of supply.

price elastic demand Relatively high responsiveness income elastic demand Relatively high
of quantity demanded to changes in price; PED (price responsiveness of demand to changes in income;
elasticity of demand) > 1. See price elasticity of YED (income elasticity of demand) > 1
demand.
income elasticity of demand A measure of the
responsiveness of demand to changes in income;
measured by the percentage change in quantity
demanded divided by the percentage change in  Positive Externality - This occurs when the
price. consumption or production of a good causes
a benefit to a third party
income inelastic demand Relatively low  Negative Externality - This occurs when
responsiveness of demand to changes in income; the consumption or production of a good
YED (income elasticity of demand) < 1 causes a harmful effect to a third party.
 Merit goods
a good which when consumed provides external
luxury goods Goods that are not necessary or benefits which may not be fully recognized by
essential; they have a price elastic demand (PED>1) consumers – hence the good is under-consumed.
and income elastic demand (YED>1). To be Examples include education and healthcare.
contrasted with necessities.  Social Benefit (SB) - all the utility or
benefit derived form the use of a good,
including the benefits to the consumer and
necessities Goods that are necessary or essential:
the rest of society
they have a price inelastic demand (PED<1) and  Private Benefit (PB) - the benefit derived
income inelastic demand (YED<1). To be contrasted exclusively by the consumer of a good
with luxuries.  Social Cost (SC) - All the cost incurred
from the production or use of a good,
including the costs to the producers and rest
primary commodity Any product that is produced in of society
the primary sector, which includes agriculture,  Private Cost (PC) - the costs of a good
forestry, fishing and the extractive industries; also suffered solely by the producer
known as ‘commodity’.  Public good - a good which when supplied
primary products All products produced in the to one individual is immediately available to
primary sector of an economy; also known as others at no charge, hence there is a free
commodities; see primary sector. rider problem. It has two characteristics:
primary sector A part of an economy that is non-rival and non-excludable.
dominated by agriculture, also including fishing,  Private good - a good and service supplied
forestry and all extractive activities (such as mining). and sold through markets by private sector
businesses. It is rival and excludable.
 Non-rivalry. Consumption of a good or
manufactured products goods produced by labour
service by one person don’t reduce the
usually working together with capital as well as raw
benefits of other consumers who use it
materials, such as for example cars, computers and  Non-excludable. non-paying consumers can
televisions. not prevented or excluded from from using a
good or service
Market failure  common pool resources Resources that are
not owned by anyone, do not have a price,
 Market Failure: Occurs when the market and are available for anyone to use without
fails to allocate resources efficiently, or to payment (for example, lakes, rivers, fish in
provide the quantity and combination of the open seas, open grazing land, the ozone
goods and services mostly wanted by layer and many more); their depletion or
society. Market failure results in allocative degradation leads to environmental
inefficiency, where too much or too little of unsustainability.
goods or services are produced and  Indirect tax: Indirect taxes are placed on
consumed from the point of view of what is goods and services such as imports, fuel,
socially most desirable. liquor, and cigarettes. Taxes like this are
 Social optimal quantity: The output level considered indirect because they are paid
that reflects all the costs and benefits indirectly by the final consumer who enjoys
associated with a transaction i.e. it is the the use of the goods or services, and
equilibrium that would be achieved if the are collected by an intermediary, like a
market outcome reflects the effect of retailer or a manufacturer.
externalities.
International Trade two purposes: to protect a domestic industry from
foreign competition (a protective tariff); or to raise
absolute advantage Refers to the ability of a country revenue for the government (a revenue tariff).
to produce a good using fewer resources than Whatever the purpose, the impacts on the economy
another country, in other words, the ability of a are the same.
certain amount of resources in a country to produce
more than the same resources can produce in quota A type of trade protection that involves
another country. setting a legal limit to the quantity of a good that can
be imported over a particular time period (typically a
Comparative advantage Arises when a country has a year). (More generally, a ‘quota’ is a limited or fixed
lower relative cost, or opportunity cost, in the number of things.)
production of a good than another country. Forms
the basis of the theory of comparative advantage. export subsidy A payment by the government to a
producer or exporter per unit of the subsidised
theory of absolute advantage According to this good, where the subsidy is paid for each unit of the
theory, if countries specialise in and export the good that is exported.
goods in which they have an absolute advantage
(can produce with fewer resources), there results an anti-dumping An argument that justifies trade
improvement in resource allocation and increased protection policies: if a country’s trading partner is
production and consumption in each country. suspected of practising dumping, then the country
should have the right to impose trade protection
theory of comparative advantage According to this measures (tariffs or quotas) to limit quantities of the
theory (also known as a law), as long as opportunity dumped good; see dumping.
costs in two (or more) countries differ, it is possible
for all countries to gain from specialisation and trade specialisation Occurs when a firm or a country
according to their comparative advantage; this concentrates production on one or a few goods and
results in an improvement in the global allocation of services. In international trade theory, specialisation
resources, resulting in greater global output and forms the basis for the gains from trade, arising
consumption. Is a more powerful explanation of the when countries specialise according to their
gains from trade than the theory of absolute comparative advantage, and when firms specialise in
advantage. production of goods and services that offer them
economies of scale.
exports Goods or services that are sold to other
countries. diversification Generally refers to change involving
greater variety, and is used to refer to increasing the
imports Goods or services produced in other variety of goods and services produced and/or
countries that are bought and brought into the exported by a country; it is the opposite of
domestic economy. specialisation.

free trade The absence of government intervention dumping The practice of selling a good in
of any kind in international trade, so that trade takes international markets at a price that is below the
place without any restrictions (or barriers) between cost of producing it (usually by providing export
individuals or firms in different countries. subsidies); while it is illegal according to
international trade rules, many countries practise it
trade protection Government intervention in anyway. Forms the basis of the anti-dumping
international trade through the imposition of trade argument in favour of trade protection. See also
restrictions (or barriers) to prevent the free entry of anti-dumping.
imports into a country and protect the domestic
economy from foreign competition. infant industry A new domestic industry that has not
had time to establish itself and achieve efficiencies in
tariffs Taxes on imported goods; they are the most production,and may therefore be unable to compete
common form of trade restriction. Tariffs may serve with more ‘mature’ competitor firms from abroad.
The presence of infant industries is considered to be Leakages:
one of the strongest arguments in favour of trade income that escapes an economy or syste
protection policies in developing countries. m in the context of a circular flow of incom
e model, including savings, tax revenue
and imports ;or the income that is not
spent on domestically produced good and
service in the economy
The level of macro economic activities
Injections
income that enters an economy or system
Macro-economic objective –high and sustainable in the context of a circular flow of income
growth model, including investment, government
spending, exports; or the income that is
GDP (Gross Domestic Product) is the total market spent on domestically produced good and
value of all final goods & services produced in a service in the economy expect for
given time of period within a country's borders. consumption
Consumption: the use of goods and services by
GDP per capita Gross domestic product divided by households.
the number of people in the population; is an investment Includes spending by firms on
indicator of the amount of domestic output per capital goods (i.e. buildings, machinery,
person in the population. equipment, etc.) and all spending on new
construction (housing and other
Nominal gross domestic product (GDP) is GDP given buildings).
in current prices, without adjustment for inflation. Government spending Spending undertaken
by the government, for example, spending
Current price estimates of GDP are obtained by
on resources to build infrastructure
expressing values of all goods and services produced
Exports
in the current reporting period.
Exports are the goods and services produc
ed in one country and purchased by reside
Real gross domestic product (real GDP) is an nts of another country.
inflation-adjusted measure that reflects the value of Imports
all goods and services produced by an economy in a Imports are the goods and services produc
given year ed in another country and purchased by re
sidents of one country.
Gross national income (GNI) A measure of the total
income received by the residents of a country, equal Business cycles consist of short-term fluctuations
to the value of all final goods and services produced Alternating periods of expansion (increasing real
by the factors of production supplied by the output) and contraction (decreasing real output).
country’s residents regardless of where the factors Business cycles have four phrases, peak, recession,
are located; GNI = GDP plus income from abroad trough and expansion.
minus income sent abroad.
Standard of living includes both material and non-
Economic growth Increases in total real output material well-being of an individual or household.
produced by an economy (real GDP) over time; may The material well-being consists of quantity and
also refer to increases in real output (real GDP) per quality of the goods and services available for
capita (or per person). consumption while the non-material well-being
include quality of life such as the quality of the
Circular flow of income A model showing the environment, leisure hours.
flow of resources from consumers
(households) to firms, and the flow of Informal economy That part of an economy that lies
products from firms to consumers, as well outside of the formal economy, consisting of
as money flows consisting of consumers’ economic activities that are unregistered and legally
income arising from the sale of their
unregulated;
resources and firms’ revenues arising from
the sale of their products.
An intermediate good is a product used to produce aggregate demand and short-run aggregate supply
a final good or finished product—also referred to as curves intersect at a point on the long-run aggregate
a consumer good. supply curve; occurs where the vertical LRAS curve
intersects the horizontal axis, known as potential
A final good is an item produced for the direct use output.
by end consumers.
Macro-economic objective –low and stable
AD AS inflation
 aggregate demand The total quantity of goods and
services that all buyers in an economy (consumers,
firms, the government and foreigners) are willing and Inflation: a sustained increase in an economy’s
able to buy over a particular time period, at different averge price level of all goods and service in a given
possible price levels, ceteris paribus. period of time.

 aggregate supply The total quantity of goods and Consumer price index(CPI): a measure that
services produced in an economy over a particular examines the weighted average of prices of a basket
time period, at different price levels, ceteris paribus. of consumer goods and services, such as
transportation, food, and medical care. It is
 short-run aggregate supply (SRAS) curve A calculated by taking price changes for each item in
curve showing the relationship between the price the predetermined basket of goods and averaging
level and the quantity of real GDP produced by firms them. Changes in the CPI are used to assess price
when resource prices do not change.
changes associated with the cost of living.
 long-run aggregate supply (LRAS) curve A
curve showing the relationship between real GDP
Cost-push inflation: inflation caused by increases in
produced and the price level when wages (and other
resource prices) change to reflect changes in the price costs of production, which decreases aggregate
level, ceteris paribus. The LRAS curve is vertical at supply of goods and services.
the full employment level of GDP, or potential GDP,
indicating that in the long run the economy produces Demand-pull inflation: inflation caused by increases
potential GDP, which is independent of the price in aggregate demand not matched by equivalent
level. increases in aggregate supply.

equilibrium level of output The level of output (real Macro-economic objective –Low unemployment
GDP) where the aggregate demand curve intersects
the aggregate supply curve (also known as the unemployment rate A measure of the amount
‘equilibrium level of income’). Note the distinction of unemployment in an economy, expressed as a
between short-run equilibrium level of output and percentage, calculated by taking the total number of
long-run equilibrium level of output. unemployed people in an economy and dividing by
the labour force, and multiplying by 100.
short-run equilibrium level of output In the
monetarist/new classical model, it is the level of unemployment The number of unemployed people,
output (real GDP) determined by the intersection defined as all people above a particular age (i.e. not
of the aggregate demand and short-run aggregate children) who are not working and who are actively
supply curves; in the Keynesian model, it is the level looking for a job.
of output determined by the intersection of the
aggregate demand and Keynesian aggregate supply cyclical unemployment A type of unemployment
curves. In both models, equilibrium may occur where that occurs during the downturns of the business
there is (i) a recessionary (deflationary) gap, (ii) an cycle, when the economy is in a recessionary gap;
inflationary gap, or (iii) full employment output. the downturn is seen as arising from declining or low
aggregate demand, and therefore is also known as
long-run equilibrium level of output The level of ‘demand-deficient’ unemployment.
output (real GDP) that results when the economy is
in long-run equilibrium, occurring when the
frictional unemployment A type of unemployment
that occurs when workers are between jobs; workers
may leave their job because they have been fired,
or because their employer went out of business, or
because they are in search of a better job, or they
may be waiting to begin a new job; tends to be short
term.

structural unemployment A type of unemployment

that occurs as a result of technological changes and
changing patterns of demand (causing changes in
demand for labour skills), as well as changes in the
geographical location of jobs, and labour market
rigidities (lack of labour market flexibility).

seasonal unemployment A type of unemployment

that occurs when the demand for labour in certain
industries changes on a seasonal basis because of
variations in needs; for example, farm workers are
hired during peak harvesting seasons and let off for
the rest of the year.