Economics Notes

For the Academic Decathlon Curriculum

Chapter 1: Fundamentals
Economics is the study of individual choices, and how those choices affect those around us. Quite
frequently, and especially in this application, we discuss economics in a monetary manner. We contextualize
our study of economics with the following assumptions:
Scarcity - natural resources are scarce if there are limited quantities of this item and theoretically
unlimited demand for this item.
Oil, gas, diamonds, gold
Trade-offs - Scarcity implies that each choice we make requires that we forgo another choice. We call
this alternative choice the trade-off.
Opportunity Cost - We define the cost of an item as the resources necessary to obtain this item. We
define the opportunity cost as the cost of the trade-off when producing an item; in simple words, what
you leave on the table.
Rationality - theoretically, we assume that individuals make perfect decisions in their own self-interest.
This is called rationality. However, we recognize that in the real world, no individual is purely rational.
Gains from Trade - refers to the benefits of specialization and bartering rather than producing all of
one's needs individually.
Models and Economic Theory
Economic analysis relies on both observation and theory. Models allow us to predict real-world scenarios
while abstracting away unimportant details. We rely primarily on mathematics to construct economic models.
We now split into two branches of economic analysis:
Positive economics uses economic analysis to predict conditions under theoretical ideal scenarios.
How do different wages help the business and employee differently?
Normative economics compares the theoretical result of an economic model to the actual result in the
real world.
Does reducing the wages of employees to make running a business easier actually help the
economy?
Efficiency
Efficiency is one of the most important concepts within economics; it describes using the least resources to
produce the maximum result (emphasis on the latter). Mathematically, we define pareto efficiency as a
scenario in which no individual may benefit without the harm of the other. In other words, a scenario is
pareto-efficient if it maximally optimizes at least one variable (Cooper, this is where you use your
multivariable calculus to optimize!).
Microeconomics and Macroeconomics
Microeconomics describes economics on a small scale, usually on the individual business or consumer.
Macroeconomics describes economics in a large scale, looking at entire markets such as a national or global
economy.

Chapter 2: Microeconomics
We now dive into microeconomics (ew). Microeconomics focuses heavily on the interplay between supply
and demand. We first shall define markets; then, we shall explore rational self-interest, perfectly competitive
markets, and more. Note that many of these conditions are very inaccurate to real life. Economics
understand this; however, assuming theoretical perfection makes economic analysis possible. Otherwise, it
would not be.
Markets
A market is defined as all of the buyers and sellers of a certain good. This can be a stock exchange or an
agricultural exchange. Gasoline is NOT A PERFECTLY COMPETITIVE MARKET YOU IDIOTS.
Define perfect competition as an ideal scenario in which consumers and producers are 100% responsive to
changes in price. This occurs when
The number of buyers and sellers approaches infinity
All buyers and sellers are perfectly informed and always completely rational.
Every version of the good produce is exactly the same.
This is very rarely the case in real life; and this is ESPECIALLY FALSE WHEN IT COMES TO OIL.
Demand
We create a demand curve by plotting demand on the x-axis and price on the y-axis. The result in a perfectly
competitive market is a perfect negatively sloping line. This yields the law of demand: reducing the price
increases demand and increasing the price decreases the demand (negative slope). The law of demand is
a result of perfectly rational decision making by producers and consumers. We define elasticity of demand
as how sensitive items are to changes in demand; it is mathematically calculated as the percentage reduction
in quantity divided by the percentage increase of price.
We may shift a demand curve right by increasing the consumer's willingness to pay for a good (i.e. they
consume more due to income); we shift a demand curve left by decreasing the consumer's willingness to
pay for a good (consume less due to income).
We define two types of goods in regards to income as described above; normal goods follow the above
pattern, while inferior goods actually decrease when income increases.
Goods are substitutes if another good may take its place.
Goods are complements if a lower price for one causes a higher price for the other, and vice versa.
Expectations, tastes, and number of buyers all may effect the demand of an item.
Supply
The supply of a good is the quantity that it is produced at. The law of supply dictates that suppliers
increase production if the price of a good is high, and decrease production if the price of a good is high. As
a result, instead of a perfectly negatively sloping line, the law of supply creates a perfectly positive sloping
line. We define elasticity of supply as how sensitive an item is to changes in supply. We define it
mathematically as the percentage increase in quantity divided by the percentage increase in price.
We shift supply curves similar to how we shift demand curves; increases in the cost of production (input
cost) will shift the curve left, while improvements in technology and efficiency will shift the curve right.
The ideal price point which balances supply and demand (their intersection on a graph) is called
equilibrium; in this case, the quantity supplied and the quantity demanded is agreeable and thus the ideal
price for both parties has been reached.
We call an imbalance in supply and demand a consumer surplus if the curve benefits consumers, and a
producer surplus if it benefits producers. Maximizing the sum of the consumer and producer surplus leads
to pareto efficiency.
Government Policy
Taxes reduce demand by reducing income (we call this deadweight loss) but also increase demand by
either subsidizing industries or providing social nets for citizens to increase the affordability of an item.
Price ceilings puts a price cap below the equilibrium (not what you think intuitively!) to keep prices lower
than the market would otherwise be in order to help citizens afford items like housing.
Price floors puts a price floor above the equilibrium (once again, the floor goes on the top!) to keep prices
higher than the market would otherwise be to help producers. Example: farmers during the Great Depression
with the Agricultural Adjustment Act.
Governments participate in international trade in order to produce and sell more of the goods they are good
at producing while buying goods that they are bad at producing. This allows markets to specialize while still
meeting the needs of their citizens, which allows for economic prosperity. For example, the US does not
produce chocolate; instead, it buys it from Latin America. We call this improvement from specialization gains
from trade.
Production Possibility Frontier
This was already covered in Gov so I'm gonna go over this really fast. It plots the trade off of producing one
good versus the other. I would call it a demand curve where the y axis is another good instead of money. The
opportunity cost is additive inverse of the the slope of this graph; if we change which variable is being
differentiated, we can switch between the two opportunity costs.
Comparative advantage refers to the idea that even though one country may be better at producing
everything than another country, as long as each country is the best at producing different items, they can
obtain gains from trade from each other.
Profit Motive
Remember that businesses work to make as much money as possible. Profits are revenue minus expenses.
Economic profit is the profit minus the opportunity cost. Marginal cost is the cost of producing one more
item. In general, think of marginal as the next one over. Marginal revenue, then, is the revenue produced by
one more item.
Fixed costs are costs that stay the same, such as say rent. Variable costs can change over time, like the
price of petroleum.
The fact that marginal revenue tends to zero as you increase production is called diminishing returns to
scale.
Monopolies and Oligopolies
A market with many suppliers is competitive; in a competitive market, businesses make 0 money; note that
this is still the best option because otherwise they lose money. Note that when there are only a few suppliers
in a market, it is called imperfect competition. This leads to monopolies and oligopolies, which hold
unbalanced market power and thus are bad for consumers. A natural monopoly is formed when a
monopoly is miraculously the best at producing an item. Monopolies are bad because they can control
supply and demand without worrying about the consumer because they have no choice of who to turn to.
The United States started to seriously deal with monopolies through the Sherman Antitrust Act and more.
Price discrimination occurs when different groups get different pricing (out of state tuition, reduced fees for
seniors). An oligopoly where all of the actors essentially pair up is called a cartel, think of it as a monopolistic
trust. We call something monopolistic competition if a bunch of producers sell unique but similar products,
like iPhones, computers, books, music, etc. where different producers are producing feasibly different items
(so they are all monopolies in a sense). Apple is a great example of this.
Creative Destruction
Creative destruction is the idea that because producers constantly go in and out due to competition,
companies naturally lose and die while newer ones take its place; eventually, those newer companies will die
out for even newer ones. This cycle of constant competition, failing, and new kings is called creative
destruction, and it is the main philosophy by which scientific and technical innovation occurs in a capitalist
society.
Entrepreneurs are people who take on risks to create a new business, usually in the form of a loan or stable
employment.
Market Failures
Market failures occur when a market fails to meet a social good. This occurs a lot in capitalism because it
turns out that the market economy is really shitty for essential goods. We call goods that the public owns due
to the market failing to provide them public goods. We define externalities as effects that one party has on
another without profit motive. Externalities can be positive or negative depending on if the effect is good or
bad.
Some idiot named Course made Course's Theorem, which states that as long as private actors can
negotiate, negative externalities can be negotiated and the market inefficiency can be overcome. This is a
really stupid idea that doesn't really play out in theory. The Government protects externalities through
agencies like the EPA (yes, pollution is an externality).
Property Rights
In a capitalistic society, people own their own private property. In theory, self interest makes this the most
valid allocation of resources. However, collective ownership can sometimes be a better use of property. See
the US Department of Defense as an example of this, and their many bases. We call the idea that people
working separately can't properly manage shared resources as the tragedy of the commons. In general, we
use private property, unless it happens to be bad; the exceptions are public property (railroads and utilities).
Rival goods are a pair of goods whose consumption affects the enjoyment of the other. Excludability is
when enjoyment of one good doesn't effect the enjoyment of the other good.

Chapter 3: Macroeconomics
Ok now we get into the easy common sense stuff. It is getting late so I will be kind of summarizing like crazy.
I'm sorry :((
GDP is the total value of all goods produced and consumed in a market. Economics usually measure GDP per
person (per capita). This is also called the average labour productivity.
Recessions are when the market does bad. Expansions are when a market does good. Big recessions are
called depressions. The oscillation between these two states is called the natural business cycle.
Unemployment is how many people don't have a job. Unemployment will never be 0, and some
unemployment is good to cause competition in the labour market. Technology causes natural cycles in
unemployment. Inflation is when the purchasing power of money goes down; in essence, a dollar is worth
less. We measure inflation using the Consumer Price Index (CPI). This tracks the price of various goods
over time.
A trade surplus occurs when a country outputs more than it consumes (from international trade); a trade
deficit is the opposite.
Intermediate goods are goods that are used to produce other goods (like silicon, steel). The circular flow of
the economy is how money flows from one place to another. It's kind of useless idk why they like it.
Human capital (skills of the labour force), physical capital, natural resources, technological capability,
political environment, and more are all heavy indicators of economic performance.
Financial Markets
We now meet the most satanic industry on the planet. Bonds are basically purchasable loans where you are
the lender. Imagine giving the company money now in exchange for the promise of more money later.
Because they are promised and aren't tied to investment, they are pretty safe to store your money in. Stocks
are shares of a company and the premise is the same; however, with stocks, the value of the stock is tied to
the company so there is no guarantee if it will go up or down. Stocks are more risky but often more
profitable.
Banks are institutions that loan out money, borrow money, and more. Think of them as a well of capital. Most
banks are insured from the FDIC. Banks are really evil and I will not rant about it because that would be really
bad. Mutual Funds are "baskets" of bonds and stocks.
If the government makes more money than it spends, it is a budget surplus; otherwise, it is a deficit.
Interests dictate the flow rate of money. If we think of banks as money wells, then the interest rate is the
friction of using the well (if we keep losing a crap ton of money every time we draw from or store in the well,
we won't use it). Low interests can cause massive growth but they also cause shitty and irresponsible
investment and spending habits. By using interests to slow the flow rate of money, governments can slow
down inflation (this has been their best tool thus far, it works quite well. Thanks Woodrow Wilson!). Woodrow
Wilson created the Federal Reserve system, which is how the US manages the money supply. It does this
with 12 regional branches. 5 regional branch presidents and the 7 Fed board members make up the FOMC
which actually make the monetary policy decisions. For some reason, New York and Washington DC are
always in this (I wonder why! San Francisco is also a good bet).
Recall that banks affect the money supply based on their lending habits. Remember if the banks lend out too
much of the deposited money, then they don't have the money to pay back the people who put the money
there and thus is problematic if people want their money. If everyone goes out to get their money at the same
time, this is called a bank run. This causes bank failures because if everyone goes out to get their money, the
irresponsibility of the banks often causes them to be unable to give the money back; this causes banks to fail
and for people to lose their money. The federal reserve controls how problematic banks can be by setting the
reserve ratio, which tells banks how much they have to have on reserve. Basically, since the Fed controls the
banks, and the banks lend out money, the fed controls the money supply.
Liquidity is the ease by which an asset can be turned into pure liquid cash (yeah that's where the term
comes from); cash is perfectly liquid since we can transfer it very easily. We can set the liquidity of cash
through interest rates. Inflation is closely related to the velocity of money (how fast money transfers hands);
by limiting this, we can limit inflation. Inflation is bad because oftentimes wages don't outpace inflation so
people lose purchasing power and are worse off; basically, they make income inequality worse.
Keynesian Economics are when the government uses expansionist economic policy to basically inject the
market with heroin when it is doing bad (lots of money, low interest rates). Negative interest rates are one of
the most damaging policies we have ever done due to keynesian economics. This is why Cooper should be
president.
Chapter 4: Innovation and Technology
I'm actually skipping this. This is APUSH on steroids and you should be fine. Basically:
Industrial revolution good
Technology good
infrastructure good (trains and communication)
Investing in innovation (research development) good
intellectual property and stealing ideas is a thing