Economics 101: Introduction to Economics Page 1 I. What is Economics? Economics defined: The study of how societies allocate limited resources to satisfy unlimited wants. Microeconomics: Focuses on individual units, like households and firms. Macroeconomics: Studies the economy as a whole, including inflation, unemployment, and economic growth. II. Principles of Microeconomics Supply and Demand: Supply: Quantity of a good/service producers are willing to offer at various prices. Demand: Quantity of a good/service consumers are willing to buy at different prices. Equilibrium: Price and quantity where supply equals demand. Elasticity: Measures responsiveness of quantity demanded or supplied to changes in price. Price elasticity of demand, income elasticity, cross-price elasticity. Consumer and Producer Surplus: Consumer surplus: Difference between what consumers are willing to pay and what they actually pay. Producer surplus: Difference between what producers are willing to accept and what they receive. Page 2
III. Principles of Macroeconomics Gross Domestic Product (GDP): Total value of all goods and services produced in a country in a given period. Components: Consumption, investment, government spending, net exports. Inflation and Deflation: Inflation: Increase in general price level over time. Deflation: Decrease in general price level. Measured by Consumer Price Index (CPI) and Producer Price Index (PPI). Unemployment: Types: Frictional, structural, cyclical, seasonal. Natural rate of unemployment: Non-accelerating inflation rate of unemployment (NAIRU). IV. Monetary Policy and Fiscal Policy Monetary Policy: Managed by central banks (e.g., Federal Reserve). Influences money supply and interest rates to control inflation and economic growth. Fiscal Policy: Government decisions regarding taxation and spending. Expansionary vs. contractionary policies to influence aggregate demand. Budget Deficits and National Debt: Budget deficit: Government spending exceeds revenue in a year. National debt: Accumulation of budget deficits over time.
Page 3 V. International Trade Comparative Advantage: When a country can produce a good at a lower opportunity cost than another country. Basis for international trade. Trade Restrictions: Tariffs (taxes on imports), quotas (quantity limits), trade agreements. Impact on domestic industries, consumers, and global economy. Exchange Rates: Value of one currency relative to another. Fixed vs. floating exchange rates. VI. Market Structures Perfect Competition: Many small firms, identical products, no barriers to entry. Price taker, no market power. Monopoly: Single seller, unique product, significant barriers to entry. Price maker, market power. Oligopoly and Monopolistic Competition: Few sellers (oligopoly) or many sellers with differentiated products (monopolistic competition).
Strategic interactions, non-price competition. VII. Economic Indicators Leading, Lagging, and Coincident Indicators: Leading indicators predict future economic activity (e.g., stock market). Lagging indicators confirm trends (e.g., unemployment rate). Coincident indicators show current economic conditions (e.g., industrial production). Business Cycles: Fluctuations in economic activity: expansion, peak, contraction, trough. Related to changes in GDP, employment, and other indicators.