Chapter 1 Modern Economics and Thinking Like an Economist

 What is economics?
-Economics studies how people in our society make choices and how these choices
determine society’s use of its resources.
-There are seven concepts that define the core ideas of economics
1. Resources are scarce but wants are limited
2. Choices involves trade-offs, by getting something, we loss something in return
3. Opportunity cost represent the opportunity that is loss from deciding an action over
another.
4. Incentives are reasons for individuals making choices.
5. When people exchange, the range of choices becomes larger
6. Information will be crucial on making intelligent choices
7. The choices we make determine the distribution of wealth and income in our society.

 Role of markets
-Market economy revolves around the exchange between individuals and firms, which take
inputs from materials and outputs the goods and service.
-There are 3 broad categories on defining markets
1. Product markets, are firms that sell their outputs to household. Firms that sells their
outputs to other firms become the input of the other firms.
2. Labour market represents the firms need (combination of labour and machinery) to
produce their output.
3. Capital markets represents how Firms raises their funds to buy inputs from the capital
markets

 Microeconomics and Macroeconomics (The two branches of economics)

-The detailed study of the decisions of firms and households, and of prices and production in
specific industries, is called microeconomics. It focuses on the behaviour of the firms,
household, and individual. Concerned on how individual makes the decisions and what
affect those decisions
-By contrast, macroeconomics looks at the behaviour of the economy, such as
unemployment, inflation, and economic growth. The aggregate numbers tell us what is
happening in total, not each individual.
-Cause and correlations are important because economist thrive to find out how one thing
cause the other, making that changing one thing will also change another, while that is not
the case with correlation (connected but does not change 2 things).

 Normative and positive economics

-Positive economics are economics that describe how the economy behaves and predict how
it might change.
-Normative economics are economics in which judgements about the desirability (Benefits
and cost) of various policies are made.

 The competitive model

-Competition is a rivalry between producers for customers or between consumers for goods
and services
 -Competitive model is the model of the economy that pulls together the assumptions of self-
interested consumers, profit-maximising firms and perfectly competitive markets
-Price takers are firms that take the price for the goods or service they sell as give. The price
is unaffected by their level of production. This leads to perfect competitions where all firms
are price takers

 Incentives and Information (Prices, property rights, and profits)

-Price system is the economic system in which prices are used to allocate scarce resources
(to the ones who are able). Prices also indicates whether it is in high demand or not, giving
information to the firms and individual to either produce more or stop buying.
-Profits describe how firms will use less scarce resources in order to get more profits.
-For the profit motive to be effective, there must be a private property (ownership of a
property) with its attendant property rights (rights of an owner to own private property).
 Opportunity sets and trade offs
-Opportunity set is a summary of choice available to individuals (define by budget and time
constraints).
-Trade off show how much one thing a person must give up for another things.
-Production possibilities curves define a firm or society opportunity set, representing
possible combination of goods that a firm can produce. It should produce above the curve so
it could be efficient.

Chapter 2 Demand and Supply

 Demand
- Demand is the quantity of a good or service that a household or firm chooses to buy at a
given price
- Price is the price of a good or service that must be given in exchange
- Demand curve is the relationship between the quantity demanded of a good and the
price, whether for an individual or for the market
o The Individual Demand Curve
- The quantity demanded increase as the price falls, and the demand curve slopes down
- The higher the price, the less quantity and individual will buy
o The Market Demand Curve
- It is the total amount of good or service demanded in the economy at each price
- It is calculated by ‘adding horizontally’ the individual demand curves (that is, at any
given price, it is the sum of the individual demand)
- The market demand curve is downward sloping because at a higher price, each
consumer buys less, and at a high enough price, some consumer decided not to buy at
all – they exit the market
o Shifts in demand curves
- When the price of a good increase, the demand for that good decrease – when
everything else is constant (ceteris paribus)
- However, in the real-world other factors are not constant
- For example, As Australians prioritize health over desires, even though the price of the
chocolate is decrease, the demand won’t increase
o Source of shifts in demand curves
- Two factors that shifts the demand curves are specifically economic factors, which is
 - Changes in income and in the price of other goods
- A leftward shift of the demand curve means that less amount will be demanded at each
price
- A rightward shift of the demand curve means that more amount will be demanded
regardless of the price
- Two goods are substitute if the demand for one increased when the price of the other
increase
- Two goods are complements if an increase in the price of one will reduce the demand
for the other (Sugars and coffee (as sugar price increase the demand of coffee will
decrease)
- Demographic effects are effects that arises from changes in characteristic of the
population such as age, birth-rates, and location

 Supply
- The quantity of a good or service that a household or firm would like to sell at a price
- Supply curve is the relationship between the quantity supplied of a good and the price,
whether for a single firm or the market as a whole
o Market Supply Curve
- The total amount of a good or service that all the firms in the economy together would
like to supply at each price
- It is calculated by ‘adding horizontally’ the individual firm’s supply curves
- A firm is willing to produce more as the prices increase, which is why the curves slopes
upward
- The market supply curve is normally upward sloping, both because each firm is willing to
supply more of the good at a higher price and because higher prices entice new firms to
produce
o Shifts in supply curves
- A disaster (among other possible factors) will cause the supply curve to shift to the left,
so that at each price, a smaller quantity is supplied
o Sources of shifts in supply curves
- An improvement in technology (among other possible factors) will cause the supply
curve to shift to the right

 Market Equilibrium
- Equilibrium price is the price at which demand equals supply
- Equilibrium quantity is the quantity demanded and supplied at the equilibrium price,
where demand equals supply
- Equilibrium is a condition in which there are no forces (reasons) for change
- Market clearing price is the price which supply equals demand, so there is neither excess
supply nor excess demand
- Excess supply is the situation in which the quantity supplied at a given price exceeds the
quantity demanded
- Excess demand is the situation in which the quantity demanded at a given price exceeds
the quantity supplied
- Supply and demand equilibrium happen at the intersection of the demand and curve
supply
- Law of supply and demand is the law in economics that holds that, in equilibrium, prices
are determined so that demand equals supply
Chapter 3 (Elasticity)
 The Price Elasticity of Demand
- The percentage change in quantity demanded of a good as the result of a 1 per cent
change in price (The percentage change in quantity demanded divided by the
percentage change in price)