This is a 25-page comprehensive summary based on the in-person and online resources of the 'An Introduction to Economics' 6-week VU course.
Includes the following:
1. Graphs and diagrams to further illustrate the concepts;
2. Definitions of key terms;
3. A comprehensive and clear format.
I...
Chapter 1: The Principles and Practice of Economics
Economics studies how agents make choices among scarce resources and how those choices affect society
(study of people’s choices).
➔ Microeconomics: The study of individuals, firms, and governments.
➔ Macroeconomics: The study of the whole economy.
Principles of Economics:
1. Optimization of trade-offs and budget constraints (People will choose the best option available).
2. Economic systems tend to be in Equilibrium (A situation in which nobody would benefit by changing
his or her own behaviour)
Equilibrium: A situation when no one benefits by changing his/her behaviour.
3. Empiricism (analysis that uses data)
Economists use data to test theories and to determine what causes things to happen in the real world
Chapter 2: Economic Methods and Economic Questions
The Scientific Method (referred to as empiricism)
● Developing models and testing the model to ensure it matches what we observe.
Model: A simplified description of reality. A model is not exact and can be tested with data.
Correlation ≠ Causation
➔ Correlation: When two things are related.
Positive correlation ↗, Negative correlation ↘
➔ Causation: When one thing directly affects another.
Why isn’t correlation the same thing as causality?
➔ Omitted variables
➔ Reverse causality (cause and effect, but it goes in the opposite direction as predicted)
Chapter 3: Optimisation- Doing the best you can
● Comparative statics: What if the opportunity cost of commuting changes?
● Marginal analysis: What is the net benefit of one additional unit? Used for decision-making.
Optimization in Differences:
1. Express all costs and benefits in the same unit;
2. Calculate how the costs and benefits change as you move from one option to another;
3. Apply the Principle of Optimization at the Margin- choose the option that makes you better off by
moving toward it, and worse off by moving away from it.
Chapter 4: Demand, Supply, and Equilibrium
In a perfectly competitive market every buyer pays and every seller charges the same market price, no buyer
or seller is big enough to influence the market price. No buyer or seller is big enough to influence the market
price, and all sellers sell an identical good or service.
Market price: Price at which buyers and sellers conduct transactions.
Market Demand Curve: The sum of the individual demand curves of all the potential buyers. The market
demand curve plots the relationship between the total quantity demanded and the market price, holding all else
equal.
,Shifts in the Demand Curve occur when the following changes…
1. Tastes and preferences;
2. Income and wealth;
3. Availability and prices of related goods;
4. Number and scale of buyers;
5. Buyers’ expectations about the future.
Shifts in the demand curve Equilibrium
Excess Supply Excess Demand
Market Supply Curve: Plots the relationship between the total quantity supplied and the market price, holding all
else equal.
Supply and Demand in Equilibrium
➔ Competitive Equilibrium: The point at which the market comes to an agreement about what the price
will be (competitive equilibrium price) and how much will be exchanged (competitive equilibrium
quantity) at that price.
➔ Excess Demand: Occurs when consumers want more than suppliers provide at a given price. Results in
a shortage.
➔ Excess Supply: Occurs when suppliers provide more than consumers want at a given price. Results in a
surplus.
Chapter 5: Consumers and Incentives
The Buyer’s Problem:
1. What do you like? (Tastes and preferences)
2. How much does it cost? Prices are fixed (no negotiation) and there is a competitive market (purchases
do not affect prices).
3. How much money do you have? No saving or borrowing (just spending), only purchasing whole units.
, Elasticity: A measure of how sensitive one variable is to charges in another.
Three measures of elasticity:
1. Price elasticity of demand;
How much does quantity demanded change when the good’s price changes?
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
𝑃𝑟𝑖𝑐𝑒 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 𝑜𝑓 𝑑𝑒𝑚𝑎𝑛𝑑 (ε𝐷) = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒
𝐸𝐷 > 1 = Elastic
𝐸𝐷 < 1 = Inelastic
𝐸𝐷 = 1 = Unit elastic
𝐸𝐷 = ∞ = Perfectly elastic
𝐸𝐷 = 0 = Perfectly inelastic
2. Cross-price elasticity of demand;
How much does the quantity demanded of one good change when the price of another good
changes?
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑋
𝐶𝑟𝑜𝑠𝑠 𝑝𝑟𝑖𝑐𝑒 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑌
3. Income elasticity of demand.
How much does quantity demanded change when income changes?
% 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑑𝑒𝑚𝑎𝑛𝑑𝑒𝑑
𝐼𝑛𝑐𝑜𝑚𝑒 𝑒𝑙𝑎𝑠𝑡𝑖𝑐𝑖𝑡𝑦 = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑖𝑛𝑐𝑜𝑚𝑒
Chapter 6: Sellers and Incentives
Conditions of a perfectly competitive market:
1. No buyer or seller in the market is big enough to influence the market price;
2. Sellers in the market produce identical goods;
3. There is free entry and exit in the market.
Goal of the seller: Maximise profit
To achieve this goal, sellers must solve 3 problems:
1. How to make the product;
Inputs → Outputs
➔ Short run: Firm’s inputs cannot be changed (Ex. In the short run, you can’t buy another oven).
➔ Long run: All the firm’s inputs can be changed (Ex. In the long run, you can buy another oven,
even build another kitchen).
Variable factor of production: Input that can be changed in a certain period of time and that changes if
the level of output changes.
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