Economics: Supply and Demand

• Economics is the study of how societies allocate scarce resources to satisfy unlimited wants and needs
• It examines production, distribution, and consumption of goods and services

Microeconomics

• Microeconomics focuses on the behavior of individual economic agents, such as households, firms, and markets
• It analyzes how these agents make decisions in response to changes in prices, incentives, and resource allocation
• Supply and Demand: A model explaining how prices in a market economy are determined
• Demand refers to the quantity of a good or service that consumers are willing and able to purchase at various prices during a specific time period
• Supply refers to the quantity of a good or service that producers are willing and able to offer for sale at various prices during a specific time period
• Market equilibrium occurs where the supply and demand curves intersect
• At this point, the quantity supplied equals the quantity demanded, determining the market-clearing price and quantity
• Elasticity measures the responsiveness of one variable to a change in another
• Price elasticity of demand measures how much the quantity demanded of a good responds to a change in the price of that good
• Income elasticity of demand measures how much the quantity demanded of a good responds to a change in consumers' income
• Cross-price elasticity of demand measures how much the quantity demanded of one good responds to a change in the price of another good
• Market structures describe the competitive environment in a market
• Perfect competition is characterized by many buyers and sellers, homogeneous products, and free entry and exit
• Monopoly is characterized by a single seller, unique product, and barriers to entry
• Oligopoly is characterized by a few dominant firms, interdependent decision-making, and potential barriers to entry
• Monopolistic competition is characterized by many firms, differentiated products, and relatively easy entry and exit
• Production costs are the expenses incurred by a firm in producing goods or services
• Fixed costs do not vary with the level of output
• Variable costs vary with the level of output
• Marginal cost is the additional cost of producing one more unit of output
• Average cost is the total cost divided by the quantity of output
• Market failure occurs when the market fails to allocate resources efficiently
• Externalities are costs or benefits that affect parties not involved in a transaction
• Pollution is a negative externality
• Education is a positive externality
• Public goods are non-excludable and non-rivalrous
• National defense and clean air are examples of public goods
• Asymmetric information occurs when one party in a transaction has more information than the other party
• Can lead to adverse selection and moral hazard

Macroeconomics

• Macroeconomics examines the behavior of the economy as a whole
• It focuses on aggregate variables such as gross domestic product (GDP), inflation, unemployment, and economic growth
• GDP measures the total value of all final goods and services produced within a country's borders during a specific time period
• Nominal GDP is measured in current prices
• Real GDP is adjusted for inflation
• Inflation is a sustained increase in the general price level of goods and services in an economy
• Measured by the consumer price index (CPI) or the GDP deflator
• Demand-pull inflation is caused by excessive aggregate demand
• Cost-push inflation is caused by increases in the costs of production
• Unemployment refers to the state of being jobless and actively seeking employment
• Frictional unemployment is caused by the time it takes for workers to find new jobs
• Structural unemployment is caused by a mismatch between the skills of workers and the requirements of available jobs
• Cyclical unemployment is caused by fluctuations in the business cycle
• Fiscal policy involves the use of government spending and taxation to influence the economy
• Expansionary fiscal policy is used to stimulate economic growth during a recession
• Involves increasing government spending or decreasing taxes
• Contractionary fiscal policy is used to cool down an overheating economy
• Involves decreasing government spending or increasing taxes
• Monetary policy involves the use of interest rates and the money supply to influence the economy
• Conducted by central banks
• Expansionary monetary policy is used to stimulate economic growth during a recession
• Involves lowering interest rates or increasing the money supply
• Contractionary monetary policy is used to cool down an overheating economy
• Involves raising interest rates or decreasing the money supply
• Economic growth refers to the increase in the production of goods and services in an economy over time
• Measured by the percentage change in real GDP
• Factors contributing to economic growth include technological progress, capital accumulation, and human capital development

International Trade

• International trade involves the exchange of goods and services between countries
• Comparative advantage is the ability of a country to produce a good or service at a lower opportunity cost than another country
• Trade barriers are government policies that restrict international trade
• Tariffs are taxes on imports
• Quotas are limits on the quantity of imports
• Exchange rates determine the value of one currency in terms of another
• Fixed exchange rates are set by governments
• Floating exchange rates are determined by supply and demand in the foreign exchange market
• Balance of payments is a record of all economic transactions between a country and the rest of the world
• Current account measures the flow of goods, services, and income
• Capital account measures the flow of financial assets

Economic Policies

• Economic policies are actions taken by governments to influence the economy
• Fiscal policy involves the use of government spending and taxation
• Monetary policy involves the use of interest rates and the money supply
• Regulatory policies involve the use of rules and regulations to influence economic behavior
• Trade policies involve the use of tariffs, quotas, and other trade barriers
• Labor market policies involve the use of minimum wages, unemployment benefits, and other labor regulations

Behavioral Economics

• Behavioral economics studies the psychological factors that influence economic decision-making
• Challenges the assumption that individuals are always rational and self-interested
• Heuristics are mental shortcuts that people use to make decisions
• Can lead to biases and errors
• Cognitive biases are systematic patterns of deviation from norm or rationality in judgment
• Confirmation bias is the tendency to seek out information that confirms one's existing beliefs
• Loss aversion is the tendency to feel the pain of a loss more strongly than the pleasure of an equivalent gain
• Nudging involves using subtle changes in the environment to influence people's behavior
• Choice architecture is the design of different ways in which choices can be presented to consumers