Introduction to Microeconomics

• Economics is a social science that studies the production, distribution, and consumption of goods and services.
• It analyzes how individuals, businesses, governments, and societies make choices to allocate resources to satisfy their needs and wants.
• Economics can be broken down into microeconomics and macroeconomics.

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.
• Topics include supply and demand, market structures, production costs, consumer behavior, and welfare economics.
• Supply and demand is a model that explains how prices are determined in a market.
• The demand curve shows the quantity of a good or service that consumers are willing and able to purchase at different prices.
• The supply curve shows the quantity of a good or service that producers are willing and able to offer at different prices.
• The equilibrium price is the price at which the quantity demanded equals the quantity supplied.
• Market structures refer to the different types of competitive environments that exist in markets.
• Perfect competition features many buyers and sellers, homogeneous products, and free entry and exit.
• Monopoly features a single seller, a unique product, and barriers to entry.
• Oligopoly features a few sellers, differentiated or homogeneous products, and barriers to entry.
• Monopolistic competition features many sellers, differentiated products, and relatively easy entry and exit.
• Production costs are the expenses incurred by firms in the process of producing goods and services.
• Fixed costs do not vary with the level of output.
• Variable costs change with the level of output.
• Marginal cost is the cost of producing one additional unit of output.
• Consumer behavior analyzes how individuals make decisions about what to buy.
• Utility is the satisfaction a consumer receives from consuming a good or service.
• Budget constraints limit consumer spending based on income and prices.
• Consumers aim to maximize their utility given their budget constraints
• Welfare economics evaluates the well-being of society as a whole.
• Pareto efficiency is a state in which it is impossible to make anyone better off without making someone else worse off.
• Market failures occur when markets fail to allocate resources efficiently.
• Externalities are costs or benefits that affect parties not involved in a transaction.
• Public goods are non-excludable and non-rivalrous.

Macroeconomics

• Macroeconomics examines the performance of the economy as a whole.
• It analyzes aggregate variables such as gross domestic product (GDP), inflation, unemployment, and interest rates.
• Relevant topics include economic growth, business cycles, monetary policy, fiscal policy, and international trade.
• GDP measures the total value of goods and services produced in a country during a specific period.
• Nominal GDP is measured in current prices.
• Real GDP is adjusted for inflation.
• GDP growth rate indicates the percentage change in GDP from one period to another.
• Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.
• The consumer price index (CPI) measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
• Central banks often target a specific inflation rate to maintain price stability
• Unemployment refers to the state of being jobless but actively seeking work.
• The unemployment rate is the percentage of the labor force that is unemployed.
• Frictional unemployment results from the time it takes workers to switch between jobs.
• Structural unemployment results from a mismatch between the skills of workers and the requirements of available jobs.
• Cyclical unemployment results from fluctuations in the business cycle
• Interest rates are the cost of borrowing money or the return on lending money.
• Central banks use interest rates to influence economic activity.
• Higher interest rates tends to reduce borrowing and investment.
• Lower interest rates tends to increase borrowing and investment
• Economic growth refers to the increase in the production of goods and services in an economy over time.
• Productivity growth is a key driver of economic growth.
• Technological progress, investment in human capital, and capital accumulation are drivers of productivity
• Business cycles are the periodic fluctuations in economic activity that economies experience over time.
• Expansion is a period of economic growth.
• Recession is a period of economic decline.
• The National Bureau of Economic Research (NBER) in the U.S. determines the dates of recessions.
• Monetary policy involves actions undertaken by a central bank to manipulate the money supply and credit conditions to stimulate or restrain economic activity.
• Central banks can use tools such as open market operations, reserve requirements, and the discount rate to influence interest rates and the money supply.
• Fiscal policy involves the use of government spending and taxation to influence the economy.
• Expansionary fiscal policy involves increasing government spending or cutting taxes to stimulate economic activity.
• Contractionary fiscal policy involves decreasing government spending or raising taxes to restrain economic activity.
• 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 can lead to increased efficiency, specialization, and consumer welfare.
• Trade barriers, such as tariffs and quotas, can reduce trade and harm welfare through higher consumer prices

Economic Systems

• An economic system is the method a society uses to allocate scarce resources.
• Types of economic systems:
• Market economy: resources are allocated primarily through the interaction of individual households and firms.
• Command economy: resources are allocated by a central authority, typically the government.
• Mixed economy: combines elements of both market and command economies. Most modern economies are mixed

Economic Indicators

• Economic indicators are statistics that provide information about the current condition of the economy and can be used to forecast future economic activity.
• Leading indicators: indicators that tend to change before the economy as a whole changes.
• Examples: stock market indexes, building permits, consumer confidence
• Lagging indicators: indicators that tend to change after the economy as a whole changes.
• Examples: unemployment rate, inflation rate, prime interest rate
• Coincident indicators: indicators that change at approximately the same time as the economy as a whole.
• Examples: GDP, personal income, industrial production

Key Economic Concepts

• Scarcity: the limited availability of resources to meet unlimited wants.
• Opportunity cost: the value of the next best alternative that is forgone when making a decision.
• Incentives: factors that motivate individuals and firms to act in a particular way.
• Efficiency: the use of resources in the most productive way possible to maximize output.
• Equity: the fair distribution of resources and opportunities.