Micro and Macro Economics Study Notes

Supply and Demand

Supply: The quantity of a good or service that producers are willing to sell at various prices.
Demand: The quantity of a good or service that consumers are willing to buy at various prices.
Law of Demand: As the price of a good decreases, demand increases and vice versa.
Law of Supply: As the price of a good increases, supply increases and vice versa.
Equilibrium: The point where supply equals demand, determining market price.
Shifts in Curves:
- Demand shift factors: consumer preferences, income, prices of related goods, expectations.
- Supply shift factors: production costs, technology, number of suppliers, expectations.

Market Structures

Perfect Competition: Many firms, identical products, free entry/exit, price takers.
Monopolistic Competition: Many firms, differentiated products, some price-setting power.
Oligopoly: Few firms dominate the market, interdependent pricing, barriers to entry.
Monopoly: Single firm, unique product, significant barriers to entry, price maker.
Key Characteristics: Number of firms, type of products, barriers to entry.

Fiscal Policy

Definition: Government's use of spending and taxation to influence the economy.
Components:
- Government Spending: Investments in infrastructure, education, and services.
- Taxation: Changes in tax rates influence consumer spending and business investment.
Objectives:
- Stimulate economic growth during recessions.
- Control inflation during economic booms.
Types:
- Expansionary Fiscal Policy: Increased spending or tax cuts to boost economy.
- Contractionary Fiscal Policy: Decreased spending or tax increases to cool economy.

International Trade

Benefits: Access to a larger market, economies of scale, diverse products.
Comparative Advantage: Ability of a country to produce goods at a lower opportunity cost than another.
Trade Barriers:
- Tariffs: Taxes on imports to protect domestic industries.
- Quotas: Limits on the quantity of goods imported.
Balance of Trade: Difference between a country's exports and imports.
Trade Agreements: Treaties that reduce trade barriers between countries.

Monetary Policy

Definition: Central bank actions to control money supply and interest rates.
Goals:
- Control inflation.
- Stabilize currency.
- Promote employment.
Tools:
- Open Market Operations: Buying/selling government bonds to influence money supply.
- Interest Rates: Adjusting the discount rate to influence borrowing costs.
- Reserve Requirements: Changing the amount banks must hold in reserve.
Types:
- Expansionary Monetary Policy: Lower interest rates to stimulate economy.
- Contractionary Monetary Policy: Increase interest rates to curb inflation.

GDP (Gross Domestic Product)

Definition: Total value of all goods and services produced within a country in a specific time period.
Components:
- Consumption: Spending by households on goods/services.
- Investment: Business spending on capital goods.
- Government Spending: Expenditures on goods/services by the government.
- Net Exports: Exports minus imports.
Types:
- Nominal GDP: Measured at current prices, not adjusted for inflation.
- Real GDP: Adjusted for inflation, reflects true economic growth.
Importance: Indicator of economic health, used for policy-making and comparison between economies.

Supply and Demand

Supply: Represents the quantity of a good/service that producers are willing to offer at different price levels.
Demand: Illustrates the quantity of a good/service consumers are ready to purchase at various prices.
Law of Demand: Indicates that price decreases lead to an increase in demand, while price increases result in decreased demand.
Law of Supply: Suggests that as prices rise, the quantity supplied also increases, and conversely, lower prices result in lower supply.
Equilibrium: The state where the quantity supplied equals the quantity demanded, establishing the market price.
Demand Shift Factors: Influenced by consumer preferences, income levels, prices of related goods, and future expectations.
Supply Shift Factors: Affected by production costs, advancements in technology, the number of suppliers in the market, and expectations regarding the future.

Market Structures

Perfect Competition: Features many firms offering identical products, characterized by free market entry and exit, leading to price-taking behavior.
Monopolistic Competition: Consists of numerous firms selling differentiated products, allowing some degree of price-setting power.
Oligopoly: Dominated by a few firms, where pricing decisions are interconnected and significant barriers to entry exist.
Monopoly: Comprised of a single company providing a unique product, facing high barriers to entry and possessing price-setting capability.
Key Characteristics of Market Structures: Includes the number of firms involved, product types offered, and presence of barriers to entry.

Fiscal Policy

Definition: Involves government strategies utilizing spending and taxation to shape economic conditions.
Government Spending: Encompasses investments in various sectors like infrastructure, education, and social services.
Taxation Effects: Modifications in tax rates can significantly impact consumer spending habits and business investment decisions.
Objectives of Fiscal Policy: Aims to stimulate economic growth during downturns and manage inflation during periods of expansion.
Types of Fiscal Policy:
- Expansionary Fiscal Policy: Involves increased governmental spending or tax reductions to invigorate the economy.
- Contractionary Fiscal Policy: Entails reduced government spending or tax hikes to cool down an overheating economy.

International Trade

Benefits of International Trade: Grants access to broader markets, leads to economies of scale, and introduces product variety.
Comparative Advantage: A situation where a country can produce certain goods at a lower opportunity cost than others.
Trade Barriers:
- Tariffs: Taxes levied on imports to safeguard domestic industries.
- Quotas: Restrictions on the volume of goods that can be imported.
Balance of Trade: The differential between a nation's exports and imports, indicating trade status.
Trade Agreements: Treaties that streamline trade between countries by reducing or eliminating trade barriers.

Monetary Policy

Definition: Central bank efforts to regulate money supply and interest rates to manage economic performance.
Goals of Monetary Policy: Focuses on controlling inflation, stabilizing currency value, and promoting employment levels.
Monetary Policy Tools:
- Open Market Operations: Involves buying/selling government bonds to affect the money supply.
- Interest Rates: Manipulating the discount rate influences borrowing costs for banks and consumers.
- Reserve Requirements: Changing the mandated reserve levels for banks to control lending capacity.
Monetary Policy Types:
- Expansionary Monetary Policy: Lowering interest rates to stimulate economic growth.
- Contractionary Monetary Policy: Raising interest rates to combat inflationary pressures.

GDP (Gross Domestic Product)

Definition: The aggregate value of all goods and services produced in a country over a specified timeframe.
Components of GDP:
- Consumption: Expenditures by households on various goods and services.
- Investment: Business investment in durable capital goods.
- Government Spending: Government expenditures on goods and services.
- Net Exports: The balance of exports minus imports.
GDP Types:
- Nominal GDP: Measured using current market prices, without adjusting for inflation impacts.
- Real GDP: Adjusted for inflation, providing a more accurate representation of economic growth.
Importance of GDP: Serves as a key indicator of economic health, guiding policy decisions and facilitating comparisons between different economies.