Eco revision ( Week 1---> week 4)

Economics definition:
Economics is the study of the choices of people and societies make to attain their limited wants ,
given their scare resources.
In economics, we study how people make choices and interact within the market

Optimal decisions are made at the margin to optimize value gained by the entity
Marginal analysis: the comparison between marginal benefits and marginal costs.

Scarcity : The situation in which unlimited wants exceed the limited resources available to fulfil those
wants.
Resources: Inputs used to produce good and services , natural, intangible, tangible,…..
Trade-off : Due to scarcity , producing one more of this good mean less of another good.

Opportunity cost: The opportunity cost of any activity is the highest-valued alternative that must be
given up to engage in that activity.

Productive efficiency: When a good or service is produced using the least amount of resources.
Allocative efficiency: When production reflects consumer preferences; in particular, every good or
service is produced up to the point where the last unit provides a marginal benefit to consumers
equal to the marginal cost of producing it. ( MR = MC)
Dynamic efficiency: Occurs when new technology and innovation are adopted over time.

Positive analysis: Analysis concerned with what is, involving value-free statements that can be
checked by using the facts.
Normative analysis: Analysis concerned with what ought to be, involving value judgements which
cannot be tested. ( rational )

Production possibility frontier: A curve showing the maximum attainable combinations of two
products that may be produced with available resources.

Increasing opportunity cost: The more we produce , the more it takes to produce an unit
The more resources already devoted to an activity, the smaller the payoff to devoting additional
resources to that activity.
Economic growth: The expansion of society’s production potential. ( Increasing quantity, using less
input)

Specialization and trade

Absolute advantage: The ability of an individual, firm or country to produce more of a good or service
than competitors using the same amount of resources. ( The quantity when using all resource to
produce one good maximumly)
Comparative advantage: The ability of an individual, firm, or country to produce a good or service at a
lower opportunity cost than other producers. ( the basis for trading

*Individuals, firms, or countries are better off if they specialise in producing goods and services for
which they have a comparative advantage and obtain other desirable goods and services by trading

Factor markets: Markets for the factors of production, such as labour, capital, natural resources, and
entrepreneurial ability. ( input)

Week 2 : Law of demand

Quantity demanded: The amount of a good or service that a consumer is willing and able to buy at a
given price.
Demand schedule: A table showing the relationship between the price of a product and the quantity
of the product demanded.
Demand curve: A curve that shows the relationship between the price of a product and the quantity
of the product demanded.
Market demand: The demand by all the consumers of a given good or service.

Ecnomic variables :
Shifting demand
* Income : Demand rises when income rises
Normal good: A good for which the demand increases as income rises and decreases as income falls.
Inferior good: A good for which the demand increases as income falls and decreases as income rises.
( Noodles, Dried food, …. cheap things)
* The price of substitute good : Complementary : Go down as the other good down ( Corn flake and
milk)
Substitute : Demand goes up when the price of substitute rises .
* Taste : Fashion , fruit, ….
* Expected higher price : buy to avoid buying later
*Population : More people consume more
Shifting supply
* The price of an input : demand goes down when the cost rises
* Productivity : Supply goes up when more goods are produced using the same amount of resource
* The price of a substitute : more of the substitute is produced , less of this good
* Number of firms : more firm , more good
* Expected higher price : Less of this is offered to wait for a higher price.

Week 3 : Price elasticity

Elasticity: A measure of how much one economic variable, such as the quantity demanded of a
product, responds to changes in another economic variable, such as the product’s price.

Price elasticity of demand The responsiveness of the quantity demanded of a good to a change in its
price.

Elastic demand: Demand is elastic when the percentage change in quantity demanded is greater than
the percentage change in price.
The price elasticity is greater than one in absolute value

Inelastic demand: Demand is inelastic when the percentage change in quantity demanded is less than
the percentage change in price. ( <1)

Unit-elastic : Demand is unit-elastic when the percentage change in quantity demanded is equal to
the percentage change in price. ( increase and decrease, vice versa)

Price elasticity of demand =

(Q2 – Q1) (P1 –P2)
(Q1 + Q2) ÷ (P1 + P2)
2 2