Ch1 Scarcity is the condition that arises because resources are limited relative to unlimited human wants .

Faced with scarcity, we must make choices We must choose among the available alternatives and face tradeoff All economic questions and
problems arise because human wants exceed the resources available to satisfy them Goods and services: are the objects (goods) and actions (services) that people value and produce to satisfy human wants. * What to produce? What kind of goods and
services get produced and in what quantities * How to produce? How are goods and services produced? * For Whom to produce? For Whom are the various goods and services produced? Who are the buyers/users/consumers? Besides, the answer also
depends on the incomes that people earn and the prices they pay for the goods and services they buy
4. Rational Choice (Core Economics Assumption: Rationality) A rational choice is one that uses the available resources to best achieve the objective of the person making the choice   We make rational choices by comparing benefits and costs of the
alternatives option and choosing the alternative that makes net benefit = benefit minus cost as large as possible 6. Choices Respond to Incentives • An incentive is a reward or a penalty that encourages or discourages an action.

Ch2 Demand • comes from the behavior of buyers • refers to the whole plan of purchase • reflects the relationship between the quantity demanded and the price of a good when all other influences on buying plans remain the same Quantity demanded • It
is the amount of a good, service, or resource that people are willing and able to buy during a specified period at a specified price. •The demand curve is asserted to be downward sloping by the Law of Demand i e When the price of the good rises, the
quantity demanded of that good decreases, vice versa holding other things constant Supply • is a plan of production/sales • is the relationship between the quantity supplied of a good and the price of the good when all other influences on selling plans
remain the same Quantity supplied It is the amount of a good, service, or resource that people are willing and able to sell during a specified period at a specified price. The supply curve is asserted to be upward sloping by the Law of Supply ; i.e. when
the price of the good rises, the quantity supplied of that good increases, vice versa, holding other things constant Surplus is the quantity supplied exceeds the quantity demanded at a current market price. Shortage is the quantity demanded exceeds the
quantity supplied at a current market price.

Ch4 The price elasticity of demand/supply is a measure of the responsiveness of the quantity demanded/qs of a good to a change in its price when all other influences on buyers’ plans remain the same. Perfectly Inelastic Demand=0 When the percentage
change in the quantity demanded is zero for any percentage change in the price Perfectly Elastic Demand=infinitive  When the quantity demanded changes by a very large percentage in response to an almost zero percentage change in price. Inelastic
Demand<1: When the percentage change in the quantity demanded is less than the percentage change in price. Elastic Demand>1: When the percentage change in the quantity demanded exceeds the percentage change in price. Unit Elastic
Demand=1(Rectangular hyperbola): When the percentage change in the quantity demanded equals the percentage change in price. Unit Elastic Supply not Rectangular hyperbola
Factors affect the Price Elasticity of Demand (1) Availability of Substitutes • The demand for a good is elastic if a substitute for it is easy to find. • The demand for a good is inelastic if a substitute for it is difficult to find. 3 main factors influence the
“ability to find a substitute” for a good: (1.1) Luxury Versus Necessity A necessity has a few substitutes-.>inelastic A luxury has many substitutes elastic . (1.2) Narrowness of Definition The demand for a narrowly defined good is elastic. (e.g.
skinny cut jean)/ The demand for a broadly defined good is inelastic. (e.g.clothing) (1.3) Time Elapsed Since Price Change The longer the time elapsed since the price change, the more elastic iIt may be because the buyers can have more time to search
for the substitutes and find replacement. (2) Proportion of Income Spent A price rise, like a decrease in income, means that people cannot afford to buy the same quantities of a product as before. The greater the proportion of income spent on a good,
the greater is the impact of a rise in its price on the quantity of that product that people can afford to buy and the more elastic is the demand for the product.
Factors affect the Price Elasticity of Supply (1) Production Possibilities Goods that can be produced in only a fixed quantity have a perfectly inelastic supply. Goods that can be produced at a constant (or very gently rising) opportunity cost have an elastic
supply. ( 2) Time Elapsed Since Price Change As time passes after a price change, producers find it easier to change their production plans, so supply becomes more elastic (3) Storage Possibilities The supply of a storable good is highly elastic. The cost
of storage is the main influence on the elasticity of supply of a storable good.

Ch6 Types of Production Factors (& their returns) (1) Labour (wages/ salaries)(3) Capital(interest) (2) Land (rent)(4) Entrepreneurship(profit) For a production decision, the opportunity cost is the amount that a firm must pay the owners of the production
factors the firm employs to attract them from their best alternative use. Explicit Cost(rent, salary, interest paid for bank loan) An explicit cost is an opportunity cost involved outflow of cash due to the use of factors of production. For simplicity, it is
measured in terms of money. An implicit cost(rent forgone, wage forgone, interest forgone) is an opportunity cost incurred by a firm when it uses its own resources for production and forgoes the ability to earn return from the use of the resources
elsewhere. It is measured by the highest valued option forgone for the alternative use of the resources. When Marginal Product is higher than Average Product(AP), AP is increasing. When MP is lower than AP, AP is decreasing. When MP equals AP,
AP is at its maximum
Economic depreciation is an opportunity cost of a firm using capital that it owns measured as the change in the market value of capital over a given period . i.e. economic depreciation = purchase value-resale value Accounting depreciation irrelevant for
production decision. Sunk Cost irrelevant to the firm because it represents the cost of past act and cannot be recovered . Economic Profit A firm s economic profit =total revenue-total cost Total cost = explicit costs + implicit costs and is the
opportunity cost of production. The Short Run: the quantities of some resources are fixed (at least one production factor is fixed), usually change the quantity of labor it uses but not the quantity of capital. The Long Run: all production factors are
variable. Fixed and Variable Factors Fixed factor : the quantity of fixed factor remains unchanged when the output quantity changes. Variable factor : the quantity of variable factor changes in the same direction as the output quantity changes.
Total Product (TP) Total product is the total quantity of a good produced in a given period. Total product increases at the beginning but decreases eventually as the quantity of labor employed increases. Marginal Product(steepergreater) MP is
the change in total product that results from a one unit increase in the quantity of labor employed. Marginal product tells us the contribution to total product of adding one more worker Increasing marginal returns occur when the MP of an additional
worker exceeds the MP of the previous worker. Increasing marginal returns occur when a small number of workers are employed and arise from increased specialization and division of labor in the production process. The law of decreasing marginal
returns (productivity) states that: As a firm uses more of a variable input , with a given quantity of fixed inputs , the marginal product of the variable input eventually (finally) decreases. At the point of maximum MP MC is a minimum . At the point of
maximum AP AVC is a minimum. Properties of MC curve   MC curve is U shaped with the law of decreasing marginal returns   Intersects the AVC curve and the ATC curve at their minimum points. Shifts in Cost Curves Factors: Technology, Prices
of Factors of Production, Plant Size and Cost Economies of scale/ Diseconomies of scale/ Constant returns to scale exist if when a firm increases its plant size and labor employed by the same percentage , its output increases by a larger/smaller/same
percentage and average total cost decreases/increase/remain constant  The main source of economies of scale is greater specialization of both labor and capital Constant returns to scale occur when a firm is able to replicate its existing production facility
including its management system.

Ch7 perfect competition there are so many (potential) buyers and sellers; Products (i.e. goods and services) are the same; all market buyers and sellers are well-informed; there is free entry and exit in the long run; Deductively, no individual buyer or seller
can influence the price or no one has the market power.
If marginal revenue exceeds/less than marginal cost, the extra revenue from selling one more unit exceeds/less than the extra cost incurred to produce it. total economic profit increase if output in/de
If marginal revenue equals marginal cost, the extra revenue from selling one more unit is equal to the extra cost incurred to produce it. so total economic profit is maximized
Temporary Shutdown condition in Short Run In the short run, theoretically, it is not possible for a firm to leave the market due to the existence of fixed factor such as the rental contract. Thus, the fixed cost is something which cannot be avoided and thus
it does not affect the production decision. On the other hand, the variable costs can be avoided if a firm chooses to produce nothing in case of suffering temporarily economic loss. Thus, the variable costs play a more important role in explaining a firm’s production decision
When a firm suffers an economic loss, in the short run, it can choose to: a. shut down temporarily , so it receives no revenue and incurs no variable cost. It incurs an economic loss equal to total fixed cost (econ loss = TFC b. produces some output, Econ
Loss = TC TR = TFC + TVC TR If TR > TVC   the firm s economic loss < TFC   So it pays the firm to produce and incur an economic loss, but the economic loss is less than the amount when the firm shuts down temporarily If TR < TVC  
the firm s economic loss > TFC   the firm would shut down temporarily
Short to long The profit or loss situation occurred in the short run will provide an incentive for the firms to adjust their production plan in the long run situation when the fixed factors are converted into variable factors. The Effects of Entry Economic
profit is an incentive for new firms to enter a market . The market supply increases due to the increase in the number of firms. However, as they do so, the price falls and the economic profit of each existing firm decreases until each of the competitive
firm earns zero profit. The Effects of Exit Economic loss is an incentive for firms to exit a market . The market supply decreases due to the exit of firms. However, as they do so, the price rises and the economic loss of each remaining firm decreases
until each of the competitive firm earns zero profit. The Long Run Equilibrium In either case, the price adjustment will continue in response to the change in the number of firms. It lasts until the zero profit equilibrium is restored in the long run. The
firms produce at the minimum average total cost . This output level is also efficient as the total surplus in the market is maximized
A price taker firmMR=P=AR=D

Ch8 Monopoly 1, one single seller (price searcher) 2, no close substitutes 3, barriers to Entry(Natural, Ownership, Legal) A monopolist faces a trade off between price and the quantity sold. ∗ To sell a larger quantity, the monopolist must set a lower price.
Price= AR ∗ MR decrease as quantity increases ∗ MR< price because price must be decrease to sell an additional unit
Is Monopoly Efficient? ∗ Monopoly is inefficient because it is underproduction when compared with the case of perfect competition. A deadweight loss is created. ∗ Deadweight loss: It is a loss of economic efficiency which occurs when marginal benefit does
not equal marginal cost at the last unit. In other words, deadweight loss is a concept to illustrate inefficiency in resource allocation. Due to the existence of deadweight loss. the total surplus will be lower than the one under perfect competition. ∗ Monopoly also redistributes
consumer surplus. This portion of the loss of consumer surplus is not a loss to society. ∗ The producer gains, and the consumers lose. For profit maximization, a firm should produce up to the last unit at which marginal revenue equals marginal cost
natural monopoly exists when the technology for producing a good or service enables one firm to meet the entire market demand at a lower price than two or more firms could Ownership Barrier to Entry A monopoly can arise in a market in which
competition and entry are restricted by the concentration of ownership of a natural resource. A legal monopoly is a market in which competition and entry are restricted by granting of a public franchise, government license, patent, or copyright

Ch9, GDP GDP Defined Total production is measured as Gross domestic product or GDP The market value of all the final goods and services currently produced within a country in a given time period Intermediate good or service is a good or service
that is produced by one firm, bought by another firm, and used as a component of a final good or service. To avoid double counting, the value of intermediate good and service is deducted from the calculation.The Expenditure Approach: Total expenditure
is the total amount received by producers of final goods and services. Used Goods(as produced before) & Financial Assets(bond/stock) not included Income (Y) (created from the production of final products) Households receive these incomes: • Labor
earns wages • Capital earns interest • Land earns rent • Entrepreneurship earns profits. GDP and Related Measures of Production and Income 1) Gross national product or GNP is the market value of all the final goods and services produced anywhere in
the world in a given time period by the factors of production supplied by residents of the country. 2) Disposable Personal Income Consumption expenditure is one of the largest components of aggregate expenditure and one of the main influences on it is
disposable personal income. Disposable personal income is the income received by households minus personal income taxes paid. Real GDP and Nominal GDP Nominal GDP is the value of the final goods and services produced in a given year
expressed in the prices of the current year Real GDP is the value of the final goods and services pduced in a given year expressed in the prices of the base year. Real GDP uses: (1) To compare the standard of living over time (2) To track the course
of the business cycle (3) To compare the standard of living among countries FOR(1) Living standard is measured by the values of goods and services that people enjoy, on average. Potential GDP is the value of real GDP when all the economy s factors
of production labor, capital, land, and entrepreneurial ability are fully employed. When some factors of production are unemployed , real GDP is less than potential GDP. When some factors of production are over employed and working hard, real GDP
exceeds potential GDP. In the short term, real GDP fluctuates around potential GDP . To measure the trend in the standard of living, we remove the influence of short-term fluctuations and focus on potential GDP. Limitation Real GDP Household
Production(underestimate), Underground Production(unreportedavoid tax/ illegal production), Leisure Time, Environment Quality

CH10 Money is any commodity or token that is generally accepted as a means of payment . The Functions of Money: Medium of exchange, unit of account, store of value The properties of Money: General accepted, Durability, Portability,
Divisibility(divided into small to transact small amount), Homogeneity (Same Quality), Scarcity(price stable) Fiat money is objects that are money because the law decrees or orders them to be money. The objects that we use as money today are  
Currency and   Deposits at banks and other financial institutions Currency / Cash (C) The notes and coins that we use today are known as currency Deposits (D) Deposits at banks such as saving deposits (Ds), checking deposits ( Dd )(also known as
demand deposits) and time deposits (Dt ) are also Deposits are money because - they can be converted into currency on demand and - are used directly to make payments. M1 consists of legal tender and demand deposits in licensed banks M1 only includes
the most liquid assets used as a medium of exchange A central bank is owned and operated by the government responsible for: Conducting monetary policy involves the use of money supply and interest rate to affect the economic activities.
Oversight and regulation of financial markets Central to solve financial crises A commercial bank A firm that accept deposits and make loans to the general public. Deposit Creation : deposit cash in the fractional reserve system deposit
creation process multiple increase in the deposit and the money supply. Deposit Contraction: withdraw money deposit contraction process multiple drop deposit and the money supply. The Monetary Base ( = C + Reserve)The Hong Kong Monetary
Authority most functions of central bank. issuing bank notes (HKMACoin)•Hong Kong and Shanghai Banking Corporation •Standard Chartered Bank •Bank of China (Hong Kong) Limited •clearing houseHong Kong Interbank Clearing Limited
100% reserve banking system is when banks' reserves equal 100% of their deposits
Fractional Reserve Banking System is a system in which commercial banks are only required to keep a small fraction of their deposits on cash reserve in case depositors wish to withdraw their deposits. This permits the

CH11 Working age population / Working Population is the total number of people aged 15 64 years who are not in a jail, hospital, or some other form of institutional care in Hong Kong Labor Force The labor force refers to the land based non institutional
population aged 15 and over who satisfy the criteria for being classified as employed population or unemployed population. Employed Population The employed population consists of persons aged 15 and over who have been at work for pay or profit
during the 7 days before enumeration or who have had formal job attachment in Hong Kong. Unemployment rate refers to the proportion of unemployed persons in the labour force. The labour force participation rate refers to the proportion of labour
force in the land based non institutional population aged 15 and over. It is the percentage of the working age population who are members of the labor force. Frictional unemployment is the unemployment that arises from normal labor turnover — from
people entering and leaving the labor force, — from quitting jobs to find better ones, and — from the ongoing creation and destruction of jobs. Structural unemployment is the unemployment that arises when • changes in technology, or • international
competition change the skills needed to perform jobs, or • change the locations of jobs. Cyclical unemployment is the fluctuating unemployment over the business cycle that increases during a recession and decreases during an expansion. Natural
Unemployment: the unemployment that arises when all the unemployment is frictional and structural . There is no cyclical unemployment in it. At full employment, all the unemployment is frictional or structural and not cyclical unemployment. In other
words, the economy is at full employment if the actual unemployment rate equals natural unemployment rate. The major influences on natural unemployment are: ( i ) Age distribution of the population An economy with a young population has a large
number of new job seekers every year and has a high level of frictional unemployment. (ii) The pace of structural change The amount of structural unemployment fluctuates with the pace of technological change and fierce international competition.
(iii) The real wage rate Anything that raises the real wage rate above the market equilibrium level creates a surplus of labour and increases the natural unemployment rate. (iv) Unemployment benefits Unemployment benefits increase the natural
unemployment rate by lowering the opportunity cost of job search. Unemployment and Real GDP Cyclical unemployment is the fluctuating unemployment over the business cycle unemployment increases during recessions and decreases during expansions.
At full employment, there is no cyclical unemployment. At the business cycle trough (depression), cyclical unemployment is positive At the business cycle peak, cyclical unemployment is negative Potential GDP is the value of real GDP when the economy
is at full employment. (When the (actual) unemployment rate (say 7%) is above the natural rate (say 4%), real GDP is below potential GDP.) When the economy is at full employment,real GDP equals potential GDP and there is no output gap. Output
gap When the (actual) unemployment rate is above/below the natural rate, real GDP is below/above potential GDP and the output gap is negative/positive . This gap is also known as a GDP recessionary gap/inflationary gap.

1, Opportunity cost is the highest valued option forgone for an act or a decision Total opportunity cost can be the sum of money cost and time cost. That is the best alternative use of the money and time resource for a given act or decision. (money cost
forgone? Time costvalue/enjoyment/pleasure forgone?) Marginal cost [MC] of something is the opportunity cost of a oneunit increase in an activity. It is measured in terms of what you must give up to get one additional unit of it.   Marginal benefit
[MB] is the what you gain when you get one more unit of something. It is measured by what you are willing to give up to get one additional unit of it.
Rational choice Max Willing to pay how many?expected benefit the expected benefit of xxx is greater/ same/less than that the opportunity cost of it??? benefit >cost?

2, standard method: ((Q2-Q1)/Q1)*100%/((P2-P1)/P1)*100% Mid-Point Method: ((Q2-Q1)/(Q1+Q2)/2)*100%/((P2-P1)/(P1+P2)/2)*100%

Step: (1) Based on the given information, the price elasticity of demand is ______ which is __________ than 1 for red wine. (2) The price elasticity of demand of red wine is __________. (3) If there is an increase in price, a given percentage rise in price
brings a larger(elastic)/smaller(inelastic) percentage decrease in the quantity demanded (4) As a result, the total revenue_________ . (5) To verify the explanation, the total revenue decreases from ____________________ to when the price of red wine
increases from $200 to $250

3, (Accounting Profit = Total Revenue-Total Explicit Costs) (Economic Profit = Total Revenue-Total Explicit Costs – Total Implicit Costs) Total cost (Full cost) = explicit cost + implicit cost Explicit Cost(rent, salary, interest paid for bank loan, cost of
raw material, promotional expense), An implicit cost(rent forgone, wage forgone, interest forgone, economic depreciation (purchase value-resale value))Set-up cost NO NEED INCLUDE(decoration cost, purchase of machine) Operation cost need include
(purchase of raw material) Remember: state the item’s name next to the figure Con: I would recommend Eason to run the cupcake shop because he can earn an economic profit of $197,000. All opportunity costs of running this cupcake shop can be
covered and he earns a higher rate of return than normal.
4 Labor force = Employed + Unemployed
Unemployment rate = Number of people unemployed/ Labor force x 100%
Labor force participation rate = Labor force/Working age population x 100%
Natural unemployment rate = natural unemployment /labor force x 100%
Output gap = real GDP -potential GDP

Section C 1, GDP GDP MV C+I(gross investment=net investment+depreciation+change in inventories(closing-opening))+G+NX(Net Exports = Exports + Re exports-Imports) Net Domestic Product at factor cost ( NDP fc) is the sum of wages, interest,
rent, and profit. NDP fc = Gross Domestic Product at factor cost+subsidies-indirect taxes - $Depreciation(gross-net) NDP Market Value = NDP fc + indirect tax (sales tax)-subsidies GDP MV = NDP MV + Depreciation Gross national product (GNP) =
GDP + Net factor income from abroad

2 Money Supply = M1 = C + Dd
M1= Currency/ Cash(at the hand of non-bank public)+Demand deposit (narrow version of Money Supply)
M2=M1+ savings deposits with licensed banks(Ds)+time deposits with licensed banks(Dt)+Negotiable Certificates of Deposits issued by licensed banks held by the public(NCDb)(board version of Money Supply)
M3=M2+ deposits with restricted licence banks and deposit taking companies(Ddtc )+ negotiable certificates of deposits issued by restricted licence banks and deposit taking companies held by the public(NCD dtc)(extended version)
Actual rrreserve/deposits required rr(reserve-exceed)/deposits if any changeuse rrr
Maximum deposits created = initial reserve x 1/ rr =
1. Required Reserve Ratios (rr): Expansionary/Contractionary (reverse) Monetary Policy: required reserve ratio decreaserequired reserve de(excess) reserve in/more money to lend to public loans in Deposits inMoney Supply inAggregate
demand inGDP (Y) in & unemployment de
2. Discount Rate The discount rate is the interest rate at which the central bank stands ready to lend reserves to commercial banks Expansionary/ Contractionary(reverse) Monetary Policy: discount rate de(%)loans in/Dd inMS in AD inGDP
(Y) in & unemployment de
3. Interest Rate (prime rate) is the interest rate at which commercial banks lent to favored customers. Expansionary Monetary Policy: interest rate (%) deloans inDd inMS inAD inGDP (Y) in & unemployment de
4. Open Market Operations Expansionary Monetary Policy If the central bank buy bonds from the commercial banks/the general public bank reserve ($) inloans inDd inMS inAD inGDP (Y) in & unemployment de

Section D1, DEMAND 1. Price of related good   The demand for a good increases/decrease if the price of one of its substitutes rises/falls (Substitute is a good that can be consumed in place of another good.)   The demand for a good increases/decreases
if the price of one of its complements falls/rises(A complement is a good that is consumed with another good.) 2. Change in income   A rise/fall in income brings an increase/decrease in demand for a normal good A fall/rise in income brings an
increase/decrease in demand for an inferior good 3. Expected future price of a good: A rise/fall in the expected future price of a good increases/decreases the current demand for that good 4. Expected future income and credit: When income expected to
increase/decrease in the future, or when credit is easy/difficult to get and the cost of borrowing is low/high , the demand for some good increase/decrease 5. Number of buyers When the number of buyers increases/decreases in a market, the demand for a
good increases/decreases. 6. Consumers’ preferences If there is a favorable/unfavorable change in consumers’ preference of a good, the demand for this good increases/decreases
SUPPLY 1. Price of related good   The supply of a good increases if the price of one of its substitutes in production falls (A substitute in production is a good that can be produced in place of another good.) The supply of a good increases if the price of
one of its complements in production increases.(A complement in production is a good that is produced along with another good.)2. Prices of resources and other production factors/inputs   The supply of a good increases if the price of one of its resources
or production factor decreases , as cost of production decreases. 3. Expected future price of a good: A fall in the expected future price of a good increases the current supply of that good 4. Number of sellers When the number of sellers/producers increases
in a market, the supply of a good increases. 5. Advancement of technology or enhancement of Productivity Productivity is output per unit of input. An advance in technology will enhance productivity, reduce cost of production and increases supply. 5.
Productivity A decrease in productivity, increase cost of production and decreases the supply of a good.
Factordemand/ supply change?  curve shift?  equilibrium q & p change?
At equilibrium, quantity demanded equals quantity supplied. QD = QsPe=$?  Qe=?units conclusion
solve shortage/surplus  increase/decrease price?  Qd de/in & Qs in/de?, holding the same demand and supply schedules. The price adjustment is made until the market reaches the equilibrium again, that is at which quantity demanded equals
quantity supplied
perfect com

mono