Economics & Society Notes
CHAPTER 1 – PRINCIPLES & PRACTICE OF ECONOMICS
Choices & Scarcity
• World where resources are scarce; unable to satisfy all wants
• Because we face scarcity, we must make choices
• Choices made depend on incentives we face
Definition of Economics
• The social science that studies:
o The choices made by economic agents to deal with scarcity
o The incentives and institutions that influence those choices
o The outcomes of those choices
• Economists study (the rational part of) human behaviour
• Economic agent: an individual or a group that makes choices
Microeconomics v Macroeconomics
• Microeconomics is the study of how individuals, households, firms and governments make choices, and
how those choices affect prices, allocation of resources and well-being of other agents
o e.g. carbon tax to curb carbon emissions; affect usage of households and firms
• Macroeconomics is the study of economy as a whole (at the national or global level)
o e.g. policies by government to achieve economic growth, increase living standards, reduce
unemployment after an economic downturn, inflation rate
Positive vs Normative Economics
• Positive: describes what people actually do
o Explanations, e.g. A fall in incomes will lead to a rise in demand for own-label supermarket
foods
• Normative: describes what people ought to do
o Recommendations for specific actions, e.g. The retirement age should be raised to 70 to
combat the effects of our ageing population.
Choices
• Cost of a choice is what you give up getting the benefit (benefit is the gain an economic agent derives)
• Optimal choice: achieves the greatest benefit for a given set of choices we can make
o Aka rational choice (minimizes opportunity cost)
o Opportunity cost: the benefit of the highest-valued alternative given up for the optimal choice
§ If you don’t minimize opportunity cost, you miss out the best choice
,CHAPTER 4 – DEMAND, SUPPLY & EQUILIBRIUM
Markets
• A market any place or arrangement that allows buyers and sellers to do business with each other
• What distinguishes a specific market?
o What product is this (e.g. tomato, is it a specific type of tomato)
• In any market, we distinguish between demand (buyers) and supply (sellers)
Perfectly Competitive Markets
• “Benchmark” type of market, where all sellers sell and identical good or service, and any individual
isn’t powerful enough on his/her own to affect the market price of that good or service
• Buyers pay and sellers all charge the same market price
o Price-taker is a buyer or seller who accepts the market price
Demand and Quantity Demanded
• If you demand something, you (1) want it, (2) can afford it, (3) have made a plan to buy it.
• Quantity demanded is the amount of a good that consumers are willing to purchase at a given price.
• Demand refers to the entire relationship between price and quantity demanded of the good.
Law of Demand
• A demand curve shows the relationship between quantity demanded and price when all other factors
affecting consumers’ purchases remain the same.
• The higher the price of a good, the smaller the quantity demanded, other things remaining the same.
• Do we observe demand?
o Not really – for instance market analysts might do surveys to find out the consumers’
willingness to pay for a certain number of products. We observe the price created by the
marketer (price equilibrium).
Willingness to pay
• The highest price that a buyer is willing to pay for an extra unit of a good.
o When you already own something, you might be less willing to pay the same price for another
of that item if you do not need it. (diminishing marginal benefit)
o Hence the price of the item might fall for each additional unit of that item required.
Aggregated Demand Curves
• Sum of all individual demand curves (linear)
• Market demand curve: sum of all individual demand curves of all potential buyers.
• P = a - bQD
o a is the intercept (choke price)
o b is the slope
• Any amount above the choke price will have zero demand, hence must set below the choke price.
,Changes in Demand
• When some influence on buying plans other than the price of the good changes, there is a change in
demand for that good.
• The quantity of the good that people plan to buy changes at each price point, so there is a new demand
curve.
• What affects demand? The most important ones are:
o Population/demographic/market segment – the larger the number of people buying, the
greater is the demand for all goods
o Preferences – everyone has different preferences for goods & services; they can change due
to external “shocks” (examples with covid-19?)
o Income – when income increases, consumers buy more of most goods and demand curve
shifts rightward.
§ A normal good is a good for which demand increases as income increases.
§ An inferior good is a good for which demand decreases as income increases.
o Expected future income & credit – when income is expected to increase/decrease in the
future (or credit is easy to obtain), demand might increase/decrease now.
o Availability and prices of related goods
§ When price of a substitute good increases, demand of the good increases.
§ When price of a complement good increases, demand of the good decreases. A
complement good is used in conjunction with another good or service.
o Expected future prices (stockable goods only) – if the price of a good is expected to rise in the
future, current demand for the good increases and demand curve shifts rightward.
• Two key concepts to note: (movement along =/= shift of demand curve)
o If a good’s own price changes and other factors remain the same, quantity demanded
changes and there is movement along the demand curve.
§ Looking at the same demand curve
o If for the same price the quantity of goods demand changes, one of the determinants of
buyers’ plans has changed, hence the demand curve has shifted.
§ The demand curve shifts only when the quantity demanded changes at a given price.
§ Looking at a different demand curve.
Cost & Price
• Price is what the producer receives for each good sold.
• Cost is what the producer pays to produce each good.
o The cost of producing one more unit of a good or service is its marginal cost, hence marginal
cost is also the minimum price a firm is willing to accept.
, Supply & Quantity Supplied
• If a firm supplies a good or service, then the firm (1) has the resources and technology to produce it,
(2) can profit from producing it, (3) has made a definite plan to produce and sell it.
• Quantity supplied of a good is the amount producers plan to sell at a particular price.
• Supply (schedule) refers to the entire relationship between quantity supplied and the price of a good.
Law of Supply
• The supply curve shows the (positive) relationships between the quantity supplied of a good and its
price, when all other influences on producers’ planned sales remain the same.
• The higher the price of a good, the greater the quantity supplied, other things remaining the same.
Changes in Supply
• When some influence on selling plans other than the price of the good changes, there is a change in
supply for that good.
• The quantity of goods producers plans to sell changes at each price point > there is a new supply curve.
• What affects supply?
o Number of suppliers – the larger the number of firms producing the good, the greater the
supply of the good; an increase in the number of suppliers shifts the supply curve rightward
o The state of nature – includes all external events influencing products (like weather), e.g.
natural disaster decreases supply and shifts supply curve leftward
o Prices of factors of production – when price of a production factor rises, marginal cost
increases, so the price of good increases; a rise in the price of a factor of production shifts the
supply curve up (leftward)
o Technology – advances in technology lower production costs, so they increase supply and shift
supply curve down (rightward)
o Expected future prices – if a price of a stockable good is expected to rise in the future, current
supply of the good decreases and supply curve shifts leftward to increase later on.
CHAPTER 1 – PRINCIPLES & PRACTICE OF ECONOMICS
Choices & Scarcity
• World where resources are scarce; unable to satisfy all wants
• Because we face scarcity, we must make choices
• Choices made depend on incentives we face
Definition of Economics
• The social science that studies:
o The choices made by economic agents to deal with scarcity
o The incentives and institutions that influence those choices
o The outcomes of those choices
• Economists study (the rational part of) human behaviour
• Economic agent: an individual or a group that makes choices
Microeconomics v Macroeconomics
• Microeconomics is the study of how individuals, households, firms and governments make choices, and
how those choices affect prices, allocation of resources and well-being of other agents
o e.g. carbon tax to curb carbon emissions; affect usage of households and firms
• Macroeconomics is the study of economy as a whole (at the national or global level)
o e.g. policies by government to achieve economic growth, increase living standards, reduce
unemployment after an economic downturn, inflation rate
Positive vs Normative Economics
• Positive: describes what people actually do
o Explanations, e.g. A fall in incomes will lead to a rise in demand for own-label supermarket
foods
• Normative: describes what people ought to do
o Recommendations for specific actions, e.g. The retirement age should be raised to 70 to
combat the effects of our ageing population.
Choices
• Cost of a choice is what you give up getting the benefit (benefit is the gain an economic agent derives)
• Optimal choice: achieves the greatest benefit for a given set of choices we can make
o Aka rational choice (minimizes opportunity cost)
o Opportunity cost: the benefit of the highest-valued alternative given up for the optimal choice
§ If you don’t minimize opportunity cost, you miss out the best choice
,CHAPTER 4 – DEMAND, SUPPLY & EQUILIBRIUM
Markets
• A market any place or arrangement that allows buyers and sellers to do business with each other
• What distinguishes a specific market?
o What product is this (e.g. tomato, is it a specific type of tomato)
• In any market, we distinguish between demand (buyers) and supply (sellers)
Perfectly Competitive Markets
• “Benchmark” type of market, where all sellers sell and identical good or service, and any individual
isn’t powerful enough on his/her own to affect the market price of that good or service
• Buyers pay and sellers all charge the same market price
o Price-taker is a buyer or seller who accepts the market price
Demand and Quantity Demanded
• If you demand something, you (1) want it, (2) can afford it, (3) have made a plan to buy it.
• Quantity demanded is the amount of a good that consumers are willing to purchase at a given price.
• Demand refers to the entire relationship between price and quantity demanded of the good.
Law of Demand
• A demand curve shows the relationship between quantity demanded and price when all other factors
affecting consumers’ purchases remain the same.
• The higher the price of a good, the smaller the quantity demanded, other things remaining the same.
• Do we observe demand?
o Not really – for instance market analysts might do surveys to find out the consumers’
willingness to pay for a certain number of products. We observe the price created by the
marketer (price equilibrium).
Willingness to pay
• The highest price that a buyer is willing to pay for an extra unit of a good.
o When you already own something, you might be less willing to pay the same price for another
of that item if you do not need it. (diminishing marginal benefit)
o Hence the price of the item might fall for each additional unit of that item required.
Aggregated Demand Curves
• Sum of all individual demand curves (linear)
• Market demand curve: sum of all individual demand curves of all potential buyers.
• P = a - bQD
o a is the intercept (choke price)
o b is the slope
• Any amount above the choke price will have zero demand, hence must set below the choke price.
,Changes in Demand
• When some influence on buying plans other than the price of the good changes, there is a change in
demand for that good.
• The quantity of the good that people plan to buy changes at each price point, so there is a new demand
curve.
• What affects demand? The most important ones are:
o Population/demographic/market segment – the larger the number of people buying, the
greater is the demand for all goods
o Preferences – everyone has different preferences for goods & services; they can change due
to external “shocks” (examples with covid-19?)
o Income – when income increases, consumers buy more of most goods and demand curve
shifts rightward.
§ A normal good is a good for which demand increases as income increases.
§ An inferior good is a good for which demand decreases as income increases.
o Expected future income & credit – when income is expected to increase/decrease in the
future (or credit is easy to obtain), demand might increase/decrease now.
o Availability and prices of related goods
§ When price of a substitute good increases, demand of the good increases.
§ When price of a complement good increases, demand of the good decreases. A
complement good is used in conjunction with another good or service.
o Expected future prices (stockable goods only) – if the price of a good is expected to rise in the
future, current demand for the good increases and demand curve shifts rightward.
• Two key concepts to note: (movement along =/= shift of demand curve)
o If a good’s own price changes and other factors remain the same, quantity demanded
changes and there is movement along the demand curve.
§ Looking at the same demand curve
o If for the same price the quantity of goods demand changes, one of the determinants of
buyers’ plans has changed, hence the demand curve has shifted.
§ The demand curve shifts only when the quantity demanded changes at a given price.
§ Looking at a different demand curve.
Cost & Price
• Price is what the producer receives for each good sold.
• Cost is what the producer pays to produce each good.
o The cost of producing one more unit of a good or service is its marginal cost, hence marginal
cost is also the minimum price a firm is willing to accept.
, Supply & Quantity Supplied
• If a firm supplies a good or service, then the firm (1) has the resources and technology to produce it,
(2) can profit from producing it, (3) has made a definite plan to produce and sell it.
• Quantity supplied of a good is the amount producers plan to sell at a particular price.
• Supply (schedule) refers to the entire relationship between quantity supplied and the price of a good.
Law of Supply
• The supply curve shows the (positive) relationships between the quantity supplied of a good and its
price, when all other influences on producers’ planned sales remain the same.
• The higher the price of a good, the greater the quantity supplied, other things remaining the same.
Changes in Supply
• When some influence on selling plans other than the price of the good changes, there is a change in
supply for that good.
• The quantity of goods producers plans to sell changes at each price point > there is a new supply curve.
• What affects supply?
o Number of suppliers – the larger the number of firms producing the good, the greater the
supply of the good; an increase in the number of suppliers shifts the supply curve rightward
o The state of nature – includes all external events influencing products (like weather), e.g.
natural disaster decreases supply and shifts supply curve leftward
o Prices of factors of production – when price of a production factor rises, marginal cost
increases, so the price of good increases; a rise in the price of a factor of production shifts the
supply curve up (leftward)
o Technology – advances in technology lower production costs, so they increase supply and shift
supply curve down (rightward)
o Expected future prices – if a price of a stockable good is expected to rise in the future, current
supply of the good decreases and supply curve shifts leftward to increase later on.
