Introduction to Economics
September 2019
,Contents
Chapter One ............................................................................................................................................. 1
Basics of Economics ............................................................................................................................... 1
1.1 Definition of economics ........................................................................................................ 1
1.2 The rationales of economics ................................................................................................ 2
1.3 Scope and method of analysis in economics ..................................................................... 2
1.3.1 Scope of economics ............................................................................................................ 2
1.3.2 Positive and normative analysis ...................................................................................... 4
1.3.3 Inductive and deductive reasoning in economics .......................................................... 4
1.4 Scarcity, choice, opportunity cost and production possibilities frontier ............................. 5
1.5 Basic economic questions....................................................................................................... 10
1.6 Economic systems................................................................................................................... 11
1.6.1 Capitalist economy ......................................................................................................... 11
1.6.2 Command economy........................................................................................................ 13
1.6.3 Mixed economy............................................................................................................... 14
1.7 Decision making units and the circular flow model ...................................................... 15
Chapter summary ................................................................................................................................ 19
Review questions ................................................................................................................................ 19
Chapter Two .......................................................................................................................................... 21
Theory of Demand and Supply .......................................................................................................... 21
2.1 Theory of demand ................................................................................................................ 21
2.1.1 Demand schedule (table), demand curve and demand function ........................ 22
2.1.2 Determinants of demand ............................................................................................ 24
2.1.3 Elasticity of demand .................................................................................................... 26
2.2 Theory of supply................................................................................................................... 31
2.2.1 Supply schedule, supply curve and supply function ............................................. 31
2.2.2 Determinants of supply............................................................................................... 32
2.2.3 Elasticity of supply ....................................................................................................... 33
2.3 Market equilibrium ............................................................................................................. 34
Chapter summary .................................................................................................................................... 37
Review questions .................................................................................................................................... 38
Chapter Three ....................................................................................................................................... 40
Theory of Consumer Behaviour ........................................................................................................ 40
3.1 Consumer preferences ........................................................................................................... 40
3.2 The concept of utility ............................................................................................................. 41
3.3 Approaches of measuring utility ........................................................................................... 42
3.3.1 The cardinal utility theory ......................................................................................... 42
ii
, 3.3.2 The ordinal utility theory ........................................................................................... 47
Chapter summary ................................................................................................................................ 57
Review questions ................................................................................................................................ 58
Chapter Four ......................................................................................................................................... 60
The Theory of Production and Cost .................................................................................................. 60
4.1 Theory of production in the short run ................................................................................. 60
4.1.1 Definition of production ............................................................................................. 60
4.1.2 Production function ..................................................................................................... 60
4.1.3 Total, average, and marginal product ...................................................................... 62
4.1.4 The law of variable proportions ............................................................................... 64
4.1.5 Stages of production .................................................................................................... 64
4.2 Theory of costs in the short run ........................................................................................ 65
4.2.1 Definition and types of costs ...................................................................................... 65
4.2.2 Total, average and marginal costs in the short run ............................................... 66
4.2.3 The relationship between short run production and cost curves ...................... 70
Chapter summary ................................................................................................................................ 72
Review questions ................................................................................................................................ 73
Chapter Five .......................................................................................................................................... 74
Market Structure .................................................................................................................................. 74
5.1. The concept of market in physical and digital space .......................................................... 74
5.2. Perfectly competitive market ................................................................................................ 74
5.2.1 Assumptions of perfectly competitive market ............................................................. 75
5.2.2 Short run equilibrium of the firm................................................................................. 76
5.2.3 Short run equilibrium of the industry .......................................................................... 82
5.3. Monopoly market ................................................................................................................... 83
5.3.1. Definition and characteristics ....................................................................................... 83
5.3.2. Sources of monopoly ...................................................................................................... 83
5.4. Monopolistically competitive market ................................................................................... 84
5.5. Oligopoly market ................................................................................................................... 85
Chapter summary ................................................................................................................................ 85
Review questions ................................................................................................................................ 86
Chapter Six............................................................................................................................................. 87
Fundamental Concepts of Macroeconomics ................................................................................... 87
6.1. Goals of macroeconomics ...................................................................................................... 87
6.2. The National Income Accounting ......................................................................................... 88
6.2.1. Approaches to measure national income (GDP/GNP) ................................................ 88
6.2.2. Other income accounts .................................................................................................. 94
iii
, 6.3. Nominal versus Real GDP ..................................................................................................... 95
6.4. The GDP Deflator and the Consumer Price Index(CPI) .................................................... 95
6.5. The Business Cycle ................................................................................................................. 97
6.6. Macroeconomic Problems ..................................................................................................... 98
6.6.1. Unemployment ............................................................................................................... 98
6.6.2. Inflation ......................................................................................................................... 100
6.6.3. Trade deficit and budget deficit .................................................................................. 101
6.7. Macroeconomic policy instruments .................................................................................... 102
6.7.1. Monetary policy............................................................................................................ 102
6.7.2. Fiscal policy .................................................................................................................. 103
Chapter summary .............................................................................................................................. 105
Review questions .............................................................................................................................. 106
iv
September 2019
,Contents
Chapter One ............................................................................................................................................. 1
Basics of Economics ............................................................................................................................... 1
1.1 Definition of economics ........................................................................................................ 1
1.2 The rationales of economics ................................................................................................ 2
1.3 Scope and method of analysis in economics ..................................................................... 2
1.3.1 Scope of economics ............................................................................................................ 2
1.3.2 Positive and normative analysis ...................................................................................... 4
1.3.3 Inductive and deductive reasoning in economics .......................................................... 4
1.4 Scarcity, choice, opportunity cost and production possibilities frontier ............................. 5
1.5 Basic economic questions....................................................................................................... 10
1.6 Economic systems................................................................................................................... 11
1.6.1 Capitalist economy ......................................................................................................... 11
1.6.2 Command economy........................................................................................................ 13
1.6.3 Mixed economy............................................................................................................... 14
1.7 Decision making units and the circular flow model ...................................................... 15
Chapter summary ................................................................................................................................ 19
Review questions ................................................................................................................................ 19
Chapter Two .......................................................................................................................................... 21
Theory of Demand and Supply .......................................................................................................... 21
2.1 Theory of demand ................................................................................................................ 21
2.1.1 Demand schedule (table), demand curve and demand function ........................ 22
2.1.2 Determinants of demand ............................................................................................ 24
2.1.3 Elasticity of demand .................................................................................................... 26
2.2 Theory of supply................................................................................................................... 31
2.2.1 Supply schedule, supply curve and supply function ............................................. 31
2.2.2 Determinants of supply............................................................................................... 32
2.2.3 Elasticity of supply ....................................................................................................... 33
2.3 Market equilibrium ............................................................................................................. 34
Chapter summary .................................................................................................................................... 37
Review questions .................................................................................................................................... 38
Chapter Three ....................................................................................................................................... 40
Theory of Consumer Behaviour ........................................................................................................ 40
3.1 Consumer preferences ........................................................................................................... 40
3.2 The concept of utility ............................................................................................................. 41
3.3 Approaches of measuring utility ........................................................................................... 42
3.3.1 The cardinal utility theory ......................................................................................... 42
ii
, 3.3.2 The ordinal utility theory ........................................................................................... 47
Chapter summary ................................................................................................................................ 57
Review questions ................................................................................................................................ 58
Chapter Four ......................................................................................................................................... 60
The Theory of Production and Cost .................................................................................................. 60
4.1 Theory of production in the short run ................................................................................. 60
4.1.1 Definition of production ............................................................................................. 60
4.1.2 Production function ..................................................................................................... 60
4.1.3 Total, average, and marginal product ...................................................................... 62
4.1.4 The law of variable proportions ............................................................................... 64
4.1.5 Stages of production .................................................................................................... 64
4.2 Theory of costs in the short run ........................................................................................ 65
4.2.1 Definition and types of costs ...................................................................................... 65
4.2.2 Total, average and marginal costs in the short run ............................................... 66
4.2.3 The relationship between short run production and cost curves ...................... 70
Chapter summary ................................................................................................................................ 72
Review questions ................................................................................................................................ 73
Chapter Five .......................................................................................................................................... 74
Market Structure .................................................................................................................................. 74
5.1. The concept of market in physical and digital space .......................................................... 74
5.2. Perfectly competitive market ................................................................................................ 74
5.2.1 Assumptions of perfectly competitive market ............................................................. 75
5.2.2 Short run equilibrium of the firm................................................................................. 76
5.2.3 Short run equilibrium of the industry .......................................................................... 82
5.3. Monopoly market ................................................................................................................... 83
5.3.1. Definition and characteristics ....................................................................................... 83
5.3.2. Sources of monopoly ...................................................................................................... 83
5.4. Monopolistically competitive market ................................................................................... 84
5.5. Oligopoly market ................................................................................................................... 85
Chapter summary ................................................................................................................................ 85
Review questions ................................................................................................................................ 86
Chapter Six............................................................................................................................................. 87
Fundamental Concepts of Macroeconomics ................................................................................... 87
6.1. Goals of macroeconomics ...................................................................................................... 87
6.2. The National Income Accounting ......................................................................................... 88
6.2.1. Approaches to measure national income (GDP/GNP) ................................................ 88
6.2.2. Other income accounts .................................................................................................. 94
iii
, 6.3. Nominal versus Real GDP ..................................................................................................... 95
6.4. The GDP Deflator and the Consumer Price Index(CPI) .................................................... 95
6.5. The Business Cycle ................................................................................................................. 97
6.6. Macroeconomic Problems ..................................................................................................... 98
6.6.1. Unemployment ............................................................................................................... 98
6.6.2. Inflation ......................................................................................................................... 100
6.6.3. Trade deficit and budget deficit .................................................................................. 101
6.7. Macroeconomic policy instruments .................................................................................... 102
6.7.1. Monetary policy............................................................................................................ 102
6.7.2. Fiscal policy .................................................................................................................. 103
Chapter summary .............................................................................................................................. 105
Review questions .............................................................................................................................. 106
iv
