Chapter 1 Preliminaries
Microeconomics deals with the behavior of individual economic units: how and why
decisions, how interact to form larger units. Microeconomics reveals how markets operate
and evolve, why they differ and how they are affected by conditions.
Macroeconomics deals with aggregate economic quantities. Macro is an extension of micro.
Micro→ the allocation of scarce resources.
Themes of micro: Trade-offs, prices, markets.
model = mathematical representation, based on economic theory.
- positive analysis = describes relation of cause and effect.
- normative analysis = questions of what ought to be. Often combined with individual
value judgements.
Market = collection of buyers and sellers that through their actual or potential interactions,
determine the price of a product or set of products.
Extent of the market = boundaries, both geo and in terms of range of products produced and
sold within it.
A company must understand who its actual and potential competitors, know the boundaries
in order to set the price, budgets and investments. Government makes decisions if the
market is defined.
Nominal price = absolute price, unadjusted by inflation.
Real price = relative to an aggregate measure of prices, adjusted.
Consumer price index = measure of aggregate price level.
Producer price index = measure of aggregate price level for intermediate products and
wholesale goods.
Chapter 2 Basics of supply and demand
Supply curve (upwards): Qs = Qs(P)
When production costs decrease, output increases no matter what the price happens to be.
Change of quantity = movement along the curve
Change of supply/demand = shift of curve itself.
Demand curve (downwards): Qd = Qd(P)
Market clears at price P0 and Q0. At higher price P1, a surplus develops, so price falls. At
lower price P2, there is a shortage, so price is bid up.
Elasticity = percentage change that will occur in one variable in response to a 1-percent
increase in another variable.
Magnitude = absolute size
- Price elasticity = Δ%Q / Δ%PQ / Δ%Q / Δ%PP
- Income elasticity = Δ%Q / Δ%PQ / Δ%Q / Δ%PI
- cross-price elasticity = Δ%Q / Δ%PQa / Δ%Q / Δ%PPb
Infinitely elastic demand = principle that consumers will buy as much of a good as he can get
at a single price, but for any higher price the quantity demanded drops to zero, while for any
Microeconomics deals with the behavior of individual economic units: how and why
decisions, how interact to form larger units. Microeconomics reveals how markets operate
and evolve, why they differ and how they are affected by conditions.
Macroeconomics deals with aggregate economic quantities. Macro is an extension of micro.
Micro→ the allocation of scarce resources.
Themes of micro: Trade-offs, prices, markets.
model = mathematical representation, based on economic theory.
- positive analysis = describes relation of cause and effect.
- normative analysis = questions of what ought to be. Often combined with individual
value judgements.
Market = collection of buyers and sellers that through their actual or potential interactions,
determine the price of a product or set of products.
Extent of the market = boundaries, both geo and in terms of range of products produced and
sold within it.
A company must understand who its actual and potential competitors, know the boundaries
in order to set the price, budgets and investments. Government makes decisions if the
market is defined.
Nominal price = absolute price, unadjusted by inflation.
Real price = relative to an aggregate measure of prices, adjusted.
Consumer price index = measure of aggregate price level.
Producer price index = measure of aggregate price level for intermediate products and
wholesale goods.
Chapter 2 Basics of supply and demand
Supply curve (upwards): Qs = Qs(P)
When production costs decrease, output increases no matter what the price happens to be.
Change of quantity = movement along the curve
Change of supply/demand = shift of curve itself.
Demand curve (downwards): Qd = Qd(P)
Market clears at price P0 and Q0. At higher price P1, a surplus develops, so price falls. At
lower price P2, there is a shortage, so price is bid up.
Elasticity = percentage change that will occur in one variable in response to a 1-percent
increase in another variable.
Magnitude = absolute size
- Price elasticity = Δ%Q / Δ%PQ / Δ%Q / Δ%PP
- Income elasticity = Δ%Q / Δ%PQ / Δ%Q / Δ%PI
- cross-price elasticity = Δ%Q / Δ%PQa / Δ%Q / Δ%PPb
Infinitely elastic demand = principle that consumers will buy as much of a good as he can get
at a single price, but for any higher price the quantity demanded drops to zero, while for any
