CSEC Economics cheat sheet

Scarcity: unlimited wants exceed limited resources, so every choice carries an opportunity cost - the value of the next best alternative forgone.

Production possibility frontier (PPF): points on the curve are productively efficient; points inside are inefficient; points beyond are unattainable with current resources and technology.

A straight-line PPF implies constant opportunity cost; a bowed-out (concave) PPF implies increasing opportunity cost as resources are less suited to the alternative use.

Movement along the PPF = reallocation of existing resources; an outward shift of the PPF = growth from more or better resources or improved technology.

Positive statements are testable claims about what is; normative statements are value judgements about what ought to be.

Ceteris paribus means holding all other influences constant so the effect of one variable can be isolated.

Microeconomics studies individual markets, households and firms; macroeconomics studies aggregates such as national output, inflation and unemployment.

Factors of production and their rewards: land → rent, labour → wages, capital → interest, enterprise → profit.

Three basic economic questions: what to produce, how to produce it, and for whom to produce it; market, planned and mixed economies answer them differently.

Law of demand: price and quantity demanded are inversely related (ceteris paribus); law of supply: price and quantity supplied are directly related.

A change in price causes movement along the curve (change in quantity demanded/supplied); a change in any non-price determinant shifts the whole curve.

Demand shifters: income, tastes, prices of substitutes and complements, population, expectations. Supply shifters: input costs, technology, taxes and subsidies, weather, number of sellers.

Equilibrium price clears the market; a price above equilibrium creates a surplus (excess supply) that pushes price down; a price below equilibrium creates a shortage (excess demand) that pushes price up.

Price elasticity of demand = % change in quantity demanded ÷ % change in price; use the midpoint formula to avoid direction bias.

Demand is elastic when |PED| > 1 (total revenue moves opposite to price), inelastic when |PED| < 1 (total revenue moves with price), unit elastic when |PED| = 1.

Determinants of PED: availability of substitutes, proportion of income spent, necessity vs luxury, time period, habit/addictiveness.

Price elasticity of supply is greater in the long run and when spare capacity exists; perfectly inelastic supply is a vertical line.

Perfect competition: many sellers, homogeneous product, free entry, price takers. Monopoly: single seller, high barriers, price maker. Monopolistic competition: many sellers, differentiated products. Oligopoly: few large firms, interdependence.

Government intervention tools: price controls (ceilings create shortages, floors create surpluses), indirect taxes, subsidies, quotas, regulation and public provision.

Indirect tax on a good with inelastic demand raises more revenue and is borne mostly by consumers; on elastic demand the burden falls mainly on producers.

Circular flow: households supply factors and receive incomes; firms produce and pay factor incomes; leakages (saving, taxation, imports) reduce the flow, injections (investment, government spending, exports) expand it.

GDP = C + I + G + (X − M); real GDP is adjusted for inflation, nominal GDP is at current prices.

Inflation is a sustained rise in the general price level, measured by a consumer price index; demand-pull arises from excess aggregate demand, cost-push from rising input costs.

Unemployment types: frictional, structural, seasonal, cyclical (demand-deficient); the unemployment rate = unemployed ÷ labour force × 100.

Fiscal policy uses government spending and taxation; monetary policy uses interest rates, money supply and credit controls; both aim at price stability, full employment and growth.

Balance of payments: current account (goods, services, income, transfers) plus capital and financial accounts must balance overall; a current account deficit means M + outflows exceed X + inflows.

Development differs from growth: development includes income distribution, literacy, health, and standard of living indicators such as HDI and per capita income.