Pancyprian Economics cheat sheet

Scarcity: unlimited wants versus limited resources; scarcity forces choice and is the source of all opportunity cost.

Opportunity cost = value of the next best alternative forgone; it excludes monetary payments that would be made anyway.

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

A straight-line PPF implies constant opportunity cost; a bowed-out PPF implies increasing opportunity cost because resources are not perfectly substitutable.

PPF shifts outward with more or better resources or improved technology; it shifts outward more in the good whose production the new resources favour.

Factors of production: land (rent), labour (wages), capital (interest), enterprise (profit).

Positive statement is testable against evidence; normative statement contains a value judgement and cannot be tested.

Microeconomics studies individual markets and firms; macroeconomics studies economy-wide aggregates such as output, employment and the price level.

Free good has zero opportunity cost (e.g. air); economic good is scarce and commands a price.

Ceteris paribus: all other influences held constant, allowing a single relationship to be isolated.

Law of demand: price rises, quantity demanded falls, ceteris paribus; the demand curve slopes downward.

Movement along the demand curve is caused only by a change in the good's own price; a shift is caused by a change in a non-price determinant.

Demand shifters: income, tastes, price of substitutes and complements, population, expectations, advertising.

Supply shifters: cost of inputs, technology, taxes and subsidies, other prices, number of firms, expectations.

Law of supply: price rises, quantity supplied rises, ceteris paribus; the supply curve slopes upward.

Equilibrium: quantity demanded equals quantity supplied; above equilibrium price there is a surplus, below it there is a shortage.

A simultaneous rise in demand and supply raises equilibrium quantity but leaves the price change ambiguous.

Price ceiling set below equilibrium creates a shortage and may cause queues, rationing or black markets.

Price floor set above equilibrium creates a surplus, e.g. a minimum wage causing unemployment or a support price causing surpluses.

Joint demand (complements) and competitive demand (substitutes) determine how a price change in one good affects another market.

Derived demand: demand for a factor of production depends on demand for the final good it helps produce.

Price elasticity of demand (PED) = % change in quantity demanded / % change in price; use the average (midpoint) formula for large changes.

|PED| > 1 elastic, |PED| < 1 inelastic, |PED| = 1 unit elastic; PED is negative for normal goods so the sign is often ignored.

PED determinants: number of substitutes, proportion of income spent, necessity versus luxury, time period, habit.

Total revenue test: if price rises and revenue rises, demand is inelastic; if revenue falls, demand is elastic.

Price elasticity of supply (PES) rises with time: supply is more elastic in the long run; spare capacity and stock levels raise PES.

Income elasticity of demand (YED) = % change in quantity / % change in income; positive for normal goods, negative for inferior goods, above 1 for luxuries.

Cross elasticity of demand (XED) = % change in quantity of A / % change in price of B; positive for substitutes, negative for complements.

Indirect taxes fall mostly on consumers when demand is inelastic relative to supply; subsidies likewise pass through more when demand is inelastic.

Diminishing marginal utility: as consumption rises, each extra unit adds less utility; total utility is maximised where marginal utility is zero.

Consumer surplus = area below the demand curve and above price; producer surplus = area above the supply curve and below price.

A price-discriminating firm raises profit by charging a higher price in the market with the lower PED.

Short run: at least one factor fixed; long run: all factors variable.

Fixed cost is constant with output; variable cost changes with output; total cost = fixed + variable.

Average total cost (ATC) = TC/Q; marginal cost (MC) = change in TC / change in Q.

MC cuts ATC at its minimum point; when MC < ATC, ATC falls; when MC > ATC, ATC rises.

Law of diminishing returns: adding variable factors to a fixed factor eventually lowers marginal product and raises marginal cost.

Economies of scale (internal: technical, managerial, financial, marketing) lower long-run average cost; diseconomies raise it.

Revenue: total revenue = P × Q; average revenue = price under a horizontal demand curve; marginal revenue is below price for a downward-sloping demand curve.

Profit maximisation: MR = MC; normal profit is included in cost, supernormal profit is profit above normal.

Perfect competition: many firms, homogeneous product, free entry and exit, price taker; long-run equilibrium at minimum ATC with normal profit only.

Monopoly: single seller, high barriers to entry, downward-sloping demand, MR = MC output with price set on the demand curve; deadweight loss arises.

Monopolistic competition: differentiated products, many firms, free entry, downward-sloping demand tangent to ATC in long-run equilibrium.

Oligopoly: few firms, interdependence, kinked demand curve or collusion; game theory shows incentives to cheat on cartels.

Market failure: the market produces a quantity that differs from the socially efficient level, where marginal social cost = marginal social benefit.

Negative externality of production: MSC > MPC, output is above the social optimum; a tax equal to the marginal external cost internalises it.

Positive externality: MSB > MPB (consumption) or MSC < MPC (production), output below the social optimum; a subsidy can correct it.

Public good: non-rival and non-excludable, so the free-rider problem means the market underprovides it; provision usually requires taxation.

Merit and demerit goods are under- and over-consumed because of imperfect information, not only externalities.

Information failure, market power, immobility of factors and inequality are further sources of market failure.

Government failure: intervention creates a worse outcome through poor information, administrative cost, unintended side effects or regulatory capture.

Indirect tax on a demerit good reduces quantity but raises revenue; the effect depends on PED.

Regulation, tradable permits, education and provision are alternatives to taxation when prices are hard to set.

Cost-benefit analysis compares social costs and benefits of a project; the discount rate converts future values to present values.

Buffer stock schemes stabilise prices but face storage cost, financing cost and the risk of setting the band wrongly.

Circular flow: households supply factors and receive income; firms produce and pay factor incomes; injections are investment, government spending and exports; withdrawals are saving, taxation and imports.

Equilibrium national income where injections = withdrawals, equivalently where aggregate demand = aggregate supply.

GDP = C + I + G + (X − M); GNP/GNI = GDP plus net factor income from abroad.

Nominal GDP uses current prices; real GDP is deflated for inflation using a price index.

GDP deflator = (nominal GDP / real GDP) × 100.

GDP per capita = GDP / population; it ignores income distribution, non-market activity and environmental costs.

The multiplier k = 1 / (1 − marginal propensity to consume) = 1 / marginal propensity to withdraw.

Accelerator: investment responds to the rate of change of national income, not to its level.

Macroeconomic objectives: price stability, full employment, economic growth, balance of payments equilibrium, and fair income distribution.

Demand-pull inflation arises from excess aggregate demand; cost-push inflation from rising input costs or wages above productivity.

Phillips curve shows a short-run trade-off between inflation and unemployment that weakens in the long run.

Unemployment types: frictional, structural, cyclical (demand-deficient) and seasonal; only cyclical responds directly to demand management.

Functions of money: medium of exchange, unit of account, store of value, standard of deferred payment.

Characteristics needed: acceptability, divisibility, portability, durability, scarcity, homogeneity.

Money supply measures distinguish narrow money (currency plus sight deposits) from broad money (adding time deposits and other liquid assets).

Commercial banks create deposits by lending out excess reserves; the credit multiplier = 1 / reserve ratio in the simple model.

Central bank functions: issue currency, banker to government and banks, lender of last resort, monetary policy, manage reserves and exchange rate.

Expansionary monetary policy: lower policy rate, buy government securities, lower reserve requirements - raises investment and consumption.

Contractionary monetary policy: raise interest rates, sell securities - reduces aggregate demand and inflationary pressure.

Transmission: interest rate changes affect borrowing cost, asset prices, wealth and the exchange rate.

A liquidity trap occurs when interest rates are so low that further increases in money supply do not raise spending.

Quantity theory of money: MV = PT (or MV = PY); monetarists argue that sustained inflation is a monetary phenomenon.

Higher domestic interest rates tend to appreciate the currency by attracting capital inflows.

Fiscal policy uses government spending and taxation to influence aggregate demand, output and employment.

Expansionary fiscal policy: raise spending or cut tax; contractionary: cut spending or raise tax.

Budget deficit = government spending − tax revenue in a year; national debt is the accumulated stock of borrowing.

Automatic stabilisers (progressive tax, unemployment benefit) dampen the cycle without discretionary action.

Discretionary fiscal policy faces recognition, decision and implementation lags.

Crowding out: government borrowing raises interest rates and may reduce private investment.

Progressive tax takes a larger proportion of income as income rises; regressive tax takes a smaller proportion; proportional tax takes a constant proportion.

Direct taxes fall on income and wealth; indirect taxes fall on expenditure and can be avoided by not buying the good.

Principles of taxation: equity, certainty, convenience, economy, and efficiency (minimising distortion).

Laffer curve links tax rate to revenue; beyond some rate, higher tax rates reduce revenue.

Public expenditure categories: merit goods, public goods, transfer payments, debt interest and capital investment.

Absolute advantage: producing more output with the same resources; comparative advantage: lower opportunity cost.

Comparative advantage raises total output through specialisation and trade, even if one country is absolutely better at everything.

Terms of trade = (index of export prices / index of import prices) × 100.

Current account = trade in goods + trade in services + income + current transfers; the capital and financial accounts offset it.

A current account deficit must be financed by a financial account surplus (borrowing or asset sales).

A depreciation makes exports cheaper and imports dearer, improving the trade balance if the Marshall-Lerner condition holds (|PEDx| + |PEDm| > 1).

The J-curve: the trade balance may worsen before improving after a depreciation because of contracts already fixed.

Floating exchange rate is set by demand and supply; a fixed rate is pegged and defended by central bank intervention.

Rising domestic interest rates attract capital inflow and appreciate a floating currency.

Tariffs raise domestic price, cut imports and create deadweight loss; quotas restrict quantity directly.

Trading blocs: free trade area, customs union (common external tariff), common market (factor mobility), monetary union.

Economic growth is a rise in real GDP; economic development also covers living standards, health, education and income distribution.

HDI combines life expectancy, mean and expected years of schooling, and GNI per capita (PPP).

PPP exchange rates compare purchasing power rather than market rates, giving a better real income comparison.

Characteristics of developing economies: low income per capita, dependence on primary products, low saving, rapid population growth, weak infrastructure.

Sources of growth: capital accumulation, human capital, technology, institutions; the Harrod-Domar model links growth to the saving ratio and capital-output ratio.

Cyprus economy: small open economy, services-dominated (tourism, shipping, financial and professional services), heavy reliance on imports of fuel and manufactures.

Cyprus joined the EU in 2004 and adopted the euro in 2008, so monetary policy is set by the ECB.

The 2013 banking crisis led to a bail-in of large depositors and capital controls; recovery was supported by fiscal consolidation and structural reform.

Small-island constraints: narrow export base, high transport and energy costs, vulnerability to external shocks and dependence on tourism receipts.

Sustainable development requires balancing growth with resource depletion and environmental damage (externalities, common resources).

Income inequality measured by the Lorenz curve and Gini coefficient; the Gini ranges from 0 (perfect equality) to 1 (perfect inequality).