LC Economics cheat sheet

Scarcity: wants are unlimited but resources are finite, so every choice involves a trade-off; the three basic questions are what, how and for whom to produce.

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

Opportunity cost is the value of the next best alternative forgone, not the sum of all alternatives and not necessarily a money cost.

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

PPF slope equals the marginal rate of transformation; a straight-line PPF implies constant opportunity cost, a bowed-out PPF implies increasing opportunity cost.

The PPF shifts outward with more or better factors of production or technical progress; it shifts inward with war, natural disaster or resource depletion.

Zero opportunity cost applies only to a genuinely free good; free goods are non-scarce, whereas economic goods are scarce and command a price.

Marginal decision rule: an activity is worth expanding while marginal benefit exceeds marginal opportunity cost; optimal where MB = MC.

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

Law of demand: price and quantity demanded are inversely related, ceteris paribus; the demand curve slopes downward.

Movement along the curve = change in quantity demanded caused by the good's own price; shift of the curve = change in demand caused by income, tastes, prices of substitutes or complements, population or expectations.

Supply shifts with input costs, technology, taxes and subsidies, number of firms, and expectations; a subsidy shifts supply right, a tax shifts it left.

Equilibrium: quantity demanded equals quantity supplied; above equilibrium price there is a surplus (excess supply), below it a shortage (excess demand).

A simultaneous rightward shift of demand and supply raises equilibrium quantity but leaves the price change ambiguous; the outcome depends on relative shift sizes.

Normal goods: demand rises with income; inferior goods: demand falls with income; Giffen goods are a theoretical exception with upward-sloping demand.

Consumer surplus = area below the demand curve and above price; producer surplus = area above the supply curve and below price; total surplus is maximised at competitive equilibrium.

A price ceiling set below equilibrium creates shortage, queues, rationing and black markets; a price floor set above equilibrium creates surplus, e.g. agricultural surpluses or minimum-wage unemployment.

Price elasticity of demand PED = % change in quantity demanded / % change in price; use the midpoint formula for arc elasticity: (ΔQ/avg Q)/(ΔP/avg P).

|PED| > 1 elastic (total revenue moves opposite to price); |PED| < 1 inelastic (revenue moves with price); |PED| = 1 unit elastic (revenue maximised).

Determinants of PED: availability of substitutes, proportion of income spent, necessity versus luxury, time horizon, habit and brand loyalty.

Income elasticity YED: positive for normal goods, negative for inferior goods, greater than 1 for luxuries; cross elasticity XED positive for substitutes, negative for complements.

Price elasticity of supply PES rises with time period, spare capacity, ease of stockholding and factor mobility; perfectly inelastic supply is a vertical line.

Tax incidence: the more inelastic side of the market bears the larger share of an indirect tax; total burden does not depend on who legally pays.

Deadweight loss from a tax or price control equals the lost consumer plus producer surplus from units no longer traded.

Indirect tax on a good shifts supply up by the tax per unit; a specific (unit) tax shifts parallel, an ad valorem tax pivots the supply curve upward.

Intervention instruments: buffer stocks, minimum prices, subsidies, quotas and tariffs; each creates efficiency costs that must be weighed against stated objectives.

Law of diminishing marginal utility: as consumption of a good rises, marginal utility falls; total utility is maximised where marginal utility per unit of spending is equal across goods (MUx/Px = MUy/Py).

Indifference curve properties: downward sloping, convex to origin, never intersecting; the budget line's slope equals the price ratio Px/Py, and the optimum is where MRS = Px/Py.

Short-run costs: TC = TFC + TVC; AC = TC/Q; MC = ΔTC/ΔQ; MC cuts AC at AC's minimum point.

Law of diminishing returns explains the U-shaped short-run cost curves: marginal product falls as a variable factor is added to fixed factors.

Long-run average cost is the envelope of short-run curves; economies of scale explain the falling section, diseconomies the rising section.

Internal economies of scale: technical, managerial, financial, marketing and risk-bearing; external economies arise from the industry's location or size.

Diseconomies of scale stem mainly from managerial coordination problems, motivation loss and industrial relations in large organisations.

Perfect competition: many buyers and sellers, homogeneous product, free entry and exit, perfect information; firms are price takers with P = MR = AR, and long-run equilibrium has P = minimum AC.

Monopoly: single seller, high barriers to entry, downward-sloping demand; profit maximised where MR = MC, with output lower and price higher than under competition.

Expenditure approach: GDP = C + I + G + (X − M); income approach sums factor incomes; output approach sums value added to avoid double counting.

GNP/GNI = GDP + net factor income from abroad; NNP = GNP − depreciation (capital consumption).

Nominal versus real GDP: real GDP is valued at constant prices; GDP deflator = (nominal GDP / real GDP) × 100.

GDP per capita = GDP / population; it ignores distribution, non-market output, the informal economy and environmental costs.

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

Equilibrium national income occurs where injections equal leakages; the multiplier k = 1/(1 − MPC) = 1/MPS + MPT + MPM in an open economy with tax.

Economic growth is a sustained rise in real GDP; the business cycle has recovery, boom, downturn and trough phases, with output gaps measured against potential GDP.

Demand-pull versus cost-push inflation; growth policy targets the supply side (education, infrastructure, innovation) for long-run potential output.

Functions of money: medium of exchange, unit of account, store of value, standard of deferred payment; desirable properties are durability, portability, divisibility, scarcity and acceptability.

Money supply measures: narrow money (currency plus sight deposits) versus broad money (plus time and savings deposits); credit creation multiplier ≈ 1/reserve ratio.

Central bank functions: monetary policy, lender of last resort, issuing currency, banker to government and banks, financial stability supervision.

Inflation measured by the consumer price index: a weighted average of price changes in a representative basket, expressed relative to a base year.

CPI biases: substitution bias, quality change, new goods and outlet bias; RPI/CPI differ in coverage and in treatment of housing costs.

Real interest rate ≈ nominal interest rate − inflation rate (Fisher equation); unanticipated inflation redistributes from creditors and savers to debtors.

Contractionary monetary policy raises policy rates, reduces money supply or credit, raising borrowing costs and dampening aggregate demand; expansionary policy does the reverse.

Transmission channels: interest rate, credit, asset price, exchange rate and expectations; lags mean effects appear after several months.

Fiscal stance: expansionary = higher spending or lower taxes to raise aggregate demand; contractionary = the reverse; automatic stabilisers dampen cycles without new legislation.

Progressive tax: average rate rises with income; proportional: constant; regressive: average rate falls as income rises (indirect taxes are typically regressive).

Tax principles: equity (ability to pay, horizontal and vertical), certainty, convenience, efficiency; direct taxes on income and wealth, indirect taxes on spending.

Budget balance = government revenue − government expenditure; primary balance excludes interest payments on debt.

Structural (cyclically adjusted) balance removes the effect of the cycle; a structural deficit persists even at full employment.

Public debt as a share of GDP is the standard sustainability measure; debt rises with primary deficits, interest rates above growth, and low nominal GDP growth.

Crowding out: government borrowing can raise interest rates and displace private investment; Ricardian equivalence suggests consumers save tax cuts.

Laffer curve: tax revenue is zero at 0% and 100% rates, implying a revenue-maximising rate between them; evidence on its position is contested.

Unemployment rate = unemployed / labour force × 100; the labour force is employed plus unemployed actively seeking work.

Types: frictional (search), structural (skills/geographic mismatch), cyclical (demand-deficient), seasonal, and real-wage/classical unemployment.

Labour force participation rate = labour force / working-age population × 100; it moves independently of the unemployment rate.

Equilibrium in a competitive labour market is where the supply of labour equals the demand for labour, giving the wage rate and employment level.

A minimum wage set above the market-clearing wage can raise unemployment where labour demand is elastic; a monopsony employer may instead raise both wages and employment.

Unemployment costs: lost output (Okun-type gap), fiscal costs of benefits and lost tax, and human capital erosion; hysteresis means cyclical joblessness becomes structural.

Lorenz curve plots cumulative income share against cumulative population; the Gini coefficient ranges 0 (perfect equality) to 1 (perfect inequality).

Poverty measures: absolute (fixed real threshold) versus relative (share of median income); the poverty line and poverty trap arise from benefit withdrawal and tax.

Demographic change: dependency ratio = dependants / working-age population; ageing populations raise pension and health spending and may lower potential growth.

Comparative advantage: specialise where opportunity cost is lower, giving gains from trade even when one country has an absolute advantage in everything.

Terms of trade = (index of export prices / index of import prices) × 100; a rise means more imports per unit of exports.

Current account = trade in goods and services + primary income (investment income) + secondary income (transfers); a current account deficit must be financed by financial inflows.

Balance of payments always balances in accounting terms: current account + capital and financial account + net errors and omissions = 0.

Exchange rate regimes: floating, fixed and managed float; appreciation makes exports dearer and imports cheaper, worsening the trade balance if the Marshall-Lerner condition (|PEDx| + |PEDm| > 1) fails.

Purchasing power parity and interest rate parity are long-run anchors; short-run rates respond to interest differentials, speculation and central bank intervention.

Protection instruments: tariffs, quotas, subsidies, embargoes and administrative barriers; arguments include infant industry, dumping and strategic trade, countered by consumer and efficiency losses.

Development indicators: GDP per capita, HDI (income, education, health), Gini, literacy and life expectancy; growth is necessary but not sufficient for development.

EU economic policy: single market and four freedoms, customs union with common external tariff, Stability and Growth Pact fiscal rules, and euro-area monetary policy set by the ECB.

Index numbers: value index = (current value / base value) × 100; a weighted index uses base-period or current-period weights (Laspeyres versus Paasche).

Real values deflate nominal values by a price index: real = nominal / (price index / 100); index rebasing changes the base year but not percentage changes.

Percentage change = (new − old) / old × 100; percentage points measure the difference between two percentages, not a relative change.

Reading tables: check units, base year, whether values are nominal or real, per capita or total, and whether the series is seasonally adjusted.

Chart types: line for trends over time, bar for comparisons across categories, pie for shares of a whole, scatter for correlation; a scatter plot shows association, not causation.

Correlation coefficient r lies between −1 and +1; r near 0 means no linear relationship, and extrapolation beyond observed data is unreliable.

Sampling and measurement issues: sample bias, non-response, revisions, informal activity and unreported transactions all distort official statistics.

Evaluation structure for case material: identify the trend, quantify it from the data, explain the cause, then weigh the limitations of the evidence before concluding.