Economics and Public Finance
Economic foundations
Economics studies choices under scarcity. Opportunity cost is the value of the next-best alternative. Demand and supply show how prices ration goods; elasticity measures responsiveness.
- Price elasticity of demand equals percentage change in quantity demanded divided by percentage change in price. Demand is elastic if the absolute value exceeds 1.
- Market failure includes public goods, externalities, imperfect competition and information asymmetry.
- Public finance deals with taxation, expenditure, deficits and debt. Taxes should be equitable, efficient, certain and convenient.
- Fiscal policy uses spending and taxation to influence aggregate demand; monetary policy is managed by the central bank.
Worked example: A price rise from 100 to 110 reduces quantity from 1,000 to 900. The percentage change in price is 10%; the percentage change in quantity is negative 10%; elasticity is negative 1.0, which is unit elastic. Revenue stays at 100,000. If demand were elastic, a price rise would reduce revenue. This reasoning prevents the common error of assuming a higher price always raises sales revenue.
Traps
Moving along a demand curve versus shifting it; confusing a deficit (annual gap) with debt (accumulated stock); confusing percentage points with percent; ignoring tax incidence because the statutory payer is not always the economic bearer.