MATSEC AM Economics cheat sheet

Scarcity means wants exceed available resources; opportunity cost is the value of the next-best alternative forgone, including explicit and implicit costs.

A production possibility frontier shows maximum combinations of two goods; points on the curve are productively efficient, inside are inefficient, and outside are unattainable with current resources and technology.

Demand law: ceteris paribus, quantity demanded falls as price rises; demand shifts with income, tastes, prices of related goods, expectations, and number of buyers.

Supply law: ceteris paribus, quantity supplied rises as price rises; supply shifts with input costs, technology, taxes, subsidies, expectations, and number of sellers.

Market equilibrium occurs where quantity demanded equals quantity supplied; below equilibrium price a shortage pushes price up, above equilibrium price a surplus pushes price down.

Price elasticity of demand = percentage change in quantity demanded / percentage change in price; |PED|>1 elastic, |PED|<1 inelastic, |PED|=1 unit elastic.

Income elasticity = %ΔQd/%ΔY: positive for normal goods, negative for inferior goods; cross elasticity = %ΔQa/%ΔPb: positive for substitutes, negative for complements.

A binding price ceiling set below equilibrium creates a shortage and deadweight loss; a binding price floor set above equilibrium creates a surplus and deadweight loss.

Market failure occurs when markets fail to allocate efficiently: externalities, public goods, merit/demerit goods, asymmetric information, and market power.

Budget constraint: PxX + PyY = I; slope = −Px/Py; intercepts are I/Px and I/Py; a change in income shifts it parallel, a price change rotates it.

Utility maximization occurs where MUx/Px = MUy/Py; equivalently the indifference curve is tangent to the budget line and MRSxy = Px/Py.

Indifference curves slope downward, are convex to the origin under diminishing marginal rate of substitution, and higher curves represent higher utility; they cannot intersect.

A price fall has a substitution effect (always increasing quantity demanded) and an income effect; for inferior goods the income effect is opposite and outweighs it only in the rare Giffen case.

Consumer surplus is the area below the demand curve and above the market price up to quantity bought; producer surplus is the area above supply and below price.

Short-run production: Q=f(L,K) with K fixed; marginal product MP=ΔQ/ΔL and average product AP=Q/L; diminishing marginal returns begin when MP falls.

Cost-minimization: MRTS = MPL/MPK = w/r; isocost line C = wL + rK; expansion path joins tangency points as output changes.

Cost identities: TC=TFC+TVC; MC=ΔTC/ΔQ; ATC=TC/Q; AVC=TVC/Q; AFC=TFC/Q; MC crosses ATC and AVC at their minimum points.

Long-run average cost falls with economies of scale, is flat at minimum efficient scale, and rises with diseconomies of scale; all inputs are variable in the long run.

Perfect competition assumptions: many buyers and sellers, homogeneous product, free entry and exit, perfect information; each firm is a price taker with P=MR=AR.

Perfectly competitive short-run profit maximization: produce where MC=MR=P if P exceeds minimum AVC; shut down if P<minimum AVC; long-run equilibrium at P=minimum ATC with zero economic profit.

Monopoly: single seller, barriers to entry, downward-sloping market demand; MR lies below price; profit-maximizing output where MC=MR, with price read from demand.

Monopoly creates allocative inefficiency because P>MC and output is below the socially efficient level; deadweight loss measures lost consumer and producer surplus.

Monopolistic competition: many firms, differentiated products, free entry; short-run profit possible, but long-run entry shifts demand until P=ATC and economic profit is zero.

Oligopoly: few interdependent firms; pricing behaviour can be analysed with game theory, kinked demand curves, collusion, or cartels; Nash equilibrium occurs when no firm gains by unilateral change.

Price discrimination requires market power, separable markets with different elasticities, and no resale; first degree charges each buyer's reservation price, third degree charges different groups different prices.

Allocative efficiency requires P=MC; productive efficiency requires production at minimum ATC; perfect competition attains both in long-run equilibrium, while monopoly generally attains neither.

Barriers to entry include legal barriers such as patents and licences, natural barriers from economies of scale, and strategic barriers such as predatory pricing or brand proliferation.

GDP expenditure identity: GDP = C + I + G + (X − M); it measures final output produced within a country's borders in a period.

GNI = GDP + net factor income from abroad; NNP = GNI − depreciation; real GDP values output at constant prices, nominal GDP at current prices.

GDP deflator = (nominal GDP / real GDP) × 100; inflation rate = [(CPI_t − CPI_{t−1}) / CPI_{t−1}] × 100, where CPI uses a weighted basket.

Unemployment rate = unemployed / labour force × 100; labour force = employed + unemployed; types include frictional, structural, cyclical, and seasonal unemployment.

Demand-pull inflation arises from excess aggregate demand; cost-push inflation arises from rising input costs or supply shocks; imported inflation enters through higher import prices.

Short-run Phillips curve shows a trade-off between inflation and unemployment; expectations and supply shocks can shift it, and the long-run curve is vertical at the natural rate.

Fiscal multiplier = 1/(1−MPC) = 1/MPS in a simple closed economy; expansionary fiscal policy raises G or cuts T, but crowding out and import leakage reduce the multiplier.

Expansionary monetary policy lowers policy interest rates or raises money supply, stimulating C and I; contractionary policy raises rates to reduce aggregate demand and inflation.

AD = C+I+G+(X−M); short-run equilibrium is where AD intersects SRAS; a negative output gap is actual output below potential, a positive gap is above potential.

Balance of payments accounts: current account + capital account + financial account + errors and omissions = 0; current account includes goods, services, primary income, and secondary income.

Exchange rate appreciation raises the foreign price of exports and lowers the domestic price of imports; depreciation does the reverse and can improve the current account if the Marshall-Lerner condition holds.

Marshall-Lerner condition: a currency depreciation improves the trade balance only if |PED of exports| + |PED of imports| > 1, after adjustment lags.

Comparative advantage: a country gains from specialising where its opportunity cost is lower; terms of trade = (index of export prices / index of import prices) × 100.

A tariff raises import price, reduces imports, raises domestic producer surplus and government revenue, lowers consumer surplus, and creates deadweight loss; a quota restricts quantity directly.

Malta is a small open economy with a high trade-to-GDP ratio; tourism, financial services, remote gaming, and manufacturing are major earners, and imported inputs make it sensitive to external shocks.

Malta joined the EU in 2004 and adopted the euro in 2008; monetary policy is set by the ECB, so Malta has no independent national interest-rate policy.

Euro adoption required meeting Maastricht criteria on inflation, government deficit below 3% of GDP, debt below 60% of GDP or falling toward it, exchange-rate stability, and long-term interest rates.