MATSEC IM Economics cheat sheet

Opportunity cost: the value of the next-best alternative forgone; every choice with scarce resources has one, and it is measured in real terms, not money alone.

Production possibility frontier (PPF): shows maximum combinations of two goods producible with given resources and technology; points on the curve are productively efficient, inside are inefficient, outside are unattainable.

PPF shifts outward with more or better resources or improved technology; the curve's bowed-out shape reflects increasing opportunity cost as resources are imperfectly substitutable.

Demand: inverse relationship between price and quantity demanded (law of demand), ceteris paribus; movement along the curve is caused by price, a shift by non-price determinants (income, tastes, prices of related goods, expectations, population).

Supply: positive relationship between price and quantity supplied; shifts arise from input costs, technology, taxes/subsidies, number of firms, and expectations.

Equilibrium price and quantity occur where demand equals supply; a price above equilibrium creates surplus (excess supply) and downward pressure on price, a price below creates shortage and upward pressure.

Price elasticity of demand (PED) = % change in quantity demanded / % change in price; |PED| > 1 elastic, < 1 inelastic, = 1 unit elastic; demand is more elastic with more substitutes, longer time horizon, and larger share of income.

Income elasticity of demand (YED) = % change in quantity demanded / % change in income; positive for normal goods (necessities 0<YED<1, luxuries YED>1), negative for inferior goods.

Price elasticity of supply (PES) = % change in quantity supplied / % change in price; larger when firms hold spare capacity, have flexible inputs, and face longer adjustment periods.

Perfect competition assumptions: many buyers and sellers, homogeneous product, free entry and exit, perfect information; firms are price takers, so price = marginal revenue and long-run profit is normal only.

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

Oligopoly: few interdependent firms; kinked demand curve explains price rigidity, and game theory (prisoner's dilemma) explains collusion incentives and the instability of cartels.

Profit maximisation rule for any firm: produce where marginal cost equals marginal revenue; if price falls below average variable cost, the firm shuts down in the short run.

Market failure: allocative inefficiency where marginal social cost differs from marginal social benefit; sources include externalities, public goods, merit and demerit goods, monopoly power, and information asymmetry.

Negative externality of production (e.g. pollution): marginal social cost exceeds marginal private cost, so the free market overproduces relative to the social optimum; a Pigouvian tax or tradable permits can internalise the cost.

Public goods are non-rival and non-excludable, so they are underprovided by markets (free-rider problem); merit goods are excludable but underconsumed because of information failure.

Government remedies: indirect taxes, subsidies, regulation, tradable permits, provision of public goods, and education; each carries costs such as deadweight loss, administration cost, and government failure.

Equity versus efficiency: redistribution through progressive taxation and transfers may reduce incentives, creating a trade-off between reducing inequality and maximising total output.

GDP (output approach) = sum of value added across sectors; expenditure approach: GDP = C + I + G + (X − M); income approach sums factor incomes; all exclude transfer payments and second-hand sales.

Nominal versus real GDP: real GDP is nominal GDP deflated by a price index, so GDP deflator = (nominal GDP / real GDP) × 100; real GDP per capita is the standard living-standards proxy.

Inflation measured by a consumer price index: CPI = (cost of basket at current prices / cost of basket at base-year prices) × 100; inflation rate = % change in CPI between periods.

Demand-pull inflation arises from excess aggregate demand; cost-push inflation from rising input costs (wages, energy, imported materials); both shift the aggregate demand or aggregate supply curve.

Unemployment types: frictional (between jobs), structural (skills or location mismatch), cyclical (deficient aggregate demand), seasonal; the unemployment rate = unemployed / labour force × 100.

Phillips curve: short-run inverse trade-off between inflation and unemployment; the long-run curve is vertical at the natural rate, so only unexpected inflation reduces unemployment temporarily.

Fiscal policy: government spending and taxation to influence aggregate demand; expansionary (higher G, lower T) raises output and may worsen the budget deficit; automatic stabilisers dampen the cycle.

Monetary policy: central bank sets interest rates to target inflation; higher rates raise borrowing costs, reduce consumption and investment, and appreciate the exchange rate via capital inflows.

Multiplier = 1 / (1 − marginal propensity to consume) in a simple closed economy; total change in income = initial injection × multiplier.

Balance of payments: current account (goods, services, income, transfers) plus capital and financial accounts must sum to zero; a current account deficit is financed by capital inflows or reserve depletion.

Exchange rates: appreciation makes exports dearer and imports cheaper, worsening the trade balance in the short run (J-curve); depreciation does the reverse.

Comparative advantage: a country gains from trade by specialising where its opportunity cost of production is lower, even if it has an absolute disadvantage in both goods.