MATSEC SEC Economics cheat sheet

MATSEC SEC Economics - Core Reference

• Scarcity: wants are unlimited but resources (land, labour, capital, enterprise) are limited, so choices must be made; every choice carries an opportunity cost equal to the value of the next best alternative forgone.

• Production possibility frontier (PPF): shows maximum combinations of two goods producible with given resources and technology; a point inside is inefficient, on the curve is productively efficient, outside is unattainable; the curve is concave because resources are not perfectly transferable.

• Positive statements are testable claims about what is (e.g. 'a price rise reduces quantity demanded'); normative statements are value judgements about what ought to be and cannot be tested by data.

• Demand: inverse relationship between price and quantity demanded (law of demand); a change in price causes movement along the curve, while income, tastes, prices of substitutes/complements, population and expectations shift the whole curve.

• Supply: direct relationship between price and quantity supplied; changes in costs of production, technology, taxes/subsidies, weather and number of firms shift the supply curve.

• Market equilibrium occurs where demand equals supply; a price above equilibrium creates a surplus (excess supply) pushing price down, a price below creates a shortage (excess demand) pushing price up.

• Price elasticity of demand (PED) = % change in quantity demanded / % change in price; |PED| > 1 elastic, < 1 inelastic, = 1 unit elastic; demand is more elastic when substitutes exist, the good is a luxury, or the time period is longer.

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

• Price elasticity of supply (PES) = % change in quantity supplied / % change in price; supply is more elastic in the long run and when spare capacity or stock exists.