ECO401 Final Term Short Notes

What is Economics?

“Economics is the study of how we the people engage ourselves in production, distribution and consumption of goods and services in a society.” Normative economics: Normative economics refers to value judgments, e.g. what “ought” to be the goals, of public policy. Normative statements cannot be tested. Positive Economics: The analysis of facts and behavior in an economy OR “the way things are.” Goods: Are the things which are produced to be sold. Services: Involve doing something for the customers but not producing goods. Factors of production: Factors of production are inputs into the production process. The factors of production are:

• Land

includes the land used for agriculture or industrial purposes as well as

• Natural

resources taken from above or below the soil

• Capital

consists of durable producer goods (machines, plants etc.) that are in Turn used for production of other goods

• Labor

consists of the manpower used in the process of production.

• Entrepreneurship:

includes the managerial abilities that a person brings to the Organization: Entrepreneurs can be owners or managers of firms. Scarcity: Shortage of resources because economic resources are unable to supply all the goods demanded. Rationing: A process by which we limit the supply or amount of some economic factor which is scarcely available Economic Systems: A free market/capitalist economy is a system in which the questions about what to produce, how to produce and for whom to produce are decided primarily by the demand and supply interactions in the market. Dictatorship: A system in which economic decisions are taken by the dictator which may be an individual or a group of selected people Command or planned economy: A mode of economic organization in which the key economic functions –for whom, what, how to produce are principally determined by government directive. Optimum: Producing the best possible results (also optimal) Equity in economics: Asituation in which every thing is treated fairly or equally, i.e. according to its due share Nepotism: Doing unfair favors for near ones when in power Microeconomics: The behavior of individual elements in the economy Macroeconomics: The economy as whole or on aggregate level

The choice based on pure reason and without succumbing to one’s emotions or whims. Barter trade: A non-monetary system of trade in which “goods” not money is exchanged. Opportunity Cost: It is what must be given up or sacrificed in making a certain choice or decision. Marginal Cost: Marginal cost is the increment to total costs of producing an additional unit of some good or service. Marginal benefit: The increment to total benefit derived from consuming an additional unit of good or service. Production Possibility Frontier (PPF): The maximum amount of goods and services which the country can produce in a given time with limited resources, given a specific state of technology Economic growth: An increase in the total output of a country over time Perfect competition: Asituation in which no firm or consumer is big enough to affect the market price. Shortage: Shortage is a situation in which demand exceeds supply, i.e. producers are unable to meet market demand for the product. Surplus: Situation of excess supply, in which market demand falls short of the quantity supplied Goods market: Market in which goods are bought and sold for the purpose of consumption Factors markets: Markets in which factors of production are bought and sold, for the purpose of production

Whose quantity demanded goes up as consumer income increases.

Whose quantity demanded goes down as consumer income increases. Giffen goods: Aspecial case of inferior goods whose quantity demanded increases when the price of the good rises Price effect: The sum of income and substitution effects

The effect of a price rise on quantity demanded that works through a decline in the real income (or purchasing power) of the consumer. Substitution effect: The effect of a price rise on quantity demanded that works through the consumer switching to substitutes goods. Substitutes: Goods that compete with one another or can be substituted for one another, like butter and margarine Compliments: Goods that go hand in hand with each another. Cash crops: THe crops which are not used as food but as a raw material in factories e.g. cotton Demand: Demand is the quantity of a good buyer wish to purchase at each conceivable price. Law of demand: If the price of a certain commodity rises, its quantity demanded will go down, and vice-versa. Demand function: An equational representation of demand as a function of its many determinants Demand curve: A graph that obtains when price (one of the determinants of demand) is plotted against quantity demanded. Supply: Supply is the quantity of a good seller wish to sell at each conceivable price. The law of supply: The quantity supplied will go up as the price goes up and vice versa. Supply schedule: A table which shows various combinations of quantity supplied and price. Supply function: An equational representation of supply as a function of all its determinants Supply curve: When price is plotted against quantity supplied. Determinants of supply are:

• Costs of production
• Profitability of alternative products (substitutes

in supply)

• Profitability of goods in joint supply
• Nature and other random shocks
• Aims of producers
• Expectations of producers Equilibrium:

Equilibrium is a state in which there are no shortages and surpluses; in other words the quantity demanded is equal to the quantity supplied. Equilibrium price: It is the price at which the quantity demanded is equal to the quantity supplied. Equilibrium quantity: