An overview of the basic principles of economics, including the concepts of scarcity, opportunity cost, and the economic problem of unlimited wants and limited resources.
Introduction to Economics – Study Notes
1. What Is Economics?
- Definition: The social science that examines how individuals, firms, and societies allocate scarce resources to satisfy unlimited wants.
- Core Problem: Scarcity – limited resources vs. infinite needs.
- Goal: Understand decision‑making and the outcomes (production, distribution, and consumption) that result.
2. Two Main Branches
| Branch |
Focus |
Typical Questions |
| Microeconomics |
Behavior of individual agents (households, firms, markets) |
How do consumers decide what to buy? How do firms set prices? |
| Macroeconomics |
Aggregate economy-wide phenomena |
What determines national output? How is unemployment measured? How do fiscal and monetary policies affect growth? |
3. Fundamental Concepts
| Concept |
Explanation |
Example |
| Opportunity Cost |
The value of the next best alternative forgone when a choice is made. |
Choosing to study economics instead of a part‑time job costs the wage you could have earned. |
| Marginal Analysis |
Decisions are made by comparing additional (marginal) benefits to marginal costs. |
A bakery decides whether to bake one more loaf by weighing extra revenue vs. extra flour and labor. |
| Supply & Demand |
Interaction of sellers’ willingness to provide a good (supply) and buyers’ willingness to purchase it (demand) determines market price and quantity. |
A rise in smartphone demand pushes prices up, encouraging firms to produce more. |
| Equilibrium |
The point where quantity supplied equals quantity demanded; market clears. |
At $300 per TV, the number of TVs consumers want equals the number producers are willing to sell. |
| Elasticity |
Measures responsiveness of quantity demanded or supplied to changes in price, income, or other factors. |
If a 10 % price drop leads to a 20 % increase in sales, demand is price‑elastic. |
| Market Failure |
Situations where markets alone do not allocate resources efficiently (e.g., externalities, public goods, information asymmetry). |
Pollution from a factory imposes health costs on nearby residents—an externality. |
4. Economic Systems
| System |
Ownership of Resources |
Decision‑Making |
Typical Example |
| Traditional |
Communal, based on customs |
Customary, slow to change |
Indigenous societies |
| Command (Planned) |
State‑owned |
Central planners set output & prices |
Former Soviet Union |
| Market (Capitalist) |
Private ownership |
Prices set by supply & demand |
United States |
| Mixed |
Combination of private & public |
Both markets and government intervene |
Most modern economies (e.g., Canada, Germany) |
5. Key Economic Indicators
| Indicator |
What It Measures |
Why It Matters |
| GDP (Gross Domestic Product) |
Total market value of all final goods/services produced in a period |
Shows overall economic activity & growth |
| Unemployment Rate |
Share of labor force without a job but actively seeking work |
Reflects labor market health |
| Inflation Rate (CPI) |
Percentage change in price level of a basket of goods |
Indicates purchasing‑power stability |
| Balance of Payments |
Record of a country’s transactions with the rest of the world |
Shows external sustainability |
| Interest Rates |
Cost of borrowing money |
Influences investment, consumption, and inflation |
6. The Economic Way of Thinking
- Model Building – Simplify reality with assumptions to analyze cause‑