1.

Basic Economic Problem and Economic Systems

 Scarcity: The fundamental economic problem of having limited resources to satisfy

unlimited wants and needs.

 Opportunity Cost: The next best alternative foregone when making a choice.

 Factors of Production: The resources used to produce goods and services: land, labor,
capital, and enterprise.

 Production Possibility Curve (PPC): A curve showing the maximum possible

combinations of two goods that an economy can produce using all its resources
efficiently.

 Economic System: The way in which a country allocates its scarce resources (e.g., free
market, mixed, and planned economies).

 Consumer Goods: Goods produced for consumption rather than investment.

 Capital Goods: Goods used in the production of other goods and services.

2. Demand, Supply, and Market Equilibrium

 Demand: The quantity of a good or service consumers are willing and able to buy at
different prices over a period of time.

 Law of Demand: As price falls, quantity demanded rises, ceteris paribus.

 Supply: The quantity of a good or service producers are willing and able to supply at
different prices over a period of time.

 Law of Supply: As price rises, quantity supplied rises, ceteris paribus.

 Market Equilibrium: The point where quantity demanded equals quantity supplied,
determining the equilibrium price and quantity.

 Excess Demand (Shortage): When demand exceeds supply at a given price.

 Excess Supply (Surplus): When supply exceeds demand at a given price.

3. Elasticities

 Price Elasticity of Demand (PED): Measures the responsiveness of quantity demanded

to a change in price.
  Income Elasticity of Demand (YED): Measures the responsiveness of demand to a
change in income.

 Cross Elasticity of Demand (XED): Measures the responsiveness of demand for one good
to a change in the price of another good.

 Price Elasticity of Supply (PES): Measures the responsiveness of quantity supplied to a

change in price.

4. Market Failure and Government Intervention

 Market Failure: When the free market fails to allocate resources efficiently.

 Externalities: Costs or benefits of economic activity that affect third parties.

o Positive Externality: A benefit to third parties (e.g., education, vaccinations).

o Negative Externality: A cost to third parties (e.g., pollution, smoking).

 Public Goods: Goods that are non-excludable and non-rivalrous (e.g., street lighting,
national defense).

 Merit Goods: Goods with positive externalities that are under-consumed in a free
market (e.g., education, healthcare).

 Demerit Goods: Goods with negative externalities that are over-consumed in a free
market (e.g., cigarettes, alcohol).

 Government Failure: When government intervention leads to inefficient outcomes,

worsening resource allocation.

5. Costs, Revenue, and Market Structures

 Total Cost (TC): The total cost of production, including fixed and variable costs.

 Average Cost (AC): The cost per unit of output. AC=TCQAC = \frac{TC}{Q}AC=QTC

 Marginal Cost (MC): The additional cost of producing one more unit of output.

 Total Revenue (TR): The total income from sales. TR=P×QTR = P \times QTR=P×Q

 Profit: The difference between total revenue and total cost. Profit=TR−TCProfit = TR -
TCProfit=TR−TC
  Perfect Competition: A market structure with many firms, identical products, and no
barriers to entry.

 Monopoly: A market dominated by a single firm with high barriers to entry.

 Oligopoly: A market dominated by a few large firms, often engaging in price-setting and
non-price competition.

6. Macroeconomic Indicators

 Gross Domestic Product (GDP): The total value of goods and services produced within a
country in a given period.

 Real GDP: GDP adjusted for inflation.

 Inflation: A sustained increase in the general price level over time.

 Deflation: A sustained decrease in the general price level.

 Unemployment: The percentage of the labor force that is willing and able to work but
cannot find a job.

 Balance of Payments (BOP): A record of all economic transactions between a country

and the rest of the world.

7. Government Policies and Economic Growth

 Fiscal Policy: The use of government spending and taxation to influence the economy.

 Monetary Policy: The use of interest rates and money supply to influence economic
activity.

 Supply-Side Policies: Government policies aimed at increasing the productive capacity of

the economy.

 Economic Growth: An increase in the real GDP of an economy over time.

 Sustainable Growth: Growth that meets present needs without compromising future
generations' ability to meet their needs.

8. Production, Productivity, and Efficiency

 Production: The process of combining resources to create goods and services.

  Productivity: Output per unit of input (e.g., labor productivity = output per worker per
hour).

 Efficiency: Using resources in the best possible way to maximize output and minimize
waste.

 Allocative Efficiency: When resources are distributed in a way that maximizes consumer
satisfaction.

 Productive Efficiency: When production is achieved at the lowest possible cost (MC =
AC).

 Dynamic Efficiency: Improvements in efficiency over time due to innovation and

investment.

9. Types of Goods and Markets

 Normal Goods: Goods for which demand increases as income rises (e.g., clothing,
electronics).

 Inferior Goods: Goods for which demand decreases as income rises (e.g., cheap bread,
public transport).

 Substitutes: Goods that can replace each other (e.g., Coke and Pepsi).

 Complements: Goods that are consumed together (e.g., cars and petrol).

 Derived Demand: Demand for a good that results from the demand for another good
(e.g., labor demand depends on product demand).

 Joint Supply: When the production of one good automatically leads to the production of
another (e.g., beef and leather).

10. Market Structures and Business Behavior

 Barriers to Entry: Obstacles that prevent new firms from entering a market (e.g., high
startup costs, patents).

 Barriers to Exit: Costs or obstacles that prevent a firm from leaving a market.

 Contestable Market: A market with low barriers to entry and exit, where firms face
potential competition.
  Price Discrimination: Charging different prices to different consumers for the same
product based on willingness to pay.

 Collusion: When firms agree to set prices or limit competition (often illegal in many
markets).

 Cartel: A formal agreement between firms to restrict competition (e.g., OPEC).

 Price Leadership: When one dominant firm sets the price, and others follow.

11. Macroeconomic Objectives

 Full Employment: When most people who are willing and able to work are employed.

 Economic Stability: A situation where an economy experiences steady growth, low

inflation, and low unemployment.

 Income Inequality: The unequal distribution of income in an economy, often measured

by the Gini coefficient.

 Poverty: A situation where individuals lack sufficient income to meet basic needs.

 Absolute Poverty: Living below the minimum income needed for survival.

 Relative Poverty: Being significantly worse off than the average income in society.

12. Inflation and Money

 Consumer Price Index (CPI): A measure of inflation based on the price of a basket of
goods and services.

 Cost-Push Inflation: Inflation caused by rising production costs (e.g., higher wages, oil
prices).

 Demand-Pull Inflation: Inflation caused by excessive demand in the economy.

 Hyperinflation: Extremely rapid and out-of-control inflation.

 Deflationary Gap: When actual GDP is below potential GDP, leading to unemployment.

 Monetary Policy Instruments: Tools such as interest rates, money supply, and exchange
rate policies used to control inflation and stabilize the economy.
13. International Economics

 Exchange Rate: The price of one currency in terms of another.

 Appreciation: When the value of a currency increases relative to another currency.

 Depreciation: When the value of a currency decreases relative to another currency.

 Trade Balance: The difference between a country's exports and imports.

 Trade Surplus: When exports exceed imports.

 Trade Deficit: When imports exceed exports.

 Protectionism: Government policies that restrict free trade to protect domestic

industries (e.g., tariffs, quotas).

 Tariff: A tax on imported goods.

 Quota: A limit on the quantity of a good that can be imported.

 Subsidy: Financial assistance from the government to local businesses to encourage

production.

14. Circular Flow of Income and Multiplier Effect

 Circular Flow of Income: A model showing how income, goods, and services circulate in
an economy between households and firms.

 Injection: Additions to the circular flow (e.g., investment, government spending,

exports).

 Leakage (Withdrawal): Money leaving the circular flow (e.g., savings, taxes, imports).

 Multiplier Effect: The process where an increase in spending leads to a greater increase
in national income.

15. Labor Market and Unemployment

 Labor Force: The number of people who are employed or actively looking for work.

 Unemployment Rate: The percentage of the labor force that is unemployed.

 Frictional Unemployment: Short-term unemployment when people move between jobs.

  Structural Unemployment: Long-term unemployment caused by changes in industries
or technology.

 Cyclical Unemployment: Unemployment caused by downturns in the business cycle

(recession).

 Seasonal Unemployment: Unemployment that occurs due to seasonal fluctuations in

demand (e.g., tourism jobs).

16. Development Economics

 Economic Development: Improvement in living standards, education, healthcare, and

economic opportunities.

 Human Development Index (HDI): A measure of economic development based on

income, education, and life expectancy.

 Foreign Direct Investment (FDI): Investment by multinational corporations in foreign

countries.

 Microfinance: Small loans given to low-income individuals to help them start businesses.

 Debt Relief: The cancellation or reduction of debt owed by developing countries.