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Chapter 3 : Economics - Introduction

Economics: Introduction arrow_upward

  • Economics is about the production, distribution, and consumption of goods and services.

  • The Law of Demand arrow_upward

  • The law of demand states that people will buy more at lower prices and buy less at higher prices, other things remaining the same.
  • So, as the price increases, demand decreases.
  • A demand curve is a graphical depiction of the law of demand. We plot price on the vertical axis and quantity demanded on the horizontal axis.
  • As the below figure illustrates, the demand curve has a negative slope, consistent with the law of demand.

  • The Law of Supply arrow_upward

  • The basic law of supply is that as the price of a commodity rises, so producers expand their supply onto the market.
  • A supply curve shows a relationship between price and quantity a firm is willing and able to sell.

  • Equilibrium arrow_upward

  • When supply and demand are equal, the economy is said to be in equilibrium.
  • The supply function and demand function intersect at a point called equilibrium.

  • Elasticity arrow_upward

  • The degree to which a demand or supply curve reacts to a change in price is the curve’s elasticity.
    • If Elasticity is greater than or equal to one, the curve is considered to be elastic.
    • If Elasticity is less than one, the curve is said to be inelastic.
  • Products that are necessities are more insensitive to price changes.

  • Utility arrow_upward

  • Utility represents the advantage or fulfillment a person receives from consuming a good or service.
  • A person’s goal is to gain optimal satisfaction in dealing with scarcity.

  • Marginal Utility arrow_upward

  • Additional satisfaction, or the amount of utility, gained from each extra unit of consumption.

  • The Law of Diminishing Marginal Utility arrow_upward

  • As a person increases consumption of a product while keeping consumption of other products constant, there is a decline in the marginal utility that person derives from consuming each additional unit of that product.
  • As the consumer consumes more and more units of a specific commodity, the utility from the successive units goes on diminishing.
  • X-axis: Units of a commodity consumed.
  • Y-axis: Marginal utility derived from them.
    • The marginal utility of the first glass of water is called initial utility.
    • It is equal to 20 units.
    • The MU of the 5th glass of water is zero. It is called the Satiety Point.
    • The MU of the 6th glass of water is negative –3.

    Monopoly arrow_upward

  • Monopoly is a market structure in which there is only one producer/seller of a product.

  • Oligopoly arrow_upward

  • Oligopoly is a market dominated by a small number of sellers.
  • This selected group of firms has control over the price and, like a monopoly; an Oligopoly has high entry barriers.

  • Perfect Competition arrow_upward

  • Perfect Competition is characterized by:
    • Many buyers and sellers.
    • Many products those are similar in nature and, as a result, many substitutes.
  • Perfect competition means there are few, if any, barriers to entry for new companies, and prices are determined by supply and demand.

  • How people make decisions? arrow_upward

  • People face tradeoffs:
    • To get one thing, you have to give up something else.
  • Making decision requires balancing one goal with another.
  • The cost of something is what you would give up to get it.
    • A rational decision-maker takes action if and only if the marginal benefit of the action exceeds the marginal cost.
  • People respond to incentives.
    • Behavior changes when costs or benefits change.

    How the economy works as a whole? arrow_upward

  • Trade can make everyone better off.
  • Trade allows each person to specialize in the activities he or she does best.
  • By trading with others, people can buy a greater variety of goods or services. 
  • Markets are usually a good way to organize economic activity.
  • Adam Smith wrote:
    • Households and firms that interact in market economies act as if they are guided by an “invisible hand” that leads the market to allocate resources efficiently.
  • The opposite of this is economic activity that is organized by a central planner within the government.
  • Governments can sometimes improve market outcomes.
    • When a market fails to allocate resources efficiently, the government can change the outcome through public policy.
    • Examples are regulations against monopolies and pollution.

    Gross Domestic Product (GDP) arrow_upward

  • GDP is the value of economic activity within a country.
  • GDP is the sum of the market values, or prices, of all final goods and services produced in an economy during a period of time.
    • For every goods and services produced within the country.


  • GDP is a sum of Consumption Investment, Government Spending  and Net Exports.
  • Gross National Product (GNP): Gross National Product (GNP) is defined as the market value of all goods and services produced in one year by labor and property supplied by the residents of a country.

  • Monetary Policy arrow_upward

  • Monetary policy is the process by which the government, central bank, or monetary authority of a country controls:
    • Supply of money
    • Availability of money
    • Cost of money
    • Rate of interest to attain a set of objectives oriented towards the growth and stability of the economy.

    Currency arrow_upward

  • The coins and banknotes of a particular currency, which comprise the physical aspects of a nation’s money supply.
  • Each private central bank has a monopoly on the supply and production of its own currency.

  • Thank You from Kimavi arrow_upward

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