ECONOMICS CHEAT SHEET

METHOOGY
1. Definition of Economics
• The science of balancing our needs/wants with limit
• The study of how society manages its scarce resources
2. Principle of scarcity
• The limited nature of society’s resources
• A society cannot give every individual the highest standard of living to
which he or she might aspire.
• AKA TRADE OFFS!!!
3. Opportunity cost
• The slope of rise over run
• Whatever must be given up to obtain some item
• Input
4. Circular flow diagram
• Assume there are only 2 groups in the economy (household and firms)
• Assume there are only 2 markets (factors of production,
goods/services)
• Inner loop: flow of inputs and goods & services
• Outer loop: flow of $
5. PPF diagram
• Captures trade off
• Captures opportunity costs
• Not constant, keeps changing
o If it is a straight line then slope is constant
• Ppf changes over time
o Lose/gain resources
Lose/gain technology
6. Pos/normative
• Positive – how it is- scientists
• Normative – how it should/ought to be – policy advisors

GAINS FROM TRADE

1. Ranger and Farmer example
2. Comparative advantage
• Ability to produce at a lower OPPORTUNITY COST than another
• A country cannot have comparative advantage over everything

3. Absolute advantage
• Ability to produce using fewer inputs over another
• A country may have an absolute advantage in the production of
 everything
o Example: rancher is better at everything

HOW MARKET WORKS

1. What determines Q
a. Quantity Demand – quantity buyers are willing to buy at any given
price
• If buyers buy more, increase in demand. Shift to right
• If buyers buy less, decrease in demand. Shift to left.
• Income
• Price of related good
• Preference or taste
• Expectation
• Number of buyers

b. Quantity Supply – amount sellers are willing or able to sell at any

given price
• Positive relationship - Qty Supplied and price
• Input prices
• Technology
• Expectation of tomorrow
• Number of sellers

2. Law of
a. Demand
• Other things equal, there is a negative relationship between the
quantity demand of a good and the price of that good
• INVERSE RELATIONSHIP
• If $ of good changes, the Qty Demand will change
b. Supply
• Positive relationship between Qty supplied and price
• Move in same direction
• Increase of price = increase of Qty supplied, vice versa

3. differences between moving along the curve and the shift of curves (s&d)
a. Demand
• If price of the good changes, the Qty D will move along the Demand
Curve
• If any of the other factors change, then the Demand curve will shift.
b. Supply
• If there is a change in price, the Qty S will move along the Supply
curve
• If any of the factors are changed, then Supply curve will shift.
4. normal & inferior goods
a. normal good
• a good for which, other things equal, an increase in income leads to an
increase in demand

b. inferior good
• a good for which, other things equal, an increase in income leads to a
decrease in demand
5. compliments & substitutes
a. substitutes
• two goods for which an increase in the price of one leads to an
increase in the demand for the other
b. complements
• two goods for which an increase in the price of one leads to a decrease
in the demand for the other
6. Difference between Qd Qs at equilibrium
• Qty D MUST = Qty S at equilibrium… MUST!!!
7. What happens when there is no equilibrium

8. What happens when there is a shortage/surplus

a. Surplus
• IF GOING PRICE IS ABOVE EQUILIBRIUM – Qs > Qd
• Excess demand
• Sellers will decrease price and Qty D go up until you reach the
equilibrium
b. Shortage
• IF GOING PRICE IS BELOW EQUILIBRIUM
• Qd > Qs
• Excess demand
• Price will go up until you reach equilibrium

9. Difference between going price and equilibrium

a. Equilibrium
• Where Qd is equal to Qs,
• Where they intersect on the map
b. Going price
• What everyone else is selling it as
 SUPPLY
No change Increase Decrease
No change No change in Pe or Qe  Qe 
Qe Pe  Pe 
Increase Qe  Qe  Qe – Ambiguous
Pe  Pe – Ambiguous Pe 

Decrease Qe  Qe – ambiguous Qe 
Pe  Pe  Pe – ambiguous

10. What happens when both move (TABLE)

ELASTICITY
1. know everything about ED P
2. Demand – if response is substantial  elastic; if response is less than
substantial, demand  inelastic
3. definition
• measure how buyers respong to change in price
4. calculations – MIDPOINT FORMULA!
• EDP= % QD
% P
• % D
Q = Q2 – Q1
(Q2 + Q1) / 2
• % P = P2 – P1
(P2 + P1) / 2
5. determinates
• Availability of substitutes
i. More subs  more elastic
ii. Less subs  less elastic, INELASTIC
• Necessity vs Luxury
i. Luxury  more elastic
ii. Necessity  less elastic, INELASTIC
 • Market Definition
i. More narrowly defined  more elastic
ii. More broadly defined  less elastic, INELASTIC
• Time Horizon
i. Long run  more elastic
ii. Short term  less elastic, INELASTIC
6. Interpretation
• If EDP > 1
• then %change in Qd > % change in P
• Buyers are very responsive
• Demand is elastic
• D curve is flat

b. If EDP < 1
• Then % change in Qd < % change in P
• Buyers are not that responsive
• Demand is inelastic
• D curve is steep

c. If EDP = 1
• Then the changes = each other
• Demand is unit elastic
• D curve is neither flat nor steep

7. what D curve looks like when…

• elastic
• inelastic
• perfectly elastic
• perfectly inelastic