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INTRODUCTION TO
ECONOMICS
- Part 1: Introduction -

Good luck studying!

short manual:
- includes a graph
- includes a schema/diagram
- includes an introduction
- includes additional information that
is not in the main textbook

updated: 5/11/2017

CONTENTS
CHAPTER 1: ECONOMICS AND THE ECONOMY
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Introduction to Economics …………………………………………………………
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Economic issues
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Scarcity and the competing use of resources ………………………………
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Micro and macro …………………………………………………………………………
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Economic data ……………………………………………………………………………
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Nominal and real variables …………………………………………………………
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Theories and evidence …………………………………………………………………
Some popular criticisms on economics and economists ………………
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Demand and supply ……………………………………………………………………
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Behind the supply curve ………………………………………………………………
Consumer and producer surplus …………………………………………………
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Markets determine production ……………………………………………………

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Introduction to Economics
WHAT IS ECONOMICS?
 study of how societies make choices under conditions of scarcity

MAIN CHARACTERISTICS OF ECONOMICS
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IT STUDIES HUMAN BEHAVIOUR
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QUESTIONS: THREE BASIC TRADE-OFFS THAT SOCIETY FACES
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HOW TO PRODUCE
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by independent decisions by individuals and firms in MARKETS
 INDIVIDUALS  what to buy and how much to buy, how much to work
 FIRMS  what to produce, how much to produce, which resources to use

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INDIVIDUALS BEHAVE RATIONALLY WHEN MAKING CHOICES
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4/

 willingness-to-pay for doing the
activity
 e
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amount of money I am
willing to pay to watch film

 Opportunity costs:
 they are variable from individual to
individual
 represent direct link between scarcity
and choices

-3-

2) RATIONAL INDIVIDUALS RESPOND TO INCENTIVES
 WHAT ARE INCENTIVES?
o rewards or penalties that affect individuals’ choices

 CAN BE:
o monetary (e
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prices)
o non-monetary (e
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flexible work hours for employees)

CASE 1
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LENDERS GIVE SUBPRIME MORTGAGES
o subprime mortgage  those given to questionable borrowers

why lend?

why borrow?

increase in house prices

low interest rates

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BORROWERS DEFAULT  MORE HOUSES  DROP IN PRICE!
o this causes subprime mortgages to lose their value!

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THIS DECREASES ECONOMIC ACTIVITY
o closing down of firms, cutting jobs, decrease in consumer confidence

THE EFFECTS OF THE CRISIS
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HOW TO PRODUCE
o less: employment
o more: unemployment

reallocation of input resources

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 distrubution shows us how income is distributed between and within countries

INCOME PER CAPITA
 indicates average standard of living
o poor countries: £300 a year
o rich countries: £17 700 a year

IT ANSWERS THREE TRADE-OFF QUESTIONS
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WHAT IS PRODUCED?
o goods and services consumed in the rich countries
o degree of income distribution within a country also affects this:
 larger: rich can employ low-income people as maids, cooks
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HOW IS IT PRODUCED?
o in poor countries: little machinery, few people with professional training
o in rich countries: more machinery, more people with professional training

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or
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MODELS
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they quantify relationships
to which models draw attention
(e
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traffic congestion)

o to focus on the essentials of how
world functions, in order to draw
conclusions about economic
behaviour
 example:
o tourist map - there’s not all
information there, but crucial is 

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g
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2 x 150) + (0
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2 x 150) + (0
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INDEX OF WAGES IN MANUFACTURING
o weighted average of wages in different manufacturing industries

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FINANCIAL TIMES STOCK EXCHANGE INDEX (FTSE) = ’footsie’
o index of share prices quoted on the London Stock Exchange

- 16 -

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Nominal and real variables
NOMINAL VALUES

REAL VALUES

 DEFINITION

 DEFINITION
o measured in the prices adjusted
for inflation

o measured in the prices ruling at
the time of measurement

 FORMULA

 FORMULA
𝑁𝑜𝑚𝑖𝑛𝑎𝑙 =

𝑅𝑒𝑎𝑙 × 𝐶𝑃𝐼 𝑜𝑟 𝑅𝑃𝐼
100

𝑅𝑒𝑎𝑙 =

𝑁𝑜𝑚𝑖𝑛𝑎𝑙
× 100
𝐶𝑃𝐼 𝑜𝑟 𝑅𝑃𝐼

DISTINCTION BETWEEN NOMINAL AND REAL VALUES
 applies to all variables measured in MONEY VALUES (NOT to units of output)

CHARACTERISTICS OF REAL (RELATIVE) PRICES
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they show if the PRICE OF COMMODITY ROSE FASTER THAN PRICES IN GENERAL

 economic analysis should be based on real values, not nominal values!

PURCHASING POWER OF MONEY
 index of the quantity of goods that can
be bought for 1 pound
 PPM, price 

MONEY ILLUSION
 many people have an illusory picture of
their income and wealth
 e
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rise in nominal icnome, people see it
as great; it might not happen in real terms

PURCHASING POWER PARITY
 it compares different countries’ currencies through a market ‘basket of goods’
approach
 it is relatively constant
 for future learning:
o market exchange rates
o Big Mac index
- 17 -

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Measuring changes in economic variables
1) ABSOLUTE CHANGE
 DEFINITION

2) PERCENTAGE CHANGE
 DEFINITION
o change in % between two
variables
o unit-free

o change in units between two
variables
o not unit-free




FORMULA
𝐴𝑏𝑠𝑜𝑙𝑢𝑡𝑒 𝑐ℎ𝑎𝑛𝑔𝑒 = 𝑉𝑎𝑟 2 − 𝑉𝑎𝑟 1



EXAMPLE
o 2016: production 1
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200 kg
o absolute change: 200 kg

FORMULA
% 𝑐ℎ𝑎𝑛𝑔𝑒 =



𝑉𝑎𝑟 2
× 100 − 100
𝑉𝑎𝑟 1

EXAMPLE
o 2016: production 1
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200 kg
o percentage change: +20%

3) GROWTH RATE
 percentage change PER PERIOD (usually a year)
o example: economic growth  % annual change in national income 

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Economic models
HOW DOES A MODEL LOOK LIKE? (example)
 𝒓𝒆𝒗𝒆𝒏𝒖𝒆 = 𝒇𝒂𝒓𝒆 × 𝒏𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒑𝒂𝒔𝒔𝒆𝒏𝒈𝒆𝒓𝒔
 𝒏𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒑𝒂𝒔𝒔𝒆𝒏𝒈𝒆𝒓𝒔 = 𝒇 (… )

CONSTRUCTING A MODEL
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analyse which factors CAN AND CAN’T BE IGNORED
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EXAMINE THE RELATIONSHIP OF INTEREST (ignoring other factors)
o e
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between fare and revenue

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