Informal lecture notes.


We use graph to visualize the relationaship between two variables. We start with two lines perpendicular to each other, the x-axis and the y-axis.

Economic Resources

  • Land–natural resources
  • Labour–Human capital
  • Capital–Not financial products. Roads, infrastructure, tools.
  • Firms–Will combine all three above to produce a consumption good.

Economic Models

  • Microeconomics–Study the individual and the firm.
  • Macroeconomics–Households, government, countries.

A model is a simplification of reality. You need the ability to abstract from superfluous information.

  • Common Assumptions–Rationality of economic agents, ceteris paribus (all else being equal.)

Circular flow

Businesses pay workers for their lavour.

  1. Business —–\($\)—> Workers (households)

  2. Business <—Labour— Workers (households)


Workers pay business for their final goods.

  1. Business <—–\($\)—— Workers (households)
  2. Business —Final Goods—> Workers (households)


  • Utility–Overall satisfaction derived from an activity. Utility is ordinal (the order matter), but not cardinal (the distance between numbers has no meaning)

  • Rational behaviour– The pursuit of self-interest. The pursuit of happiness. One of the best economic insight of Adam Smith was to realize that the pursuit of self-interest leads to social cooperation. For example, the baker is not cooking pizza out of altruism, but rather out of self-interest. Does not mean the maximization of material consumption.

Opportunity Cost

  • What is the opportunity cost from one year of school.

  • Why do poor people have more leisure than the poor? Americans with a household income of more than $100,000 indulge in 40% less passive leisure (Facebook, Instagram,…) than those earning less than $20,000.

\[\textrm{opportunity cost} = \frac{What \; you\; give\; away}{What\; you\; get}\]

Production Possibilities

Market Economy

Capitalism; Democratic system

Command Economy

How to promote efficiency? How to determine what is produced?

Economic Goals

  • equal opportunities
  • target inflation
  • full employment
  • economic growth
  • economic efficiency