Author: Saim Khalid

• Price of the good
• Income of consumers
• Prices of substitutes & complements
• Tastes & preferences
• Future expectations

• Law of Demand: Price ↑ → Quantity demanded ↓.
• Curve is downward sloping because of substitution effect and income effect.

• Microeconomics: Studies individual units (firms, households, markets).
• Macroeconomics: Studies economy as a whole (GDP, inflation, unemployment).

• Concept: Countries benefit by specializing in goods they produce at lower opportunity cost.
• Why? Allows countries to consume more than their PPF.

Example:

• Pakistan produces textiles cheaply.
• Japan produces cars efficiently.
• If they trade → both gain more than producing everything themselves.

Graph:

• PPF shows country’s production limits.
• Trade allows them to consume outside their PPF.

Key Insight: Trade increases total world output & efficiency.

• Concept: In short run, unemployment and inflation move in opposite directions.
• Low unemployment = high inflation.
• High unemployment = low inflation.

Example:

• If unemployment is 3%, inflation might be 8%.
• If unemployment is 9%, inflation might be 1%.

Graph:

• Phillips Curve slopes downward.

Key Insight: In short run, there’s a trade-off between inflation and unemployment.

• Concept: Inflation happens when aggregate demand (AD) rises faster than aggregate supply (AS).
• Types:
  • Demand-pull (too much demand).
  • Cost-push (higher production costs).

Example:

• If government increases spending → AD curve shifts right.
• Output rises, but prices also rise (inflation).

Graph:

• AD (downward) & AS (upward).
• Rightward shift in AD → higher price level & output.

Key Insight: Inflation = excess demand or rising costs.

• Concept: Shows maximum production combinations with given resources.
• Trade-offs: Producing more of one good means less of another.

Example:

• Country can produce either guns (defense) or butter (food).
• More guns = less butter.

Graph:

• PPF curve is bowed outward (due to increasing opportunity cost).
• Inside curve = inefficient.
• On curve = efficient.
• Outside curve = impossible (without trade/tech growth).

Key Insight: PPF shows opportunity cost and efficiency.

• Concept: Measures how much demand changes when price changes.
• Types:
  • Elastic (>1) → demand changes a lot (luxuries, substitutes).
  • Inelastic (<1) → demand changes little (necessities).

Example:

• Coke price rises → people buy Pepsi instead (elastic).
• Petrol price rises → people still buy it (inelastic).

Graph:

• Elastic demand = flatter curve.
• Inelastic demand = steeper curve.

Key Insight: Elasticity helps businesses decide pricing strategies.

• Concept: The point where supply = demand is called equilibrium.
• At this point, there’s no shortage and no surplus.

Example:

• At $2 per apple, demand = 100, supply = 100 → balanced.
• If price is higher ($3), supply > demand → surplus.
• If price is lower ($1), demand > supply → shortage.

Graph:

• Supply (upward) and Demand (downward).
• Intersection point = equilibrium price & quantity.

Key Insight: Free markets naturally move toward equilibrium.

• Concept: Higher prices encourage producers to make more goods. Lower prices discourage production.
• Why? Higher prices mean higher profit, so firms expand supply.

Example:

• If wheat price = $100/ton → farmers produce 50 tons.
• If wheat price = $150/ton → farmers produce 80 tons.

Graph:

• Price on Y-axis, Quantity on X-axis.
• Supply curve slopes upward.

Key Insight: Producers respond positively to price increases.