● Unit 1

○ Economics - social science that studies how human being use their limited
resources to satisfy their needs and wants and how they improve their economic
well-being
○ Social science - studies people and how they interact with each other
○ Categories of Economy
■ Macroeconomics
● Studies economy as a whole, focusing on the aggregates of an
economy and the economic goals
■ Microeconomics
● Studies the behavior of individual economic agents such as
households, firms, industries, and governments
○ 9 economic key concepts
■ Scarcity
● Finite resources, how to allocate resources
■ Sustainability
● Ability of present generations to meet its own and future need
■ Choice
● Choice should be made due to scarcity, Opportunity cost
■ Change
● Investigate how world changes in term of technology and assess
issues
■ Efficiency
● How to produce efficiently, waste less
■ Equity
● Everyone has same opportunities, not same as equality
■ Economic well-being
● Quality of life like education, health
■ Interdependence
● Decisions by one stakeholder affects other stakeholders
■ Intervention
● Whether government should intervene the market or not
○ Scarcity - unlimited wants and needs but finite resources
○ Goods - physical objects ex) cars
○ Services - intangible ex) haircuts
○ Factors of production
■ Land - Rent
● ex) natural resources
■ Labour - Wage
■ Capital - Interest
● Human made resources ex) machines, factories
■ Entrepreneurship - Profit
● Skills possessed by some people involving the ability to develop
new business
○ Opportunity cost
■ The next best alternative given up when an economic decision is made
■ Goods with opportunity cost is called economic goods
■ Goods without opportunity cost and is not scarce is called free goods
○ Three basic economic questions
■ What to produce?
■ How to produce?
■ For whom to produce?
○ Theoretical economic systems
■ Centrally planned economy (command economy)
● All economic decision made by the government
● No private property
● Factors of production is state owned
■ Free market economy (market economy)
● Resources are privately owned by people and firms
● All economic decision are made by consumers and producers
through the price mechanism
■ Mixed → both
○ PPC model
■ Show potential output of an economy
■ Assumption behind the PPC curve
● Economy only produces 2 goods
● The amount of resources that country has right now is fixed
● Technology is also fixed
● Points on the curve means the resources are fully employed
■ Inside the PPC curve is underutilization of resources
(unemployment/efficiency)
■ Outside the PPC curve is unattainable now
■ Actual growth
● Increase from point inside of curve to point near the curve
■ Potential growth
● Increase in quantity of factors of production
● Increase in quality of factors of production
● Improvement in technology
■ PPC curve is curved as there is increasing opportunity cost
■ Linear PPC curve means the opportunity cost is constant
■ Linear or curve depends on how easily factors of production can be
transferred from one to another
○ Circular flow of income model
■ Closed economy with two sectors
● Household provide factors of production, Firms pay for them
● Firms provide goods and services, Households pay for them
■ National income = output = expenditure
■ Open economy with five sectors
 ● Households, Firms, Government, Foreign countries, Financial
institutions

●
● Leakage: Taxes, Savings, Imports
● Injections: Government Spending, Investment, Exports
● If Leakage>Injection, economy will shrink
● If Injection>Leakages, economy will grow
● Transfer payment, though it is a government spending, it is not
injection
○ Scientific method
■ Ask question from the observation
■ Do background research
■ State a hypothesis
■ Design an experiment to collect data
■ Collect the data and analyze the data
■ Make conclusion and formulate a general theory or a model
○ Model - Simplified
■ Ceteris Paribus condition (all other things being equal)
○ Positive Economics
■ Economic statement that is based on empirical evidence
■ ex) the inflation rate was 4% in 2016.
○ Normative Economics
■ Economics statement about what should be done
■ ex) health care should be provided for everyone
○ Feudalism to Mercantilism
■ Land was granted to people in exchange for their service
■ System based on tradition and homage
■ As market grew, power of merchants increased
■ New economic system gave king more power as they were allowing and
funding the economic activities
■ Role of the government started to grow
○ Mercantilism to Capitalism
■ Industrial revolution
■ Division of labor (specialization) and mass production → increased
production and reduced cost of factors of production
■ Kings power now limited with democratic reforms
■ Born of classical economics
○ Classical Economics
■ Adam Smith - no government intervention
● Free market
● Invisible hand = laissez-faire (let do let pass)
● Leave the market as it is, the better off the society
■ Jean-Baptiste Say - no government intervention
● Supply creates its own demand
● To have something to buy, something must be produced
○ Socialist / Communist / Command Economy
■ Karl Marx
● Due to poor working conditions in the free market, workers will
eventually revolt!
● Economies will fluctuate and during recessions, government
intervention is necessary
○ Utility
■ Measure of happiness or satisfaction a consumer receives when they
consume a product
■ Total utility
● Total satisfaction a consumer receives
■ Marginal utility
● Extra satisfaction gained by consuming one more unit of goods
● Law of diminishing marginal utility
○ Keynesian Revolution
■ After The Great Depression
■ Government should use fiscal and monetary policy in deep recession
■ Run a budget deficit, spend more money than government get from tax
○ Reintroduction to Monetarist Revolution
■ Friedriek Hayek and Milton Friedman
■ To prevent inflation due to high oil price, Friedman proposed supply side
policy
■ Increased privatization and deregulation of key industries
○ Linear flow to Circular flow
■ Take, make, use, dispose (linear)
■ Manufacturing, Consumption and use, Recycling (circular)
○ Behavioral economics
■ Everything doesn’t go the way economist predicted because of human
nature
■ How producer and consumer make choice
● Unit 2
○ Market
■ Where people are willing and able to purchase goods and services can
carry out an exchange with people who are willing and able to provide
those goods and services
■ Product Markets
● Goods and services are sold
■ Factor Markets
● Resources are sold
■ Labour Markets
● People offer their service in exchange for salary
■ Financial Markets
● Foreign currencies, contract, and shares are sold
○ Law of demand
■ Demand is quantity of goods and services consumers are willing and able
to buy at various prices during a specific time period, ceteris paribus
■ As the price of a product decreases, the quantity demanded of it
increases, ceteris paribus
■ Market Demand = Aggregate of Individual Demand
○ Movement along the curve
■ Changes in price (quantity demanded changes)
○ Shift of curve
■ Increase → Rightward shift
■ Decrease → Leftward shift
■ Income
● Normal good
○ Demand increases as income increases
● Inferior good
○ Demand decreases as income increases
■ Price of related goods
● Substitutes
○ Demand decreases as price of substitute decreases
○ Demand increases as price of substitute increases
○ Close substitute good → more shift
● Complements
○ Demand decreases as price of complements increases
○ Demand increases as price of complements decreases
○ Close complements → more shift
● Unrelated
○ Nothing happens
■ Taste and preference
■ Future expectations
● If price is expected to rise, demand will increase
● If economy is expected to be good, demand will increase
 ● If economy is expected to be bad, demand will decrease
■ Demographic changes
■ Government policy
■ Seasonal changes
○ Law of supply
■ Supply is the quantity of goods and services producers are willing and
able to offer at various prices during a specific time period, ceteris paribus
■ As the price increases, the quantity supplied increases
■ Market supply = Aggregate of individual supply
○ Shift of curve
■ Cost of factors of production
● When cost of factors of production increases, the supply will
decrease
● When cost of factors of production decreases, the supply will
increase
■ Technological change
● With technological advancement, the supply will increase
■ Future expectations
● If producers expect the price of product to decrease, they will
increase supply
● If producers expect the price of product to increase, they will
decrease supply
● If the economy is predicted to be good, supply will increase with
the hope of consumers buying more
● If the economy is predicted to be bad, supply will decrease
■ Number of firms
■ Price of related goods
● Joint supply
○ If price of good A increases, the joint supply good B will
also increase
● Competitive supply
○ If price of good A increases, the competitive supply good B
will decrease
■ Government intervention
● Indirect tax → decrease supply
● Subsidy → increase supply
● Regulations → be more eco friendly → decrease supply
○ Market Equilibrium
■ Supply of curve crosses the demand curve
■ Equilibrium price → price where quantity supplied and demanded is same
■ Market usually at disequilibrium
● Price above equilibrium price → excess supply/surplus
● Price below equilibrium price → excess demand/shortage
 ■ Changes in demand and supply can change the equilibrium price and
quantity
■ Gives incentive to consumers and producers or signals consumers and
producers
○ Social Surplus
■ Productive efficiency
● How efficient a product is produced by the producer (lower
possible cost)
■ Allocative efficiency (pareto optimality)
● Optimal combination of goods and services
● Benefit of consuming good is maximized
■ Consumer surplus
● Difference between the highest price consumers are willing and
able to pay for a good and the actual price they pay
■ Producer surplus
● Difference between the lowest price producers are willing and able
to offer the good and the actual price they receive for it
■ Social/Community surplus
● Total benefit gained by society when the society is at equilibrium
● Greatest in equilibrium
○ PED
■ How much the quantity demanded changes when price changes
● % change in Quantity demanded / % change in price
● Need to know how to calculate!! Practice!!
● PED>1: Price elastic
● 0<PED<1: Price inelastic
● PED = 1: Unitary elastic (1/x curve)
● PED = 0: Perfectly inelastic demand (change in price → no
change in quantity demanded) (vertical)
● PED = Infinite: Perfectly elastic (change in price → infinite change)
(horizontal)
■ Determinants
● Number and closeness of substitutes
○ Many substitute → more price elastic
○ More close substitutes → more price elastic
● Necessity of goods
○ Necessity → less price elastic
● Widely defined
○ More widely defined → less price elastic
● Time
○ More time passed → more price elastic
● If the product is expensive, it would be more price elastic
○ Just because candy increased by 5 cents, people won’t
buy other types of candy.
 ■ When price increases in elastic demand, the total revenue will decrease
as quantity demanded will decrease significantly.
■ When price increases in inelastic demand, the total revenue will increase
as quantity demanded will decrease less.
■ Unitary → no change in revenue
○ Gov policies
■ When the good is inelastic, consumers tend to pay more tax
■ When the good is elastic, producers tend to pay more tax
■ Tax on inelastic goods will lead to more tax revenue. (petrol or cigarette)
■ Subsidy on inelastic goods will be costly but not lead to great change
■ Tax on inelastic goods will not lead to great change.
■ Tax and subsidy are effective in consumption and production when the
good is elastic.
○ YED
■ Income elasticity of demand
■ How much quantity demanded change in response to change in price
■ % change in quantity demanded / % change in income
● Positive sign → normal goods
● As income increases, the quantity demanded increases
● Negative sign → inferior goods
● As income increases, the quantity demanded decreases
■ -1<YED<1 → Income inelastic demand
● Close to 0 is necessity goods
■ YED>1, YED<-1 → Income elastic demand
● Greater than 1 is superior goods/luxury goods
○ PES
■ Price elasticity of supply
■ How much the quantity supplied of a good changes when price changes
● PES>1 price elastic supply (vertical axis)
● 0<PES<1 price inelastic supply (horizontal axis)
● PES=1 unitary elastic supply (0,0)
● PES=0 perfectly inelastic supply (supply doesn’t change even
though price change)
● PES=infinite Perfectly elastic supply
■ Determinants
● The time period it takes for firm to respond
● Mobility and cost of factors of production
○ Services like hair cutting will be more elastic than
extracting minerals and ions
● Unused capacity
● Ability to store stocks
○ Why does the government intervene?
■ Earn government revenue
■ Support firms
 ■ Supporting households on low incomes
■ Influencing the level of production
■ Influencing the level of consumption
■ Correcting market failure (community surplus is not maximized)
■ Promote equity
○ Price ceiling
■ Set a maximum price below the equilibrium price
■ Increase the consumption, reduce the price for low-income earners,
prevent exploitation by monopolies
■ Lead to excess demand
■ Consequences
● Produces shortage
● Generate rationing (distribution) problem
● Promotes the creation of black market
● It eliminates allocative efficiency and creates the deadweight loss
■ Intervene further with policy that increases supply
○ Price floor
■ Set a minimum price over equilibrium price
■ Protect the producers (workers)
■ Excess supply
■ Consequences
● Produce surplus
● Promotes the creation of black market
● Eliminates allocative efficiency and creates deadweight loss
● Government cost to get rid of surplus
● Firm inefficiency
■ Deadweight loss depends on whether government buys the excess
supply (below is after government buys)

■
○ Indirect tax
■ Tax on goods
■ Collect government revenue
■ Discourage consumption of goods
■ Redistribute income and reduce the negative externalities
 ■
○ Subsidies

4.5 Exchange Rate

● Floating exchange rate
○ Currency is determined by the forces of supply and demand for that currency on
the market (no government interference)
○ Appreciation, Depreciation
● Fixed exchange rate
○ Revaluation, Devaluation
● Determinants (US dollars and Korean won)
○ Trade
■ US demands more Korean electronics (foreign import) → Korean won
would appreciate
■ Korea demand for import increase → more supply of won → won would
depreciate
○ FDI = Portfolio investment
■ Inward
 ● Foreign firm purchase 10% of domestic firm
● Increase in inward FDI for US dollar will lead to more demand →
appreciation
■ Outward
● Domestic firm purchase 10% of foreign firm
● Increase in outward FDI will lead to more supply of dollars →
depreciation
○ Remittance
■ Remittance to Korea → need to change US dollars into Korean won →
increase demand for Korean won → appreciate
■ Outflow from the US → more supply of US dollars → depreciate
○ Speculation
■ Korean won predicted to lose value → people sell won → more supply →
depreciation of won (self-fulfilling prophecy)
○ Relative inflation rate
■ Korea inflation rate = 5% to 10%, US stays same
● US will demand less korean export → demand for won decreases
→ depreciation of korean won
● Korean citizen will buy more import → buy more US dollars →
supply for won increase → depreciation of korean won
○ Interest rate
■ Increase interest rate in Korea → good for short-term investment →
demand for Korean currency increase → appreciation
○ Relative growth rate
■ Strong US economy → more stable to invest → demand for the US dollar
increase → appreciation
○ Central bank increase or decrease the value depending on the policy
● Consequences
○ Appreciation → cost-push inflation
○ Depreciation → demand-pull inflation
○ Economic growth → appreciation → more import, less export → AD decrease
○ Economic growth → depreciation → more export, less import → AD increase
○ Employment → appreciation → less export → less workers needed →
unemployment increases

● Components of balance of payments

○ Current account
■ Balance of trade in goods
● Import = debit
● Export = credit
■ Balance of trade in services
● Major earner for developed country
■ Income
 ● Payments for factors of production
● Money from the assets
■ Current transfers
● Payment with no exchange of goods (foreign aid)
○ Capital account
■ Capital transfers
■ Transaction in non-produced, non-financial assets
○ Financial account
■ Foreign direct investment
■ Portfolio investment
■ Reserve assets
● How much central bank has
■ Official borrowing
● Borrow from IMF