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L1 Economics revision sheets: microeconomics, macroeconomics, history of economic thought, statistics and methodology. Complete first-year programme.
The first year of an economics degree lays the groundwork across four pillars: microeconomics, macroeconomics, history of economic thought, and quantitative methods. This sheet covers the essential concepts, formulas, and reasoning frameworks you need for exam success.
A rational consumer maximises utility subject to a budget constraint. The optimum is the tangency point between the highest indifference curve and the budget line, where the marginal rate of substitution equals the price ratio: TMS = px/py, i.e. Umx/px = Umy/py (the law of equal marginal utility per unit of expenditure).
Key concepts: indifference curves (downward-sloping, convex, non-intersecting), the Slutsky decomposition (income and substitution effects), Giffen goods, and the demand curve derived from the consumer's optimisation problem.
Firms maximise profit π = TR - TC. The Cobb-Douglas production function Q = A·K^α·L^β captures returns to scale (constant if α+β=1, increasing if >1, decreasing if <1). The law of diminishing marginal returns states that adding more of one input while holding the other fixed eventually yields smaller and smaller increases in output.
Key cost concepts: fixed cost (FC), variable cost (VC), total cost (TC = FC + VC), average cost (AC = TC/Q), and marginal cost (MC = dTC/dQ). Profit is maximised where MC = MR. Under perfect competition, MR = market price.
Market equilibrium occurs where Qd = Qs. Price elasticity of demand: Ed = (dQd/dp)·(p/Qd). Elastic if |Ed|>1, inelastic if |Ed|<1. Income elasticity distinguishes normal goods (Er>0) from inferior goods (Er<0) and luxury goods (Er>1).
GDP = C + I + G + (X - M). Nominal GDP uses current prices; real GDP uses constant prices. The GDP deflator = (Nominal/Real) × 100. Growth rate: g = (GDPt - GDPt-1)/GDPt-1 × 100.
Measured by the Consumer Price Index. Causes: demand-pull, cost-push, and monetary inflation. The quantity theory of money (Fisher equation): MV = PQ. Real interest rate: r = i - π.
Frictional (job transitions), structural (skills mismatch), and cyclical/Keynesian (insufficient aggregate demand). The Phillips curve shows a short-run trade-off between unemployment and inflation. Friedman and Phelps demonstrated that the long-run Phillips curve is vertical at the NAIRU.
Fiscal policy: government adjusts spending (G) and taxes (T). The Keynesian multiplier k = 1/(1-c) amplifies spending changes. Monetary policy: the central bank adjusts interest rates and money supply to influence investment and consumption.
The IS curve (goods market equilibrium, downward-sloping) intersects the LM curve (money market equilibrium, upward-sloping) to determine equilibrium output Y* and interest rate r*. Fiscal expansion shifts IS right (but causes crowding out). Monetary expansion shifts LM right (lowers r, raises Y). In a liquidity trap (very low r), monetary policy is ineffective and only fiscal policy works.
| Concept | Formula |
|---|---|
| Marginal utility | Umx = ∂U/∂x |
| Budget constraint | R = px·x + py·y |
| Marginal cost | MC = dTC/dQ |
| Price elasticity | Ed = (dQd/dp)·(p/Qd) |
| GDP (expenditure) | Y = C + I + G + (X - M) |
| Keynesian multiplier | k = 1/(1 - c) |
| Fisher equation | MV = PQ |
| Real interest rate | r = i - π |