Principles of Economics and Business 1
Ideas of economists
Smith – trade is good for welfare > division of labor/ specialization / interdependency
Hayek – free market > leads to equilibrium. How do you allocate resources in an efficient way,
government should not plan. Price mechanism is communication between buyers/ sellers.
Coase – Firms exist, size of firm is determined by transaction costs.
- there is cost of using the price mechanism – negotiating, contracting,
contingencies
- Factors affecting size of firm
o costs of organizing additional transactions within the firm
o transaction costs
o marketing costs
porter – five forces to identify which markets to enter
- The Nature and degree of competition in an industry hinge on five forces
o forces of threat of new entrants, bargaining power of customers, bargaining power
of suppliers, threat of substitute products and jockeying among current
contestants
o Argues against competition
Bagehot – Lombard street, bonding reserves, issues
- Commercial banks hardly keep more money in cash than needed for their daily
going concern
- Bagehot believed that central banks should lend freely, at a high interest rate and
on good banking securities
Harberger – monopoly and resource allocation
- Conclusion: $1.5 lost per citizen
- Assumption 1: Demand is unit elastic
- Assumption 2: MC = AC
- Assumption 3: Natural rate for capital return is 10%
Guest Lectures
Willemijn van Dolen -> Cognitive Dissonance, Reduction strategies:
- Changing Behavior
- Changing cognition
- Adding cognition
- Ignoring information
Marijuana Markets
- Partial legalization, more supply drives prices down
van Wijnbergen
- Carbon is being released everywhere -> welfare gains problem
- Carbon Taxes +: polluter pays, revenues can be recycled. -: cooperation.
Uber – surge pricing
- reducing the gap between the supply and demand
Arnold Bout – Financial policy interventions (externalities,
incentives)
Jan Tuinstra – Market mechanism
- 1st ft: Pareto improvement (another allocation that makes one person better off)
- Indifference curve -> shows allocation of resources if there is no preference
- Edgeworth box -> graphic of two commodities and two consumers
,Carbon offsetting
- Reduction in emissions of C02, government incentivization, slow + impactful shift
Week 1
incentives are rewards and penalties that motivate behavior
5. According to Adam Smith, what human trait leads to the division of labour in particular?
1) The propensity to exchange.
2) The desire for leisure.
3) Natural talents of population.
4) Self-interest.
6. According to Adam Smith, what in particular limits the division of labour?
1) Population size.
2) Extent of markets.
3) Natural talents of population.
4) The desire for leisure.
Three consequences division of labor
• Dexterity
• Efficiency
• Improvements machinery
Comparative advantage
• The ability to produce the same good at a lower opportunity cost than another producer.
Absolute Advantage
• The ability to produce the same good using fewer inputs than another producer.
Week 2
The demand curve will shift when there is a change in:
1) Taste
2) Income
3) Population
4) Price of substitutes
5) Price of complements
, 6) Expectations
The supply curve will shift when there is a change in:
1) Technological innovations and changes in the price of inputs
2) Taxes and subsidies
3) Expectations
4) Entry or exit of producers
5) Changes in opportunity costs
When market price is lower than equilibrium price > shortage
When market price is above equilibrium > surplus
Arbitrage - the practice of taking advantage of a price difference between two or more markets
Suppose a new regulation will be implemented that leads to a subsidy for Firm A for every product
they produce, and similarly, a tax for Firm B for every product they produce.
Which of the following statements is true?
1) Supply of both Firm A and Firm B increases.
2) Supply of both Firm A and Firm B decreases.
3) Supply of Firm A increases and supply of Firm B decreases.
4) Supply of Firm A decreases and supply of Firm B increases.
Speculators may increase total welfare because:
1) They create shortages in markets, which increases prices.
2) They stock in the expectation of shortages that they thereby reduce.
3) They reduce the consumption of scarce goods.
4) They buy up items in advance of falling prices and then sell them short.
Week 3
Competitive markets
• Firms in competitive markets are price takers
• Prices are perfectly elastic
Costs
• Total economic costs involve opportunity costs (implicit) and direct (explicit) costs
Maximizing profit in perfect competition
• MR = MC
Ideas of economists
Smith – trade is good for welfare > division of labor/ specialization / interdependency
Hayek – free market > leads to equilibrium. How do you allocate resources in an efficient way,
government should not plan. Price mechanism is communication between buyers/ sellers.
Coase – Firms exist, size of firm is determined by transaction costs.
- there is cost of using the price mechanism – negotiating, contracting,
contingencies
- Factors affecting size of firm
o costs of organizing additional transactions within the firm
o transaction costs
o marketing costs
porter – five forces to identify which markets to enter
- The Nature and degree of competition in an industry hinge on five forces
o forces of threat of new entrants, bargaining power of customers, bargaining power
of suppliers, threat of substitute products and jockeying among current
contestants
o Argues against competition
Bagehot – Lombard street, bonding reserves, issues
- Commercial banks hardly keep more money in cash than needed for their daily
going concern
- Bagehot believed that central banks should lend freely, at a high interest rate and
on good banking securities
Harberger – monopoly and resource allocation
- Conclusion: $1.5 lost per citizen
- Assumption 1: Demand is unit elastic
- Assumption 2: MC = AC
- Assumption 3: Natural rate for capital return is 10%
Guest Lectures
Willemijn van Dolen -> Cognitive Dissonance, Reduction strategies:
- Changing Behavior
- Changing cognition
- Adding cognition
- Ignoring information
Marijuana Markets
- Partial legalization, more supply drives prices down
van Wijnbergen
- Carbon is being released everywhere -> welfare gains problem
- Carbon Taxes +: polluter pays, revenues can be recycled. -: cooperation.
Uber – surge pricing
- reducing the gap between the supply and demand
Arnold Bout – Financial policy interventions (externalities,
incentives)
Jan Tuinstra – Market mechanism
- 1st ft: Pareto improvement (another allocation that makes one person better off)
- Indifference curve -> shows allocation of resources if there is no preference
- Edgeworth box -> graphic of two commodities and two consumers
,Carbon offsetting
- Reduction in emissions of C02, government incentivization, slow + impactful shift
Week 1
incentives are rewards and penalties that motivate behavior
5. According to Adam Smith, what human trait leads to the division of labour in particular?
1) The propensity to exchange.
2) The desire for leisure.
3) Natural talents of population.
4) Self-interest.
6. According to Adam Smith, what in particular limits the division of labour?
1) Population size.
2) Extent of markets.
3) Natural talents of population.
4) The desire for leisure.
Three consequences division of labor
• Dexterity
• Efficiency
• Improvements machinery
Comparative advantage
• The ability to produce the same good at a lower opportunity cost than another producer.
Absolute Advantage
• The ability to produce the same good using fewer inputs than another producer.
Week 2
The demand curve will shift when there is a change in:
1) Taste
2) Income
3) Population
4) Price of substitutes
5) Price of complements
, 6) Expectations
The supply curve will shift when there is a change in:
1) Technological innovations and changes in the price of inputs
2) Taxes and subsidies
3) Expectations
4) Entry or exit of producers
5) Changes in opportunity costs
When market price is lower than equilibrium price > shortage
When market price is above equilibrium > surplus
Arbitrage - the practice of taking advantage of a price difference between two or more markets
Suppose a new regulation will be implemented that leads to a subsidy for Firm A for every product
they produce, and similarly, a tax for Firm B for every product they produce.
Which of the following statements is true?
1) Supply of both Firm A and Firm B increases.
2) Supply of both Firm A and Firm B decreases.
3) Supply of Firm A increases and supply of Firm B decreases.
4) Supply of Firm A decreases and supply of Firm B increases.
Speculators may increase total welfare because:
1) They create shortages in markets, which increases prices.
2) They stock in the expectation of shortages that they thereby reduce.
3) They reduce the consumption of scarce goods.
4) They buy up items in advance of falling prices and then sell them short.
Week 3
Competitive markets
• Firms in competitive markets are price takers
• Prices are perfectly elastic
Costs
• Total economic costs involve opportunity costs (implicit) and direct (explicit) costs
Maximizing profit in perfect competition
• MR = MC
