Summary economics and business
Chapter 1: The principles and practice of economics
1.1: The scope of economics
Economics agents and economics resources:
Choice, not money, is the unifying feature of all the things that economics study.
Economic agent: an individual or a group that makes choices.
Scare resources: things that people want, where the quantity that people want
exceeds the total available quantity.
Scarcity: the situation of having unlimited wants in a world of limited resources. The
world doesn’t have enough resources to just give everyone everything they want.
Economics: the study of how agents choose to allocate scare resources and how
those choices affect society.
Positive economics and normative economics:
Positive economics: analysis that generates objective descriptions or predictions
which can be verified with data. Describes what people do.
Normative economics: analysis recommends what an individual or society is ought to
do (subjective). Recommend what people are ought to do.
Microeconomics and macroeconomics:
Microeconomics: the study of how individuals, households, firms, and governments
make choices, and how those choices affect prices the allocation of resources, and
the well-being of other agents.
Macroeconomics: the study of the economy. Macroeconomists study economy-wide
phenomena, growth rate of a country’s total economic output, the inflation rate, or
unemployment rate. Macroeconomists design government policies that improve
overall (aggregate) economic performance.
1.2: Three principles of economics
Three principles of economics:
1. Optimisation: picking the best feasible option, given whatever (limited) information,
knowledge, experience, and training is available for the economic agent.
2. Equilibrium: special situation in which everyone is simultaneously optimizing, so
nobody would benefit personally by changing his or her own behaviour, given the
choices of others.
3. Empiricism: analysis that uses data and evidence-based analysis. Economists use data
to develop theories, to evaluate the success of different government policies, and to
determine what is causing things to happen in the world, using data to figure out
answers to interesting questions.
1.3 The first principle of economics: Optimization
,Trade-offs and budget constraints:
Trade-offs: when the agent needs to give up on one thing to get something else.
Budget constraint: shows the bundles of good or services that a consumer can
choose given her limited budget
Opportunity cost:
Opportunity cost: the best alternative use of a resource, what an optimizer is
effectively giving up for something else. Concerns opportunity in the future.
Monetary value: is value in currency that a person, business, or the marketplaces on
a resource, product, or service.
Cost-benefit analysis:
Cost-benefit analysis: a calculation that identifies the best alternative, by summing
benefits and subtracting costs, with both benefits and costs denominated in a
common unit of measurement.
Net benefit: the sum of the benefits of choosing an alternative minus the sum of the
costs of choosing the alternative.
Net present value: present value of all the expected benefits - present value of all
associated costs.
1.4: The second principle of economics: Equilibrium
The free-rider problem:
Free riders: people who let someone else do the dirty work, and who don’t
contribute but still benefit from the investments that others make.
Free-rider problem: the burden on a shared resource that is created by its use or
overuse by people who aren’t paying their fair share for it or aren’t paying anything
at all.
1.5: The third principle of economics: Empiricism
Economic science: economists use data to determine whether our theories about
human behaviour (optimisation and equilibrium) match up with actual human
behaviour. If such theories fail to explain what is happening, economists create new
theories. Also interested in what is causing things to happen.
Chapter 2: Economic methods and economic questions
,2.1: The scientific method
Developing economic models of the world and evaluating them (via testing predicted
hypotheses with data or empirical evidence).
Models: approximations that make predictions.
Always beginning with assumptions to derive other implications.
Mean: sum of values divided by number of values.
Median: ordering values from smallest to greatest and then finding the middle value.
Using lots of observations strengthens the force of an empirical argument which
leads to more precise statement.
2.2: Causation and correlation
Causation: one variable directly affects another variable to change.
Correlation: two variables tend to change at the same time:
Positive correlation: two variables tend to move in the same direction.
Negative correlation: two variables tend to move in opposite directions.
Zero correlation: two variables are not related at all.
Reasons correlation does not imply causality:
Omitted variable: something that has been left out of a study that, if
included, would explain why two variables that are in the study are
correlated.
Reverse causality: when direction of cause and effect are mixed up.
Chapter 3: Optimization: doing the best you can
, 3.1: Optimization: choosing the best feasible option
Goal of optimisation: choosing the best feasible option (optimum).
3.2: Optimization application: renting the optimal apartment
Optimisation techniques:
1. Using total value; calculating the total value of each feasible option; picking
the option with greatest total value (net benefit).
2. Differences between feasible option; picking an option based on analysis of
differences gives identical outcomes for each technique.
3.3: Optimization using marginal analysis
Marginal analysis: cost-benefit calculation about difference between one feasible
alternative and next feasible alternative.
Marginal cost: extra costs generated by moving from one feasible alternative to the
next feasible alternative (calculated using the derivative).
Principle of optimisation at the margin: optimal feasible option has the property
that moving to it makes you better off and moving away makes you worse.
Chapter 4: Demand, supply, and equilibrium
Chapter 1: The principles and practice of economics
1.1: The scope of economics
Economics agents and economics resources:
Choice, not money, is the unifying feature of all the things that economics study.
Economic agent: an individual or a group that makes choices.
Scare resources: things that people want, where the quantity that people want
exceeds the total available quantity.
Scarcity: the situation of having unlimited wants in a world of limited resources. The
world doesn’t have enough resources to just give everyone everything they want.
Economics: the study of how agents choose to allocate scare resources and how
those choices affect society.
Positive economics and normative economics:
Positive economics: analysis that generates objective descriptions or predictions
which can be verified with data. Describes what people do.
Normative economics: analysis recommends what an individual or society is ought to
do (subjective). Recommend what people are ought to do.
Microeconomics and macroeconomics:
Microeconomics: the study of how individuals, households, firms, and governments
make choices, and how those choices affect prices the allocation of resources, and
the well-being of other agents.
Macroeconomics: the study of the economy. Macroeconomists study economy-wide
phenomena, growth rate of a country’s total economic output, the inflation rate, or
unemployment rate. Macroeconomists design government policies that improve
overall (aggregate) economic performance.
1.2: Three principles of economics
Three principles of economics:
1. Optimisation: picking the best feasible option, given whatever (limited) information,
knowledge, experience, and training is available for the economic agent.
2. Equilibrium: special situation in which everyone is simultaneously optimizing, so
nobody would benefit personally by changing his or her own behaviour, given the
choices of others.
3. Empiricism: analysis that uses data and evidence-based analysis. Economists use data
to develop theories, to evaluate the success of different government policies, and to
determine what is causing things to happen in the world, using data to figure out
answers to interesting questions.
1.3 The first principle of economics: Optimization
,Trade-offs and budget constraints:
Trade-offs: when the agent needs to give up on one thing to get something else.
Budget constraint: shows the bundles of good or services that a consumer can
choose given her limited budget
Opportunity cost:
Opportunity cost: the best alternative use of a resource, what an optimizer is
effectively giving up for something else. Concerns opportunity in the future.
Monetary value: is value in currency that a person, business, or the marketplaces on
a resource, product, or service.
Cost-benefit analysis:
Cost-benefit analysis: a calculation that identifies the best alternative, by summing
benefits and subtracting costs, with both benefits and costs denominated in a
common unit of measurement.
Net benefit: the sum of the benefits of choosing an alternative minus the sum of the
costs of choosing the alternative.
Net present value: present value of all the expected benefits - present value of all
associated costs.
1.4: The second principle of economics: Equilibrium
The free-rider problem:
Free riders: people who let someone else do the dirty work, and who don’t
contribute but still benefit from the investments that others make.
Free-rider problem: the burden on a shared resource that is created by its use or
overuse by people who aren’t paying their fair share for it or aren’t paying anything
at all.
1.5: The third principle of economics: Empiricism
Economic science: economists use data to determine whether our theories about
human behaviour (optimisation and equilibrium) match up with actual human
behaviour. If such theories fail to explain what is happening, economists create new
theories. Also interested in what is causing things to happen.
Chapter 2: Economic methods and economic questions
,2.1: The scientific method
Developing economic models of the world and evaluating them (via testing predicted
hypotheses with data or empirical evidence).
Models: approximations that make predictions.
Always beginning with assumptions to derive other implications.
Mean: sum of values divided by number of values.
Median: ordering values from smallest to greatest and then finding the middle value.
Using lots of observations strengthens the force of an empirical argument which
leads to more precise statement.
2.2: Causation and correlation
Causation: one variable directly affects another variable to change.
Correlation: two variables tend to change at the same time:
Positive correlation: two variables tend to move in the same direction.
Negative correlation: two variables tend to move in opposite directions.
Zero correlation: two variables are not related at all.
Reasons correlation does not imply causality:
Omitted variable: something that has been left out of a study that, if
included, would explain why two variables that are in the study are
correlated.
Reverse causality: when direction of cause and effect are mixed up.
Chapter 3: Optimization: doing the best you can
, 3.1: Optimization: choosing the best feasible option
Goal of optimisation: choosing the best feasible option (optimum).
3.2: Optimization application: renting the optimal apartment
Optimisation techniques:
1. Using total value; calculating the total value of each feasible option; picking
the option with greatest total value (net benefit).
2. Differences between feasible option; picking an option based on analysis of
differences gives identical outcomes for each technique.
3.3: Optimization using marginal analysis
Marginal analysis: cost-benefit calculation about difference between one feasible
alternative and next feasible alternative.
Marginal cost: extra costs generated by moving from one feasible alternative to the
next feasible alternative (calculated using the derivative).
Principle of optimisation at the margin: optimal feasible option has the property
that moving to it makes you better off and moving away makes you worse.
Chapter 4: Demand, supply, and equilibrium
