Chapter 1 – First principles
Economics studies how people and firms make choices
First principles
1. Choices are necessary because resources are scarce
- You can’t always get what you want
- You always need to give up something to get something
- Resources do not have to be monetary; time, health, environment
2. The true cost of something is its opportunity cost (alternatieve kosten)
- Opportunity cost = what you forgo by not choosing next best alternative /
whatever else you could have done in the time you have done something
you chose to do
3. ‘How much’ is a decision at the margin
- Margin = the amount will be determined by the value and cost of the last
unit
- Trade-off = a comparison of costs and benefits
- Marginal decisions = decisions about whether to do a bit more or a bit less
of an activity, how you spend your next hour/dollar
- Marginal analysis = the study of such decisions
4. People usually respond to incentives, exploiting opportunities to make
themselves better off
- Incentives = anything that offers rewards to people to change their
behaviour, can be monetary and non-monetary
5. There are gains (aanwinsten) from trade
- Trade = providing goods and services to others and receive goods and
services in return
- Gains from trade = people can get more of what they want through trade
than they could if they tried to be self-sufficient (zelfvoorzienend). This
increase in output is due to specialization = each person specializes in
the task that he or she is good at performing
6. Markets move toward equilibrium (evenwicht)
- Key concept in economics (supply = demand, game theory)
- An economic situation is in equilibrium when no individual would be better
off doing something different
- Markets usually reach equilibrium via prices
7. Resources should be used efficiently to achieve society’s goals
- Efficiency = no waste of resources, no one can be made better off without
making other worse off. If there is no waste of resources, that does not
imply anything about a fair distribution of the resources (equity).
- Equity = everyone gets his/her fair share
8. Markets usually lead to efficiency
- People usually take opportunities for mutual gains
- Exceptions market failure inefficient
9. When markets don’t achieve efficiency, government intervention can improve
society’s welfare
- Can also happen because of inequity concern
10. One person’s spending is another person’s income
- A chain reaction of changes in spending behaviour tends to have
repercussions that spread through the economy
11. Overall spending sometimes gets out of line with the economy’s productive
capacity
, - Overall spending (= the amount of goods and services that consumers
and businesses want to buy) doesn’t match the amount of goods and
services the economy is capable of producing
- Inflation = a rise in prices throughout the economy
12. Government policies can change spending
- They can strongly affect overall spending, an ability they use in an effort to
steer the economy between recession and inflation
Positive analysis studies ‘how things are’
- Descriptive
- Theoretically, there is an objective correct answer
Normative analysis studies ‘how things should be’
- Prescriptive
- The answer is (at least in part) subjective
Chapter 2 – Economic models; trade-offs and trade
Model = a simplified representation of a real situation
Other things equal assumption = all other relevant factors remain unchanged
Production possibility frontier (PPF) = illustrates the trade-offs facing an economy
that produces only 2 goods. It shows the maximum quantity of one good that can be
produced for any given quantity produced of the other
- Feasible and efficient
- Opportunity cost
- Absolute advantages = firm or group is better in producing the good in
production/can produce more output per worker than others
- Comparative advantage = firm or groups opportunity cost of producing the
good or service is lower than other firm or groups
4 factors of production = resources used to produce goods and services;
1. Land
2. Labour
3. Physical capital
4. Human
Markets for goods and services = firms sell goods and services that they produce
to households in markets for goods and services
Factor markets = firms buy the resources they need to produce goods and services
in factor markets
Income distribution = the way in which total income is divided among the owners of
the various factors of production
Barter = ruilhandel
Chapter 3 – Supply and demand
Perfect competition
- Many buyers and sellers, everyone is a price taker (no party can individually
influence the market price)
- Standardized goods
- All parties fully informed
- Free entry and exit
, Describes some markets very well, but in many markets some agents have market
power
Supply and demand
Demand, consumers
- Directly, final products (beer)
- Indirectly, as inputs for final products (hops)
Depends on;
- The price of the product
- Preferences (tastes) of consumers
- Budget (income) of consumers
- Price of other product
- Expectations (about future prices or income)
Supply, producers
Depends on;
- Price of the good
- Input prices
- Prices of other goods
- Technology
- Expectations
Demand curve = shows the relationship between quantity demanded and price. All
other factors that influence demand are constant on a demand curve = ceteris
paribus). Demand curves slope downward
- Shows the relationship between quantity demanded a price
- All other factors that influence demand are constant on a demand curve
- Price change: movement along the demand curve
- Change in another factor (other than price); shift of the demand curve
o Increase in demand: demand curve shifts to the right
o Decrease in demand: demand shifts to the left
Demand schedule = table that shows the quantity demanded for different prices,
form a demand schedule, we can construct a demand curve
Demand function = a function that describes the relation between price and the
quantity demanded
The law of demand = all other things equal (ceteris paribus), a higher price leads to
a lower quantity demanded
- Violations; some good (luxury goods) show a positive relationship between
price a quantity demanded
- For luxury goods, a higher price might change the perception of quality is not
ceteris paribus
Normal and inferior goods
- The effect of an increase in income can positively of negatively affect demand
- Normal goods = if income increases, the demand for a normal good increase
- Inferior good = if income increases, the demand for an inferior good
decrease
Substitutes and complements
Economics studies how people and firms make choices
First principles
1. Choices are necessary because resources are scarce
- You can’t always get what you want
- You always need to give up something to get something
- Resources do not have to be monetary; time, health, environment
2. The true cost of something is its opportunity cost (alternatieve kosten)
- Opportunity cost = what you forgo by not choosing next best alternative /
whatever else you could have done in the time you have done something
you chose to do
3. ‘How much’ is a decision at the margin
- Margin = the amount will be determined by the value and cost of the last
unit
- Trade-off = a comparison of costs and benefits
- Marginal decisions = decisions about whether to do a bit more or a bit less
of an activity, how you spend your next hour/dollar
- Marginal analysis = the study of such decisions
4. People usually respond to incentives, exploiting opportunities to make
themselves better off
- Incentives = anything that offers rewards to people to change their
behaviour, can be monetary and non-monetary
5. There are gains (aanwinsten) from trade
- Trade = providing goods and services to others and receive goods and
services in return
- Gains from trade = people can get more of what they want through trade
than they could if they tried to be self-sufficient (zelfvoorzienend). This
increase in output is due to specialization = each person specializes in
the task that he or she is good at performing
6. Markets move toward equilibrium (evenwicht)
- Key concept in economics (supply = demand, game theory)
- An economic situation is in equilibrium when no individual would be better
off doing something different
- Markets usually reach equilibrium via prices
7. Resources should be used efficiently to achieve society’s goals
- Efficiency = no waste of resources, no one can be made better off without
making other worse off. If there is no waste of resources, that does not
imply anything about a fair distribution of the resources (equity).
- Equity = everyone gets his/her fair share
8. Markets usually lead to efficiency
- People usually take opportunities for mutual gains
- Exceptions market failure inefficient
9. When markets don’t achieve efficiency, government intervention can improve
society’s welfare
- Can also happen because of inequity concern
10. One person’s spending is another person’s income
- A chain reaction of changes in spending behaviour tends to have
repercussions that spread through the economy
11. Overall spending sometimes gets out of line with the economy’s productive
capacity
, - Overall spending (= the amount of goods and services that consumers
and businesses want to buy) doesn’t match the amount of goods and
services the economy is capable of producing
- Inflation = a rise in prices throughout the economy
12. Government policies can change spending
- They can strongly affect overall spending, an ability they use in an effort to
steer the economy between recession and inflation
Positive analysis studies ‘how things are’
- Descriptive
- Theoretically, there is an objective correct answer
Normative analysis studies ‘how things should be’
- Prescriptive
- The answer is (at least in part) subjective
Chapter 2 – Economic models; trade-offs and trade
Model = a simplified representation of a real situation
Other things equal assumption = all other relevant factors remain unchanged
Production possibility frontier (PPF) = illustrates the trade-offs facing an economy
that produces only 2 goods. It shows the maximum quantity of one good that can be
produced for any given quantity produced of the other
- Feasible and efficient
- Opportunity cost
- Absolute advantages = firm or group is better in producing the good in
production/can produce more output per worker than others
- Comparative advantage = firm or groups opportunity cost of producing the
good or service is lower than other firm or groups
4 factors of production = resources used to produce goods and services;
1. Land
2. Labour
3. Physical capital
4. Human
Markets for goods and services = firms sell goods and services that they produce
to households in markets for goods and services
Factor markets = firms buy the resources they need to produce goods and services
in factor markets
Income distribution = the way in which total income is divided among the owners of
the various factors of production
Barter = ruilhandel
Chapter 3 – Supply and demand
Perfect competition
- Many buyers and sellers, everyone is a price taker (no party can individually
influence the market price)
- Standardized goods
- All parties fully informed
- Free entry and exit
, Describes some markets very well, but in many markets some agents have market
power
Supply and demand
Demand, consumers
- Directly, final products (beer)
- Indirectly, as inputs for final products (hops)
Depends on;
- The price of the product
- Preferences (tastes) of consumers
- Budget (income) of consumers
- Price of other product
- Expectations (about future prices or income)
Supply, producers
Depends on;
- Price of the good
- Input prices
- Prices of other goods
- Technology
- Expectations
Demand curve = shows the relationship between quantity demanded and price. All
other factors that influence demand are constant on a demand curve = ceteris
paribus). Demand curves slope downward
- Shows the relationship between quantity demanded a price
- All other factors that influence demand are constant on a demand curve
- Price change: movement along the demand curve
- Change in another factor (other than price); shift of the demand curve
o Increase in demand: demand curve shifts to the right
o Decrease in demand: demand shifts to the left
Demand schedule = table that shows the quantity demanded for different prices,
form a demand schedule, we can construct a demand curve
Demand function = a function that describes the relation between price and the
quantity demanded
The law of demand = all other things equal (ceteris paribus), a higher price leads to
a lower quantity demanded
- Violations; some good (luxury goods) show a positive relationship between
price a quantity demanded
- For luxury goods, a higher price might change the perception of quality is not
ceteris paribus
Normal and inferior goods
- The effect of an increase in income can positively of negatively affect demand
- Normal goods = if income increases, the demand for a normal good increase
- Inferior good = if income increases, the demand for an inferior good
decrease
Substitutes and complements
