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Microeconomics, Institutions and Welfare - Summary
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This summary highlights the most important parts of chapters 1-8 and 11-12.
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Samenvatting The Economy - Economics (ECONOM01)
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ECB1MIMicroeconomics,
Institutions and Welfare
Summary
,Contents
Chapter 1 – The Capitalist Revolution .................................................................................................... 2
Chapter 2 – Technology, Population, And Growth ................................................................................. 5
Chapter 3 – Scarcity, Work, and Choice .................................................................................................. 7
Chapter 4 – Social Interactions................................................................................................................ 9
Chapter 5 – Property and Power: Mutual Gains and Conflict ............................................................... 11
Chapter 6 – The Firm: Owners, Managers, And Employees................................................................. 14
Chapter 7 – The Firm and its Customers ............................................................................................... 18
Chapter 8 – Supply and Demand: Price-taking and Competitive Markets............................................ 21
Chapter 11 – Rent-seeking, Price-setting, and Market Dynamics ......................................................... 23
Chapter 12 – Markets, Efficiency, And Public Policy ............................................................................. 25
1
, Chapter 1 – The Capitalist Revolution
Gross Domestic Product (GDP): The total value of goods and services in a country produced in a
given period such as a year. It measures the output of the economy in a given period.
- Nominal GDP: Total income without the adjustment of inflations
- Real GDP(also called GDP at constant prices): Total income with the adjustment of inflations
Income inequality: The uneven distributed income among the population.
Disposable income: Income available after paying taxes and receiving transfers from the government.
This is ought to be a good measurement of living standards, but it leaves out:
- Quality of our social and physical environment such as friendship and clean air
- Amount of free time we have to relax or spend time with friends and family
- Goods and services that we do not buy, such as good education and healthcare
- Goods and services that are produced within the household, such as meals
Since income distribution affects wellbeing, and because the same average income may result from
very different distributions of income between rich and poor within a group, average income may fail
to reflect how well off a group is by comparison to some other group.
GDP also includes the goods and services produced by the government, such as schooling and national
defence. Contribute to wellbeing, but are not included in disposable income, which makes GDP per
capita a better measurement of living standards in this way. However, those are hard to value, because
those goods and services are not sold.
Constant prices: Prices corrected for inflation or deflation so that a unit of currency represents the
same buying power in different periods of time.
Purchasing power parity (PPP): A statistical correction allowing comparisons of the amount of
goods people can buy in different countries that have different currencies.
Growth rate = (new-old)/old*100%
For a very long time, living standards did not grow in any sustained way. When they occurred, it
began at different times in different countries, leading to vast differences in living standards around
the world.
Adam Smith (1723-1790):
- Considered by many to be the founder of the modern economics
- An Inquiry into the Nature and Causes of the Wealth of Nations (1776)
Industrial Revolution: A wave of technological advances and organizational changes starting in
Britain in the 18th century, which transformed an agrarian and craft-based economy into a commercial
and industrial economy.
Technology: Process taking a set of materials and other inputs, including the work of people and
machines, to produce an output.
Technological progress: Change in technology that reduces the amount of resources required to
produce a given amount of the output. By reducing the amount of work-time it takes to produce the
things we needs, these changes allowed significant increases in living standards.
From global climate change to local resource exhaustion, these effects are results of both the
expansion of the economy and the way the economy is organized. The permanent technological
revolution brought us more light for less heat, which conserved natural resources.
2
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