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Samenvatting Principles of Economics, ISBN: 9780077132736 Micro Economics
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Full summary of chapters 1 until 12 without 7.
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Economics for IB Midterm Summary
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Chapter 1:Scarcity simply means that we must choose, and sometimes make hard choices.
Economics: the study of how people make choices under conditions of scarcity and of the
results of those choices for society.
Scarcity Principle (No-Free-Lunch Principle): although we have boundless needs and
wants, the resources available to us are limited, so having more of one good thing usually
means having less of another.
Cost-Benefit Principle: an individual should take an action if, and only if, the extra benefits
from taking that action are at least as great as the extra costs.
Rational person: someone with well-defined goals, who fulfils those goals as best she can.
Economic surplus: the benefit of taking that action minus its costs.
Opportunity costs: is the value of the next best alternative that must be forgone in order to
undertake the activity.
There are some pitfalls of which you need to be aware in analysing how rational choices are
made, people who think they are behaving rationally sometimes get it wrong:
1. measuring costs and benefits as proportions rather than absolute money amounts.
2. ignoring opportunity costs
3. failure to ignore sunk costs
4. failure to understand the average-marginal distinction
Marginal cost: the increase in total cost that results from carrying out one additional unit of
an activity.
Marginal benefit: the increase in total benefit that results from carrying out one additional
unit of an activity
Chapter 2:
Absolute advantage: one person has an absolute advantage over another if an hour spent
in performing a task earns more than the other person can earn in an hour at the task.
Comparative advantage: one person has a comparative advantage over another in a task if
his or her opportunity cost of performing a task is lower than the other person’s opportunity
cost.
The principle of comparative advantage: everyone does best when each person
concentrates on the activities for which his or her opportunity cost is lowest.
Production possibilities curve: a graph that describes the maximum amount of one good
that can be produced for every possible level of production of the other good.
OCx= Loss in Y / gain in X
,OCy= Loss in X / Gain in Y
Attainable point: Any combination of goods that can be produced using currently available
resources. (along ppc or within it)
Unattainable point: Any combination of goods that cannot be produced using currently
available resources (lie outside ppc)
Inefficient point: Any combination of goods for which currently available resources enable
an increase in the production of one good without a reduction in the production of the other.
(points that lay within the curve)
Efficiënt point: any combination of goods for which currently available resources do not
allow an increase in production of one good without a reduction in the production of the
other. (lies on ppc)
The PPF for multi-person economy is bow shaped.
The principle of increasing opportunity cost: is expanding the production of any good,
first employ those resources with the lowest opportunity cost, and only afterwards turn the
resources with higher opportunity costs.
trade-off: the only way people can produce and consume more X is to produce and
consume less Y.
Factors that shift the economy’s PPF:
- increases in productive resources (PPF goes up)
- improvements in knowledge and technology (PPF goes up)
- an economy has suffered a loss or exhaustion of some of its scarce resources (PPF
down)
Why have some countries been slow to specialise?
- Population density is an important precondition for specialisation.
Can we have too much specialisation?
- specialisation does not mean that more specialisation is always better than less, for
specialisation also entails costs. For example, most people appear to enjoy variety in
the work they do.
Comparative advantage and the gains from international trade:
- Nations also specialise
- nations can benefit from exchange based on comparative advantage
- trade prices determine its consumption possibilities given its production potential.
- If one country gains from being able to trade it and its trading partner both gain.
, Chapter 3:
Market: the market for any good consists of all buyers or sellers of that good.
Demand curve: a schedule or graph showing the quantity of a good that buyers wish to buy
at each price.
Supply curve: a curve or schedule showing the quantity of a good that sellers wish to sell at
each price.
Seller’s reservation price: the smallest money amount for which a seller would be willing to
sell an additional unit, generally equal to marginal cost.
Equilibrium: a system is in equilibrium when there is no tendency for it to change.
Equilibrium price and quantity: the values of price and quantity supplied and quantity
demanded are equal.
Market equilibrium: occurs in a market when all buyers and sellers are satisfied with their
respective quantities at the market price.
Excess supply: the amount by which quantity supplied exceeds quantity demanded when
the price of a good exceeds the equilibrium price.
Excess demand: the amount by which quantity demanded exceeds quantity supplied when
the price of a good lies below the equilibrium price.
Price ceiling: a maximum allowable price, specified by law.
Change in the quantity demanded: a movement along the demand curve that occurs in
response to a change in price.
Change in the quantity supplied: a movement along the supply curve that occurs in
response to a change in price.
Complements: 2 goods are complements in consumption if an increase in the price of one
causes a leftwards shift in the demand curve for the other.
Substitutes: 2 goods are substitutes in consumption if an increase in the price of one
causes a rightward shift in the demand curve for the other.
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