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Summary Economics (1IBM)
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Summary Economics – Pauline Vandenbroucke – IBM – 2021/2022PART 1: Chapter 1 – Chapter 5
PART 2: Chapter 6 - …
Chapter 1: Scope and method of economics
1.1 Definition of economics
- Human wants are unlimited, but resources are not
- Economics = “The study of how individuals and societies choose to use the scarce resources that nature and
previous generations have provided”
- Bit of a psychological field, but assuming that people and companies act rationally
So, economics usually disregards emotional decision taking
- Here we avoid feelings/emotions, economics is not about psychology, everyone is very rational and makes rational
decisions
1.2 Why we study economics?
- 1. To learn a way of thinking (3 fundamental concepts for better everyday choices)
o Opportunity cost
▪ The full “cost” of a decision includes what we give up by not making the best alternative
▪ You don’t need to pay it, but you lose it, because you never get it (you have a cost for coming to
class, but you lose the things you cannot do because you’re in class)
▪ A quantification/ a number, something you miss out, it’s about the costs
o Marginalism
▪ Only weigh the costs and benefits that arise from the decision itself
▪ Additional costs/additional value/additional revenues, it’s what the decision will influence,
decision continue program or start working ➔ you don’t include the costs of this year, this is not
relevant anymore, you look if you will study further or work how it will turn out, you look forward
not backward
o Efficient markets – no free lunch
▪ Profit opportunities are always eliminated almost instantaneously in efficient markets
▪ Computer software is free, but actually you pay for it (ads, cookies, share data,… you pay without
you knowing)
- 2. To understand society
- 3. To be an informed citizen
1.3 Understand the basics
- Identify the opportunity cost: The Agrizone Corporation invests 12$ million in a new inventory tracking system
o The $12 million could have been invested in other profit-making ventures or projects, or it could have
been put in the bank or loaned to someone else with interest.
- Identify the marginal cost for traveling from Paris to Nice: If you travel to Paris, your travel cost is 150 euro. If you
travel to Nice (via Paris) the total travel cost is 230 euro…. And what would be your marginal cost?
o Marginal cost is 80 euros: You have to be in Paris for a meeting costs 150 and you also have to go to nice
so you travel there too for 230, so the costs is 80 euros
1.4 Micro and macro
- Micro-economics = individual industries, firms, households
→ individual decision-making units
- Macro-economics = economy as a whole
→ behavior of aggregates (national output, national income, overall price level, the general rate of inflation)
1
,Chapter 2: The economic problem: scarcity and choice
Introduction: Two-person economy
2
,2.1 The economic problem
2.1.1 The problem
- Every society has some system or process that transforms its scarce resources into useful goods and services. In
doing so, it must decide what gets produced, how it is produced, and to whom it is distributed.
- The primary resources that must be allocated are land, labor, and capital.
- Resources: products of nature (minerals), products of past generations (buildings), time, talents
- Factors of production (nature, labor, capital) + Capital
- Production process (transforms scarce resources into useful goods & services)
- Production by private firms , public sector, government
- ➔ INPUT: factors of production
- ➔ OUTPUT: goods and services of value to households
3
, Factors of production (scarce resources)
- Land (nature)
- Labor
- Capital
Production
- = process that transforms scarce
resources (input) into useful goods &
services (output)
Capital goods (for later)
- Used for producing other goods (production lines, inventory,..)
Consumer goods (for now)
- For consumption purpose but can be durable or non-durable (e.g. clothes = durable and bread = non-durable)
2.1.2 Scarcity and choice in a one-person economy
- One-person economy
o (simple, island alone = one person) (1 household, one person production..) (What will I produce?, How
will I do this? & How to realize this with the resources I have?)
o Think : stranded on a deserted island
o Rare, but useful for study, because basic decisions are the same of more complex economies
- Basic decisions
o What that person wants to produce (output)
o Possibilities (what can the person do to satisfy his wants given the limits = scarcity)
o How to (best) use resources (or inputs)
▪ They will benefit from specializing in what they do best! (comparative advantage)
2.1.3 Absolute advantage – comparative advantage – opportunity cost
- OPPORTUNITY COST =
o The best alternative we give up, when we make a choice
- SPECIALIZATION = not devide everything, but everyone does a part
o Society benefits by specialising in what they do best
o Advantages:
▪ quality is better, because you focus on the one thing you do best, efficiency
o Relevant thing:
▪ easier to each skill you use, it’s about experience, helps you to gain more expertise and learn to
do things faster and learn more things (economical and technical courses), more efficient (rational
thinking, profit (not emotional in economics)
o ➔ Is about exploiting what we already have (advantage) but also about learning
- ABSOLUTE ADVANTAGE
o = the first part
o Produce using fewer resources
o Producing more or cheaper or more efficient, being better than someone else
o Better
- COMPARATIVE ADVANTAGE =
o Produce at a lower opportunity cost
o The lowest opportunitycosts
o If you compare the products, than you are more better or more worse (in products and people)
- => Parties benefit from specialization and trade, even if one party has an absolute advantage in the production of
both goods
4
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