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Samenvatting Managerial economics KU Leuven
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Managerial economics - HandelsingenieurPart 1: Introduction to economics
CHAPTER 1: WHAT IS ECONOMICS? / 10 PRINCIPLES OF ECONOMICS
1. The economy and economic systems
- Economy > oikonomos = one who manages a household
- Decisions = interaction with other people, governments and business organizations
o Interaction -> sort of exchange (f.e. money)
o Individuals; goods and services for final consumption
=> households
o Organizations buy these factors + produce goods and services
=>firms
o Level of economic activity = amount of interaction between households and firms
▪ More buying and selling -> higher the level of econ activity
❖ Economic activity= how much buying and selling goes on in the economy over
a period of time
❖ Economy= all the production and exchange activities that take place
1.1. The economic problem
- 3 questions
o What G & S should be produced?
o How should these be produced?
o Who should get the G & S that have been produced?
- Resources;
❖ land= all the natural resources of the earth
❖ labour= the human effort both mental and physical that goes in to production
❖ capital= the equipment and structures used to produce goods and services
1.2. Scarcity and choice
- People/ society: desires for G & S unlimited
- Resources are limited
⇨ Scarcity
- Scarcity= the limited nature of society’s resources
- Economics= the study of
how societies manage scarce
resources
- Idea of scarcity: questioned
o People who want to work but who can’t find a job -> labour is not scarce,
but job vacancies are
,2. How people make decisions
2.1. People face trade-offs
- To get one thing we like, we have to give up another thing that we like = trade-
off, or “There is no such thing as a free lunch”
- Examples trade- offs
o Spend all of their time studying, benefits for degree or spend their time
enjoying leisure activities
o Equity and efficiency
▪ Efficiency; society gets the most it can from its scarce resources (size)
▪ Equity; the benefits of those resources are distributed fairly among
the members of society (how to divide)
⇨ to increase equity, society may need to give up on efficiency to some
extent + vice-versa
2.2. Opportunity cost
- Face trade-offs & choices; comparing the costs and benefits of alternative
courses of action
- F.e.; going to university
o + intellectual enrichment non-economist
o – money you spend
o No uni -> still need a place to sleep economist
o Opportunity cost= the highest-valued alternative that must be given up
to obtain something
- Opportunity cost <-> direct monetary cost
⇨ Value of choice > opp cost of the choice
2.3. Rational people think at the margin
• Rational behavior
- Consumers + producers behave rationally
o Consumers maximize their utility
o Producers maximize their profit
⇨ RB -> efficient market outcomes
- Having a framework/ principle -> to base decision-making
- Thinking at the margin= one such framework that economists adopt in
making decisions
o Marginal changes= small incremental adjustments to a plan/ action
▪ Based around an assumption that economic agents are seeking
to maximize/ minimize outcomes when making decisions
individual, firm or organization that has an impact in some way
on an economy
, - Decision makers take an action if the marginal benefit of the action is equal
to marginal cost
o F.e.; study for another day for math
2.4. People respond to incentives
- Making decisions by comparing costs and benefits => behavior may change
when costs and/or benefits change
- F.e.; putting a price on plastic bags -> encourage to re-use bags
3. How people interact
3.1. Trade can make everyone better- off
- America + China <-> Europe =produce many of the same goods
- Thought; China increases its share of world trade at the expense of Europe =>
bad news for people in Europe?
• NOT, no winner no loser
⇨ Trade sports competition
⇨ Trade allows to specialize in activities they do best
⇨ Trade with others = improve their standard of living on average
= enjoys a greater variety of goods and services
3.2. Markets can be a good way to organize economic activity
- 3 questions society has to answer (what, how, who?)
o Capitalist economic system; questions are addressed
= a system which relies on the private ownership of factors of production to
produce goods and services which are exchanged through a price mechanism
and where production is operated primarily for profit
o Capable of raising the standard of living of millions of people over last
200 years
Income that people earn so they buy G & S they need
- Karl Marx
o Analyzed the CES + developed theories
- Market economy= an economy that allocates resources through the
decentralized decisions of many firms and households
o Firms decide: whom to hire + what to produce
o Households decide; what to buy and whom to work for
- Industrial Revolution 1700 & 1800
o Development: planned economic systems= command economies`
central planners could guide economic activity and
answer the 3 questions
❖ Planned economic systems= economic activity organized by central planners
who decided on the answers to the fundamental economic questions
- Adam Smith - Invisible hand
o Households and firms interacting in markets act as if guided by
invisible hand
▪ Households + firms look at prices when deciding what to buy and
sell, they take into account the costs of their actions
⇨ Prices guide decision makers to reach outcomes that tend to maximize
the welfare of society as a whole
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