This is a summary of selected chapters from the book 'Economics' by Paul Krugman and Robin Wells. It discusses chapters 1-7, 9, 11-17, 19, 21-25, 29, 30, 32, 33, and 34.
Summary ‘Economics’
Introduction. The Ordinary Business of Life
Economics is the social science that studies the production, distribution, and consumption of
goods and services. An economy delivers the goods. A market economy is an economy that is
not the result of a central authority, that is a command economy, but the result of buyers
and sellers interacting. This process was described by Adam Smith as ‘The Invisible Hand’.
Microeconomics is the study how the individuals concerned with the process interact, and
ultimately, how they influence society as a whole. Market Failure comes into existence when
an individual pursues its own interest, instead of promoting the interests of society as a
whole, with the result of society being worse off.
On the other hand, we have macroeconomics, which is concerned with the overall ups and
downs of the economy.
Chapter 1. First Principles
Every economic issue involves, at its core, individual choice, decisions by an individual about
what to do and what not to do. All sorts of limitations and needs help us determine our
individual choices. In general, four economic principles underlie the economics of individual
choice.
Principle #1: Choices are necessary because resources are scarce. You cannot always
have what you want, simply because there aren’t sufficient resources to grant everyone
everything he wants. A resource is anything that can be used to produce something else.
This includes time, labour and physical resources. It is scarce when there’s not enough of the
resource available to satisfy all the ways a society wants to use it (read: when there is a limit
to the total amount, then there is scarcity). Hence, the scarcity of resources means that
inevitably, individual choices must be made, and ultimately, this determines society’s choice.
Principle #2: The true cost of something is its opportunity cost. Opportunity costs are
costs of what you must give up in order to get it, it is a choice’s true cost. Suppose you have
to choose between going to the cinema and watching the stars. Two dimensions are
associated with these: Monetary and Opportunity value. Going to the cinema costs money,
let’s say €5,- , whilst looking into the sky is free. Suppose both cost equal amounts of time,
what are the benefits that I lose when I choose going to the cinema over watching stars?
These benefits are the opportunity costs. You lose the potential benefits you could have had
when you would’ve chosen to watch stars, or vice versa of course. Hence, the opportunity
costs are something additional to the monetary cost of a choice. Ultimately, every kind of
cost is an opportunity cost.
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