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Summary of microeconomics
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Chapter 11. What is an economy
Economic activity is how much buying and selling goes on in the economy over a period of
time.
The economy is all the production and exchange activities that take place every day.
The economy exists at different scales:
- Local
- National e.g. Belgium
- International e.g. EU
2. Economics
The word economy comes from the Greek word “oikos nomos” which means “one who
manages a household.”
you have to make decisions (who will cook, how much do I spend on a house, car, …)
-> economic and society are the same (how to spend tax money, how to manage a society)
unlimited needs: water, food, shelter, clothes, transport
scare resources: need to pay for the scare resources we have. That can be money, time
(limited amount of time)
-> we have to make choses
-> how do we use the scare resources that we can fulfill our needs
- Examples of resources:
land, oil, gas, labor, physical capital (ex: computers), human capital (ex: doctors,
engineers).
Resources are used to produce goods and services, consumed by people.
But there is a tension between:
- People’s / societies’ desire for goods and services which is unlimited
- The available resources (land, labour, capital) which are limited (note: limited
does not mean that the quantity is small !)
, Society will never have enough resources to produce the goods and services that will
satisfy the needs of all its citizens. (= Scarcity)
Economics = the study of how society manages its scarce resources
choices have to be made as efficient possible so that nothing goes to waste
3. Some important principles of economics
3.1 how people make decisions
People face trade-offs.
= if you want something, you need to sacrifice something else, making decisions requires
trading off one goal against another
- Food versus clothing
- Leisure time versus work
- Clean environment versus higher incomes
- Efficiency versus equity
Efficiency is how society gets the most that it can from its scarce resources.
Equity means the benefits of those resources are distributed fairly among the
members of society.
-> sometimes you can be more efficient but then you are less equity and the
other way round
-> when you need to pay taxes, your reward for working is less. So maybe
you are going to work less because a lot of the extra money is gone.
But on the other hand, the taxes are for school, unemployed people.
(equity)
3.2. The cost of something is what you give up to get it.
Because people face trade-offs and make choices, they must compare the costs and benefits
of each action. Sometimes the cost of an action is not as obvious as it might appear.
,ex. decide between going to university or not
+: intellectual enrichment, skills, career options
-: cost a lot of money, time consuming
Decisions require comparing costs and benefits of alternatives.
- Whether to go to university or to work?
- Whether to study or go out on a date?
- Whether to go to class or sleep in?
The opportunity cost of an item is what you give up to obtain that item. It is a ratio
expressed as the sacrifice in one good in terms of the gain in the other.
= Opportunity cost refers to the value of the next best alternative that must be given up to obtain something
else
In other words: opportunity cost = forgone value of highest valued alternative + explicit costs
of choice (paid)
How is the opportunity cost of a choice determined?
• Step 1: What choice was made?
• Step 2: What is the cost of this choice?
• Step 3: Which alternative choices were possible?
• Step 4: What is the best alternative?
• Step 5: What is the value of the best alternative?
→ the value of the best alternative + the cost of the choice is the opportunity cost of your
choice
A good decision is when the value (= benefits) of the choice > opportunity cost
- ex. slide 17
3.3. Rational people think at the margin
In economics we study the behavior of consumers and producers.
-> People are rational = when we buy something, we do this to maximize our pleasure
, if not, we are irrational
- Consumers will maximize their utility (see chapter 4)
- Producers will maximize their profit (see chapter 10)
-> Rational behavior will lead to the best possible market outcome.
-> rationality has its boundaries
-> because otherwise there would be nobody who spends his money on a good
good cause (not rational because it doesn’t have a personal benefit )
-> but we don’t take this in account for our theory
Marginal changes: small incremental adjustments to a plan of action.
In many situations, decision makers will make the best decision by thinking at the margin (=
“edge”).
- ex. airlines slide 20
-> MC < MR !
A rational decision maker takes an action if the marginal benefit of the action exceeds its
marginal cost.
4. People respond to incentives (stimulanten)
Assuming rational people make rational decisions, then….
- Marginal changes in costs or benefits motivate people to respond.
- The decision to choose one alternative over another occurs when that alternative’s
marginal benefits exceed its marginal costs!
- Public policies can create incentives (encourage certain behaviour) or disincentives
that alter behaviour.
-> Sometimes policymakers fail to understand how policies alter incentives and
behaviour.
expected changes:
1. diesel cars are very polluting -> want less diesel cats
- solution: low emission zone
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