this is a summary of all chapters needed for the exam of the principles of economics (microeconomics) course. the most important things are explained and key words have their definition. some photos are included.
a recommendation of mine is to practice all formulas well and look at the graphs i...
A definition of economics
Scarcity: our inability to get everything we want. If we want product A we
cannot also get product B.
What you can afford to buy is limited by your income and by the prices you
must pay, and your time is limited by the fact that your day has 24 hours.
Incentive: a reward that encourages or a penalty that discourages an action.
Economics: the social science that studies the choices that individuals,
businesses, governments and entire societies make as they cope with
scarcity and the incentives that influence and reconcile those choices.
You have to give something up to get something else.
The subject divides into 2 main parts:
- Microeconomics
- Macroeconomics
Microeconomies is the study of the choices that individuals and businesses
make, the way these choices interact in markets and the influence of
governments (why are people streaming more films).
Macroeconomics is the study of the performance of the national economy
and the global economy (why does the UK unemployment rate fluctuate).
, Two big economic questions
2 big questions summarizes the scope of economics:
- How do choices end up determining what, how and for whom goods
and services get produced
- When do choices made in the pursuit of self interest also promote the
social interest
What, how and for whom
Goods and services are the objects that people value and produce to satisfy
wants.
What
What we produce changes over time. Below is a graph seen from changes in
what we produce.
How
Goods and services get produced using productive resources that
economists call factors of production. These are grouped into 4 categories:
o land
, o Labor
o Capital
o Entrepreneurship
Land
The “gifts of nature” that are used to goods and services are called land.
Land it called natural resources.
Labor
The work and effort that people devote to producing goods and services is
called labor. Labor includes the physical and the mental efforts of all the
people who work on farms and construction sites and in factories, shops and
offices.
The quality of labor depends on human capital, which is the knowledge and
skill that people obtain from education, on the job training and work
experience.
Capital
The tools, instruments, machines, buildings and other constructions that
businesses now use to produce goods and services are called capital. There
is financial capital, money and shares, but this is NOT a factor of production.
Entrepreneurship
The human resource that organizes labor, land and capital is called
entrepreneurship. Entrepreneurs come up with new ideas about what and
how to produce, make business decisions and bear the risks that arise from
these decisions.
For whom (really important!!)
Who gets the goods and services that are produced depends on the incomes
that people earn. People earn incomes by selling the services of the factors
of production they own:
1. Land earns rent
2. Labor earns wages
, 3. Capital earns interest
4. Entrepreneurship earns profit
Labor earns the most income. Wages and fringe benefits are 70% of the total
income. Land, capital and entrepreneurship share the rest.
Do choices made in pursuit of self-interest also promote the social
interest?
Self- interest
A choice is in your self-interest if you think that choice is the best one
available for you. All the choice people make about how they use their time
and other resources are made in pursuit of self-interest.
The big question is: is it possible that all the choices that each one of us
makes in the pursuit of self-interest could end up achieving an outcome that
is best for everyone?
Social interest
An outcome is in the social interest if it leads to an outcome that is the best
for society as a whole.
Efficiency and the social interest
The word “efficient” is to describe a situation that can’t be improved upon.
Resource use is efficient if it is not possible to make someone better off
without making someone else worse off. If it is possible to make someone
better off without making anyone worse off, society can be made better off,
and the situation is not efficient.
Fair share and the social interest
The idea that social interest requires “fair shares” is a deeply held one.
There isn’t a crisp definition of fairness to match that of efficiency.
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