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Summary Principles of Economics AMSIB
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Summaries of the course Principles of Economics AMSIB year 1
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Summaries Principles ofEconomics
Chapters: 1, 2, 3, 6, 7, 11, 14, 15, 16
Chapter 1: what is economics?
Economics is all about making decisions under scarcity. Scarcity are the limited nature of
society’s resources. The economic activity is how much buying and selling goes on in the
economy over a period of time. The economy are all the production and exchange activities
that take place.
The three key questions (of the economic problem):
1. What goods and services should be produced?
2. How should these goods and services be produced?
3. Who should get the goods and services that have been produced?
Resources:
Land: all-natural resources of the earth.
Iron ore, gold, oil, gas, fish, food from land
Labour: the human effort, both mental and physical that goes into production
Capital: the equipment and structures used to produce goods and services.
Machinery, buildings, transport, computers, etc.
Households and firms are faced with making choices. To get what we like, we usually have
to give up another thing that we might also like. We have to consider the benefits gained
from choosing one thing over another. The opportunity cost are the costwhatever must be
given up to obtain some item; the value of the sacrificed benefits.
Capitalist economic system: a system which relies on the private ownership of factos of
production to produce goods and services which are exchanged though a price mechanism
and where production is operated primarily for profit.
Market economy: an economy that addresses the three key questions of the economic
problem by allocating resources through the decentralized decisions of many firms and
households as they interact in markets for goods and services.
Market failure: a situation where scarce resources are not allocated to their most efficient
use.
Market power: the ability of a single economic agent to have a substantial influence on
market prices or output.
Externality: the cost or benefit of one person’s decision on the well-being of a bystander (a
third party) which the decision maker does not take into account in making the decision.
,Microeconomics is the study of how households and firms make decisions and how they
interact in markets and macroeconomics is the study of economy-wide phenomena,
including inflation, unemployment and economic growth.
Phillips curve: a curve that shows the short run trade-off between inflation and
unemployment.
Chapter 2: thinking like an economist
Falsifiability: the possibility of a theory being rejected as a result of a new observation or
new data.
A model is a representation of reality used as a means of helping and understand the real
world and for making informed decisions and judgements. Models will contain a number of
variables. An endogenous variable is a variable whose value is determined within the model
(income, taste, price of other goods). An exogeneous variable is a variable whose value is
determined outside the model (price).
A positive statement has claims in them which can be tested and confirmed or not. They
attempt to describe the world as it is.
Normative statements include opinions. They attempt to prescribe how the world should
be.
Chapter 3: the market forces of supply and demand
The terns supply and demand refer to the behavior of people as they interact with one
another in markets. A market is a group of buyers and sellers of a particular good or service.
The buyers determine the demand for the product and the sellers determine the supply of
the product.
Efficient outcome of supply and demand:
1. There are many buyers and seller in the market.
2. Each buyer and seller has perfect information.
3. No individual buyer and seller are big enough or had the power to be able to
influence price.
4. There is freedom of entry and exit to and from the market.
5. Goods produced are homogeneous.
6. Buyers and sellers act independently and only consider their own position in making
decisions.
7. There are clearly defined property rights which mean that producers and consumers
both take into account all costs and benefits when making decisions.
(Perfect) competitive market is a market in which there are many buyers and sellers so that
each has a negligible impact on the market price.
1. Many buyers and sellers
2. Homogenous product
3. Freedom of entry and exit
, 4. Transparency of information
Demand
Quantity of demand: the amount of a good that buyers are willing and able to purchase at
different prices.
Law of demand: the claim that, other things equal the quantity demanded of a good dalls
when the price of the good rises.
Demand schedule: a table that shows the relationship between the price of a good and the
quantity demanded.
Demand curve: a graph of the relationship between the price of a good and quantity
demanded.
Substitutes: two goods for which an increase in the price of one leads to an increase in the
demand of the other.
Complements: two goods for which an increase in the price of one leads to a decrease in the
demand for the other.
Normal good: a good for which an increase in income leads to an increase in demand.
Inferior good: a good for which an increase in income leads to a decrease in demand.
Supply
Quantity supplied: the amount of a good that sellers are willing and able to sell at different
prices.
Law of supply: the claim that the quantity supplied of a good rises when the price of a good
rises.
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