Summary of the textbook chapters 1-6
lecture notes incorporated into textbook summaries
Textbook
Bade and Parkin. 2011. Essential Foundations of Economics, 7th Edition. Pearson International Education.
,Definitions
Scarcity
Wants exceed resources
o The available resources needed to satisfy the needs
Called problem of scarcity
o What economics deals with
o This is the starting point for economics
Economics
Definition
Definition 1
Social science that both
o Deals with the problem of scarcity
o Studies how rational individuals, businesses, and government
make rational decisions and organize themselves.
Also deals with
o Optimization
o Influences
o Constraints
Definition 2
The social science that studies the choices made by
o Individuals
o Businesses
o Governments
o Entire societies make
As they cope with
o Scarcity
o The incentives that influence those choices
o The arrangements that coordinate those choices
,Micro Economics
Definition
The study of
o The choices made by
Individuals
Businesses
o The way these choices
Interact with the government
Are influenced by governments
Explained
Choices made on an individual level
o Within a business
Macro affects micro
Government is an economic agent
o Little business
Buys stationary
Marco Economics
Definition
The study of the aggregate/total effects
o On both
The national economy
The global economy
o Caused by choices made by
Individuals
Businesses
Governments
Explained
Micro effects macro
Total effect of decisions
o On the nation
o Worldwide
Interest
Self-interest
The choices that are best for the individual who makes them.
Social interest
The choices that are best for society as a whole
,Economic Ideas
Summary
6 Ideas define the economic way of thinking
A choice is a tradeoff
People make rational choices by comparing benefits and costs
Benefit is what you gain from something
Cost is what you must give up to get something
Most choices are “how much” choices made at the margin
Choices respond to incentives
Tradeoff
Definition
An exchange
o Giving up one thing
o In order to get something else
Example
Giving up one thing
o A night out partying
In order to get something else
o A night studying
,Rational Choice
Definition
A choice that
o Uses the available resources
o To best achieve the objective
Of the person making the choice
Only that person is relevant
Their wants
Their needs
How they are made
By weighing the costs VS benefits
o Analysing the margins
See below for details on margins
o Benefit= Gain
Good rational choice
Costs are less than benefits
Marginal benefits exceed marginal costs
Benefit
Definition
The benefit of something is the gain or pleasure that it brings
Measured as
The most a person
o Is willing to give up
o In order to get something
,Opportunity cost
Definition
The loss of potential gain
o From other alternatives
o When one alternative is chosen
Idle cash balances
Represent an opportunity cost
In terms of lost interest
Measuring Opportunity Cost
Benefit measured by what you are willing to give up for it
The opportunity cost of X= the best thing you must give up to get X
Example
Have R10
Can buy a coke or Fanta
o Cost R7 each
Buying one makes buying the other impossible
o That’s the opportunity cost
,Margin
Definition
Making a choice at margin
A choice is by
o Comparing all the relevant alternatives both
Systematically
Incrementally
Explained
Talking about “one unit extra”
o One extra laptop VS one extra employee
Weigh up the costs & benefits of each
To make a rational decision
Marginal Cost
Definition
The opportunity cost
o That arises from a one-unit increase in an activity
The marginal cost of X
o Is what you must give up
o In order to get one additional unit of X
Marginal Benefit
Definition
The benefit
o That arises from a one- unit increase in an activity.
The marginal benefit of X
o Is what you are willing to give up
o In order to get one additional unit of X
Incentive
Definition
A reward or a penalty that either
o Encourages an action
Marginal benefits
o Discourages an action
Marginal costs
Incentives change
Changes in either
o Marginal benefit
o Marginal cost
Changes the incentives
Can result in a different choice
, Sunk cost
Definition
Cost one doesn’t consider when making the decision
Irreversible
Examples
Example 1
Movie at theatre
Bad movie
Already paid
o Can’t get money back
Therefore it is the sunk cost
Example2
Have 2 options
o Each option has a cost
Choose option 1
o Pay option1’s cost
Then decide to do option 2
o Realize its better
Option1’s cost is the sunk cost
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