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The Economy CORE Book Summary
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Summary of the book The Economy, used for my economics class. This summary also contains some key chapters about Gregory Mankiw: Macroeconomics.
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Resumen Economia ParcialChapter 1: The capitalist revolution
1.8: The gains from specialization
Specialization: B ecome better at producing things when we each focus on a limited range of
activities. Division of labour. This is because:
● Learning by doing: We acquire skills as we produce things.
● Difference in ability: For reasons of skill, or natural surroundings such as the quality
of the soil, some people are better at producing some things than others.
● Economies of scale: Producing a large number of units of some good is often more
cost-effective than producing a smaller number.
People will not specialize unless they have a way to acquire the other goods they need.
The division of labour in firms:
Large numbers of people, each with distinct skills and capacities, contribute to a common
outcome, the product.
The firm thus facilitates a kind of cooperation among specialized producers that increases
productivity.
All producers can benefit by specializing and trading goods, even when this means that one
producer specializes in a good that another could produce at lower cost.
Markets, specialization and comparative advantage:
Markets: Unintended cooperation on a global scale. Competition.
Absolute advantage: A person or country has this in the production of a good if the inputs it
uses to produce this good are less than another person or country.
Comparative advantage: A person or country has comparative advantage in the production
of a particular good, if the cost of producing an additional unit of that good relative to the
cost of producing another good is lower than another person or country’s cost to produce
the same two goods.
Greta has an absolute advantage in both goods but Carlos has a comparative advantage in
producing Apples.
If they specialize and trade, total production of both crops will be higher than it was under
self-sufficiency.
,Chapter 3: Scarcity, work and choice
3.1: Labour and Production
Production function: It translates the number of hours per day spent studying (his input of
labour) into a percentage grade (his output).
Alexei can achieve a higher grade by studying more, so the curve slopes upward. At 15 hours
of work per day he gets the highest grade he is capable of, which is 90%. Any time spent
studying beyond that does not affect his exam result (he will be so tired that studying more
each day will not achieve anything), and the curve becomes flat.
Average Product: Total output divided by a particular input, for example per worker (divided
by the number of workers) or per worker per hour (total output divided by the total number of
hours of labour put in).
Marginal product: The additional amount of output that is produced if a particular input was
increased by one unit, while holding all other inputs constant.
Diminishing returns: A situation in which the use of an additional unit of a factor of
production results in a smaller increase in output than the previous increase.
3.2: Preferences
Indifference curve: A curve of the points which indicate the c ombinations of goods that
provide a given level of u tility to the individual.
● Points on the same indifference curve have the same utility.
● Indifference curves slope downward due to trade-offs: If you are indifferent between
two combinations, the combination that has more of one good must have less of the
other good.
● Higher indifference curves correspond to higher utility levels: As we move up and to
the right in the diagram, further away from the origin, we move to combinations with
more of both goods.
● Indifference curves are usually smooth: Small changes in the amounts of goods
don’t cause big jumps in utility.
● Indifference curves d o not cross
● As you move to the right along an indifference curve, it becomes flatter.
,Marginal rate of substitution (MRS): The trade-off that a person is willing to make between
two goods. How many units of X would be considered by a given consumer group to be
compensation for one less unit of Y.
● The MRS is just the s lope of the indifference curve, and it falls as we move to the
right along the curve.
● For example, a consumer who prefers oranges to apples may only find equal
satisfaction if she receives three apples instead of one orange.
3.3 Opportunity cost:
Opportunity Cost: W hen taking an action implies forgoing the next best alternative action,
this is the net benefit of the foregone alternative. The amount of the alternative not chosen.
Economic Rent: A payment or other benefit received above and beyond what the individual
would have received in his or her next best alternative. Enjoyment - economic cost.
● Economic cost: S um of out-of-pocket and opportunity cost.
3.4: The Feasible Set
Feasible frontier: T
he curve made of points that defines the maximum feasible quantity of
one good for a given quantity of the other. It shows the M
RT.
● For example, the highest grade he can achieve given the amount of free time he
takes
, - B is not feasible, D is feasible but not optimum. By choosing a combination inside the
frontier, you are giving up something that is freely available → No opportunity cost.
- At point E, Alexei could transform one unit of time into 3 grade points. The marginal
rate at which he can transform free time into grade points is 3.
Marginal rate of transformation (MRT): T he quantity of some good that must be sacrificed
to acquire one additional unit of another good. At any point, it is the slope of the feasible
frontier. The number of units of good X that will be foregone in order to produce an extra
unit of good Y.
3.5: Decision making and scarcity
● The slope of the indifference curve is the MRS: It is the trade-off he is willing t o
make between free time and percentage points.
● The slope of the feasible frontier is the MRT: I t is the trade-off that he is constrained
to make between free time and percentage points because it is not possible to go
beyond the feasible frontier.
Scarcity - Make a choice. Limited.
Highest possible utility where the two trade-offs just balance. M
RS=MRT
● MRS = Slope of the Indifference Curve.
● MRT = Opportunity cost of free time. Slope of Feasible Frontier. Equal to the marginal
product of labour.
3.6: Hours of work and Economic Growth
New technologies:
● Raise the productivity of labour.
● Increase marginal product of labour.
● At every point, an additional hour of work produces more output than before.
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