Introduction to Business and Economics
Part 1 Economics
Lecture 1 Introduction
Economics
• Economics is about all (economic) interaction between individuals, organizations and
governments. This is in a broad sense (di erent transactions, also without money).
• When this interaction increases in volume there is economic growth (interact more or have more
value).
• Economic growth is a relatively “new” phenomenon.
- Economic growth is measured through GDP (Gross Domestic Product per Person).
Since property rights (when you have something, it is yours and nobody can take it for you) there
is economic growth.
Wat causes poverty?
Nothing! It’s the starting point. The real question is what causes prosperity?
Why is there economic growth?
All economic growth should we because of productivity growth (produce more, in same amount of
time or the same in less time). In the end, economic growth is productivity growth.
Why is there productivity growth?
According to capitalist:
• Private property.
• Firms and markets.
• Technology, specialisation and e ciency.
We are all incentivised to act productive and e cient.
On a macro level
Often there is a con ict between e ciency (size of the pie) and inequality (division of the pie).
Economics and choices
• The economy is the sum of all individual choices of people and organisations.
• People make a tradeo between heir individual costs and bene ts. People think they are better
o after their choices than before/without.
• How do we make these choices?
- In traditional economics “rational” and “maximizing/ optimising” behavior is assumed.
- Nowadays lot of attention for “bounded rationality” (we can’t foresee all the options) and
“cognitive biases” (all biases that a ect our thinking).
• Governments use laws, rules and incentives to in uence our choices (they want to in uence our
behaviour).
The economic problem
• What has to be produced?
• How should this be produced?
• Who will receive the produced goods and services?
A capitalist answers the same at every question, it is determined by prices (the market).
Scarcity
Our wants are unlimited, our resources are not. This is called scarcity.
• For us (simple consumers) mostly time and money.
Because of scarcity we have to make choices. These choices creates competition. And
competition results in optimal allocation of resources. Because of optimal allocation of resrouces,
e ciency (and inequality) can be achieved.
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,Opportunity costs
• Scarcity results to choices and choices result in opportunity costs.
• “There is no such thing as a free lunch” (time and you miss out on your second choice).
• Opportunity cost: the “net value” of that second choice are your opportunity costs.
- The “net value” of that second choice are your opportunity costs.
- Net value = value of alternative - costs of alternative.
• Opportunity costs (should) a ect behaviour:
- What is the in uence of salary on behaviour?
- What is the true price of an Ikea closet, much more (it costs a lot of time, the money plus the
time if you take opportunity costs in notice).
Opportunity costs example 1
• You have won a free ticket for a concert of Adela (which you can’t sell).
• Rihanna will play on the same night and is your best alternative.
• A ticket to the concert of Rihanna costs 60 dollars.
• You are willing to pay a maximum of 80 dollars for the concert of Rihanna.
• Assume that there are no other costs to see either of the concerts. What are the opportunity
costs of attending Adele’s contest?
If you go to Rihanna, you were willing to pay 80 dollars (the ticket costs you 60 dollars). The net
value is 20. The opportunity cost are 20 dollars. You should go to Adele if the value of this choice
is higher than 20.
Opportunity costs
• For every choice:
• Value of that choice (utility/ happiness/ pro t), how to measure?
- Expliciet costs of that choice, what does it cost
- Implicit costs of that choose, what do I give up?
• We regard the implicit costs to be opportunity costs!
• Economic costs of a choice: explicit costs + implicit costs.
- Choice which has higher “value” than economic costs.
• Economic rent is the di erence between value and economic costs.
Opportunity costs example 2
• You have won a free ticket for a concert of Adele (which you can’t sell).
• You would have been willing to pay 60 to see Adele.
• Rihanna will play on the same night and is your best alternative.
• A ticket to the concert of Rihanna costs 60 dollars.
• You are willing to pay a maximum of 80 dollars for the concert of Rihanna.
• Assume that there are no other costs to see either of the concerts.
• Which concert should you visit, based on this information?
• What would be your economic rent?
The explicit costs for Adele are nothing (you won a free ticket). The implicit costs (opportunity
costs) of Adele are 20 dollars (80 - 60). The economic costs are thus 20 dollars. The value of
Adele is 60 dollars. The economic rent of Adele is 40 dollars (60 - 0 - 20).
The explicit costs for Rihanna are 60 dollars. The implicit costs are 60 dollars (you give up the
value of 60). The economic costs are thus 120 dollars. The value of Rihanna is 80 dollars. The
economic rent of Adele is -40 dollars (80 - 60 - 60). So you choose to go Adele.
Opportunity costs example 3 (important)
• You have won a free ticket for a concert of Adele.
• You would have been willing to pay 60 to see Adele.
• You can sell the ticket for 50 dollars.
• A ticket to the concert of Rihanna costs 60 dollars.
• You are willing to pay a maximum of 80 dollars for the concert of Rihanna.
• Assume that there are no other costs to see either of the concerts.
• Which concert should you visit, based on this information?
• What would be your economic rent?
The explicit costs for Adele are 50 dollars. If you decide not so sell it, you lose this 50 dollars. The
implicit costs for Adele are still 20 dollars. So the economic rent of Adele is -10 dollars (60 - 50 -
20).
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, The explicit costs for Rihanna are 60 dollars (price ticket). The implicit costs are 10 dollars (the
value of going to Adele (60 dollars) reduced by the costs of going to Adele (50 dollars). The
economic rent of Rihanna is 10 dollars (80 - 60 - 10). So you choose to go to Rihanna.
Opportunity costs
• What is the real price of buying a product?
- The alternative product you cannot buy.
- Relative prices!
- If a burger costs 4 dollar and a beer is 2 dollars.
- Price burger = 2 beers.
- Price beer = 1/2 burgers
• What is the real price of producing a certain product?
- The product you cannot produce because of that.
- If a rm can make 100 TV’s or 70 laptops in one hour:
- Price laptop: 10/7 TV.
- Price TV: 7/10 laptop.
Sunk costs
• Sunk costs: costs that cannot be recovered.
• Sunk costs fallacy: (wrongly) taking sunk costs into account in decision making.
• Sunk costs a ect our emotions, we experience them as losses.
• Rough rules:
- If previously incurred costs can no longer be reversed, you should not include them in your
current situations.
- If previously incurred costs can be (partially) recovered, you should include the costs to be
reversed as explicit costs in your current considerations.
Opportunity costs example 4
• You have bought a ticket for Adele for Adele for 50 dollars.
• You cannot re-sell this ticket.
• You would have been willing to pay 60 dollars to see Adele.
• Rihanna will play on the same night and is your best alternative.
• A ticket to the concert of Rihanna costs 60 dollars.
• You are willing to pay a maximum of 80 dollars for the concert of Rihanna.
• Assume that there are no other costs to see either of the concerts.
• Which concert would you visit, based on this information?
• What would be your economic rent?
For Adele the explicit costs are 0, going to Adele costs 0 (have bought a ticket for 50 dollars, but
you can’t get this money back so this are sunk costs which won’t be taken into account in your
decision making). The implicit costs of Adele are 20 dollars. The economic rent of Adele is 40
dollars (60 - 0 - 20).
For Rihanna the explicit costs are 60 dollars (costs of a ticket). The implicit costs are also 60,
because that’s the value of going to the concert of Adele. There are no costs involved in this
opportunity costs (because the 50 dollars are sunk costs and are not taken into account). So the
economic rent of Adele is -40 dollars (80 - 60 - 60). So you go to Adele.
Marginal analyses
• With opportunity costs we see which choose we should make between two alternatives.
• Another choice we have to make is: how much of something should we produce, buy or spend
our time on?
• We assume for now rational and optimising behavior.
- Which choice yields the highest outcome?
- In other words: what is the most e cient choice? Which quantity yields the highest pro t,
happiness, utility?
• For this we need marginal analysis.
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, Marginal analysis
• Marginal returns/ bene ts:
- What is the return/ bene t of one extra unit?
• Marginal costs:
- What are the costs of one extra unit?
• This is not always constant (usually not)!
- Diminishing/ increasing marginal costs/
bene ts.
• Opportunity costs should be taken into account.
• Most e cient point:
- Marginal returns = marginal costs.
- Or point closest to where MR > MC.
How much co ee you should drink?
At a price of 3,01 euro, you should drink 4 cups of
co ee.
Decision made at the margin
• How much should a rm produce?
• The marginal costs are rst decreasing
(schaalvoordelen). Until the point there is
maximum e ciency. The curve is increasing after
that point.
• So MR = MC is the most e cient point.
• There are still making pro t! But no maximal pro t.
The economic problem
• What has to be produced?
• How should this be produced?
• Who will receive the produced goods and services?
• Capitalism: market economy.
- The economic problem is “solved” using markets and prices.
- Society determines through demand what is produced and how this is produced. Individual
decisions op people and organisations.
- Invisible hand: prices in uence our opportunity costs and optimal choices.
- Governments: incentives to in uence prices.
Incentives (and unintended consequences)
• However, sometimes individual optimal choices “should” be in uenced.
• Incentives in uence behavior
- Prices, taxes, subsidies, bonuses (they think you are lazy), nudging.
• Policy incentives results in unintended consequences.
• Prikkels leiden tot onbedoelde consequenties:
- Kinderopvang in Israël (boete als je je kind te laat komt ophalen. Meer ouders kwamen
hierdoor te laat hun kind ophalen, mooi goedkoop).
- Permanente contracten.
- Hypotheekrente aftrek.
- Sociaal leenstelsel (mensen gaan minder snel studeren als je uit een lager milieu komt,
hierdoor wordt de sociale gelijkheid groter).
- Bank deposito garantiestelsel (als je bank valt dan krijg je je spaargeld terug. Hierdoor gingen
mensen hun geld in IJsland onderbrengen, omdat de rente hier laag is en er wordt meer
risico genomen. Deze mensen maken dat toch niet uit, want het risico is niet voor hen).
Lecture 2 Trade and exchange
Recap
• Prices determine economic behavior.
- Incentives and unintended consequences.
• Relative prices (not prices measured in money, but in terms of other goods, opportunity costs).
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