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Economics of the Global Era Summary

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Economics For The Global Era

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Vrije Universiteit Amsterdam (VU)

Summary of course lectures

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Economics for the Global Era Summary
Chapter 1:

Key ideas:
 Economics is the study of people’s choices
 The first principle of economics is that people try to optimize; they try to choose the
best available option
 The second principle of economics is that economic systems tend to be in
equilibrium, a situation in which nobody would benefit by changing his or her
behavior.
 The third principle of economics is empiricism, Analysis that uses data. Economists
use data to test theories and to determine what is causing things to happen in the
real world.

Competitive market:
 Buyers and Sellers can not affect the market price (Price takers)

Individual demand – Aggregate demand

WTP = Willingness to pay

Macro-economics:
The study of the whole economy

Micro-economics:
The study of individuals, firms, governments

Economics studies how agents make choices among scarce resources and how those choices.

Economic Agent: Any group or individual that makes choices, such as consumers, firms,
parents, politicians, etc.
The Free Rider Problem: Exists when an individual or group is able to enjoy the benefits of a
situation without incurring the costs.

Chapter 2:
Key ideas:
1. A model is a simplified description of reality.
2. Economists use data to evaluate the accuracy of models and understand how the
world works.
3. Correlation is not the same thing as causality.
4. Experiments help economists to measure cause and effect.
5. Economic research focuses on questions that are important to society and can be
answered with models and data

,Scientific Method model (Empiricism):
The scientific method (also referred to as empiricism) is composed of two steps:
1. Developing models that explain some part of the world
2. Testing those models using data to see how closely the model matches what we
actually observe

Two important features of models:
1.They are not exact.
2.They generate predictions that can be tested with data

Causation: We speak of causation when one thing directly affects the other.
Example: pulling an all-nighter will make you tired

Correlation: We speak of correlation when two or more things are related to each other.
You can have a positive or negative correlation.
Example: shorter skirt lengths are associated with good economic conditions

Why isn’t correlation the same thing as causality?
1. Omitted variables: If we ignore something that contributes to cause and effect, then
that something is an omitted variable. A correlation might not make sense until the
omitted variable is added.
2. Reverse causality: Reverse causality is when there is cause and effect, but it goes in
the opposite direction as what we thought. (Example: gambling and healthy people)

How can we tell the difference?:
1. Controlled Experiments: subjects are randomly put into treatment (something
happens) and control (nothing happens) groups by the researcher.
2. Natural Experiments: subjects end up in treatment or control groups due to
something that is not purposefully determined by the researcher.

Chapter 3:

Optimizing in Levels:
1. Express all costs and benefits in the same unit (like $)
2. Calculate total net benefit (benefits – costs) for each option
3. Choose the option with the highest net benefit

Principle of Optimization at the Margin:
If an option is the best choice, you will be made better off as you move toward it, and worse
off as you move away from it.

,Example:

Optimizing in Differences:
1. Express all costs and benefits in the same unit.
2. Calculate how the costs and benefits change as you move from one option to
another.
3. Apply the Principle of Optimization at the Margin—choose the option that makes
you better off by moving toward it, and worse off by moving away from it.

Chapter 4:

Key ideas:
1. In a perfectly competitive market, (1) sellers all sell an identical good or service, and
(2) any individual buyer or any individual seller isn’t powerful enough on his or her
own to affect the market price of that good or service.
2. The demand curve plots the relationship between the market price and the quantity
of a good demanded by buyers.
3. The supply curve plots the relationship between the market price and the quantity
of a good supplied by sellers.
4. The competitive equilibrium price equates the quantity demanded and the quantity
supplied.
5. When prices are not free to fluctuate, markets fail to equate quantity demanded and
quantity supplied.

 The market price is the price at which buyers and sellers conduct transactions.
 In a perfectly competitive market every buyer pays and every seller charges the
same market price, no buyer or seller is big enough to influence that market price,
and all sellers sell an identical good or service.

Market Demand Curve: The sum of the individual demand curves of all the potential
buyers. The market demand curve plots the relationship between the total quantity
demanded and the market price, holding all else equal.

, Reasons for shifts of the Demand Curve:
1. Tastes and preferences (Fan of luxury goods or student saving money)
2. Income and wealth (Higher income vs. low income)
3. Availability and prices of related goods (Luxury goods, extremely scarce goods are sold
for higher prices because they are harder to come by)
4. Number and scale of buyers (More buyers = more products to spread the production costs
across)
5. Buyers’ expectations about the future (Pessimistic vs. Optimistic view on the future)

Reasons for shifts across the demand curve:
1. Change in price of product (The demand curve does not move, but the demand for the
product changes when the product gets cheaper or more expensive)

Excess Demand: Occurs when consumers want more than suppliers provide at a given
price. This situation results in a shortage.

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