Summary lectures: introduction to economics and business economics
Lecture 1: introduction
Economics is about all economic interaction between individuals, organizations and
governments
Also, when no money is involved à ask something to do something for you, is also an
economic interaction (ask a friend to watch your children, so that you can do something else)
When this interaction increases in volume there is economic growth à economic growth is a
relatively new phenomenon à why is there growth now and not before? à property rights
à before if you had something it could be taken away, therefore people were not productive
and did not put in effort.
What causes poverty? à real question is what creates prosperity? à it all starts with property
rights (intellectual property rights, like patent, nobody can just steal your idea)
1. Why is there economic growth?
Because of productivity growth
2. Why is there productivity growth?
Capitalism: introduction of private property à firms and markets are able to exist à these
create technology, specialization and efficiency
There is often a conflict between efficiency and inequality à growing efficiency leads to
more inequality???
The economy is the sum of all individual choices of people and organizations à people make
a tradeoff between their individual costs and benefits à make the choice if their life is better
after making the choice than before the choice
How do we make choices?
- In traditional economics ‘rational’ and ‘maximizing/optimizing’ behavior is assumed
- Nowadays more attention for ‘bounded rationality’ à we want to be fully rational
however we are not able to. ‘cognitive biases’ à all biases that affect our thinking,
we think we make a rational choice, but it is not.
Governments use laws, rules and incentives to influence our choices:
Policy à incentives à unintended consequences
Incentives influence behavior (prices, taxes, subsidies, nudging) à sometimes unintended
consequences
The economic problem:
- What has to be produced? (based on prices)
- How should it be produced?
- Who will receive the produced goods and services?
All these answers to these questions are determined by prices and government (capitalism
more prices and socialism more government)
,In capitalism: this economic problem is solved using markets and prices
Society determines through demand what is produced and how this is produced à individual
decisions of people and organizations
Invisible hand à prices influence our opportunity costs and optimal choices
Our wants are unlimited, and our resources are not à scarcity (schaarste) à because of
scarcity we have to make choices à making choices creates competition à because of
competition there is optimal allocation of resources (in this competition quality goes up and
prices go down) à this leads to efficiency, however also inequality (inequality not
necessarily bad)
Trickle-down economics à idea is that the rich get richer, spend more, pay more taxes etc.
and in the long run this makes the poorer people wealthier because of this spending.
Scarcity à choices à opportunity costs
Opportunity costs: the ‘net value’ of that second choice
Opportunity costs affect behavior:
- what is the influence of salary on behavior?
- The line in the supermarket à taking a lot of time to get a small discount, or just
leaving it and saving time
- An Ikea closet is in reality a lot more expensive then it says on the price tag à you
have to drive there and put it together yourself, it takes a lot of time
- More participating in online lectures than before physically à less choices to make
for things you have to do and no traveling time
‘there is no such thing as a free lunch’ à even when you get something for free you spend
time, and this is the opportunity costs à you miss out on the other thing you otherwise would
be doing
For every choice:
- Value of that choice à how to measure?
- Explicit costs of that choice à what does it cost?
- Implicit costs of that choice à what do I give up (opportunity costs)
- Economic costs of a choice à explicit + implicit (opportunity)
What choice to make? The one which has a higher ‘value’ than economic costs
- Economic rent: difference between ‘value’ and ‘economic costs’
What is the real price of buying a product:
- The alternative product you cannot buy
- Relative price
What is the price of producing a certain good:
- The product you cannot produce because of that
Sunk costs:
Sunk costs à costs that cannot be recovered
Sunk cost fallacy à wrongly taking sunk costs into account in decision making
Sunk costs affect our emotions, we experience them as losses
,Marginal analyses: which choice gives the highest outcome (MO=MK) how much of
something should we produce or buy?
Marginal returns/benefits: what is the benefit of one extra unit?
Marginal costs: what are the costs of one extra unit?
This is not always constant: diminishing/increasing marginal costs/benefits
Most effective point: marginal benefit = marginal costs à or point closest to where MB>MC
Lecture 2: trade and exchange
Economic growth: the size of the economy is measures using ‘gross domestic product’
(GDP) à sum of all income/all value added in an economy a certain period
Economic growth à growth of GDP per capita
- Productivity influences this
Where does productivity growth come from? à private property
- Protection
- Tangible and intangible
Production à income à demand (production influences how much income someone
receives, and the income influences how high the demand is)
GDP per capita à income for one person
Correct it for inflation à real GDP per capita
GDP per capita corrected for PPP à different valuta
How can trade and exchange influence productivity and in turn influence the GDP?
Division of labor & specialization good for productivity growth:
, - Learning by doing
- Using skill and differences
- Using price differences
- Economies of scale
In a market economy nobody is self-sufficient à productivity increases when people
specialize à they should specialize in what they are relatively good at (opportunity costs) à
everybody produces more than they need à only possible if the surplus can be sold on
markets
The more trade and exchange on markets à the more specialization is possible à the
higher the productivity à the higher the welfare (the richer we are)
Comparative advantages à the real cost of producing cars is the wine that must be
sacrificed to produce it (opportunity costs)
Opponents free trade:
Trade leads to specialization. However, there will be winners and losers:
- Winners: everybody involved in production of goods for which the country does have
comparative advantages & everybody else through lower prices.
- Losers: everybody involved in production of goods for which the country does not
have comparative advantages
Lecture 3: markets
Price somewhere between internal opportunity costs of each actor
Comparative advantage shows us who should produce what à specialize in what they are
relatively good at (lowest opportunity costs)
This leads to supply and demand which need to come together à we need markets
Standard economics: perfect markets à only works with the following assumptions:
- Homogeneous goods (every good is the same, only differ in price)
- No market power (no one is powerful enough to influence prices, the prices are given)
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