Samenvatting
Samenvatting Principles Of Economics (5181V8EC)
- Instelling
- Universiteit Leiden (UL)
Samenvatting Principles Of Economics (5181V8EC) ALL Readings for the Entire Principles of Economics Course
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Principles of Economics CompilationDocument
Contents
Principles of economics: macroeconomics ............................................................................................. 2
1. First principles ............................................................................................................................. 2
2. Economic models: trade-offs and Trade ..................................................................................... 3
3. Supply and demand .................................................................................................................. 13
4. Price controls and quotas: meddling with markets .................................................................. 25
5. Price Controls and Quotas: Meddling with Markets................................................................. 25
“Caught in the Middle of the Trade War,” – Natalie Kitroeff ............................................................... 31
Formulas principles of economics chapter 10 and 12 .......................................................................... 39
Chapter 10......................................................................................................................................... 39
Chapter 12......................................................................................................................................... 39
,Principles of economics: macroeconomics
1. First principles
Goals:
- What four principles guide the choices made by individuals?
- What five principles govern how individual choices interact?
- What three principles illustrate economy-wide interactions?
Every economic issue involves, at its most basic level, individual choice—decisions by an individual
about what to do and what not to do. In fact, you might say that it isn’t economics if it isn’t about
choice. (Individual choice is the decision by an individual of what to do, which necessarily involves a
decision of what not to do.)
The Principles of Individual Choice:
- People must make choices because resources are scarce.
o A resource is anything that can be used to produce something else.
o Resources are scarce—not enough of the resources are available to satisfy all the
various ways a society wants to use them.
- The opportunity cost of an item—what you must give up in order to get it—is its true cost.
o The real cost of an item is its opportunity cost: what you must give up in order to get
it.
- “How much” decisions require making trade-offs at the margin: comparing the costs and
benefits of doing a little bit more of an activity versus doing a little bit less.
o You make a trade-off when you compare the costs with the benefits of doing
something.
o Decisions about whether to do a bit more or a bit less of an activity are marginal
decisions.
o The study of such decisions is known as marginal analysis.
- People usually respond to incentives, exploiting opportunities to make themselves better
off.
o An incentive is anything that offers rewards to people to change their behaviour.
Interaction of choices—my choices affect your choices, and vice versa—is a feature of most
economic situations. The results of this interaction are often quite different from what the
individuals intend.
The Principles of the Interaction of Individual Choices
- There are gains from trade.
o In a market economy, individuals engage in trade: they provide goods and services
to others and receive goods and services in return.
o There are gains from trade: people can get more of what they want through trade
than they could if they tried to be self-sufficient.
o This increase in output is due to specialization: each person specializes in the task
that he or she is good at performing.
o The economy, as a whole, can produce more when each person specializes in a task
and trades with others.
- Because people respond to incentives, markets move toward equilibrium.
, o An economic situation is in equilibrium when no individual would be better off doing
something different.
- Resources should be used as efficiently as possible to achieve society’s goals.
o An economy is efficient if it takes all opportunities to make some people better off
without making other people worse off.
o Equity means that everyone gets his or her fair share. Since people can disagree
about what’s “fair,” equity isn’t as well defined a concept as efficiency.
- Because people usually exploit gains from trade, markets usually lead to efficiency.
- When markets don’t achieve efficiency, government intervention can improve society’s
welfare.
The Principles of Economy-Wide Interactions
- One person’s spending is another person’s income.
- Overall spending sometimes gets out of line with the economy’s productive capacity.
- Government policies can change spending (macroeconomic policy).
2. Economic models: trade-offs and Trade
Goals:
- What are economic models and why are they so important to economists?
- How do three simple models—the production possibility frontier, comparative advantage,
and the circular-flow diagram—help us understand how modern economies work?
- Why is an understanding of the difference between positive economics and normative
economics important for the real-world application of economic principles?
- Why do economists sometimes disagree?
A model is a simplified representation of a real situation that is used to better understand real-life
situations.
equal assumption means that all other relevant factors remain unchanged.
The production possibility frontier illustrates the trade-offs facing an economy that produces only
two goods. It shows the maximum quantity of one good that can be produced for any given quantity
produced of the other.
The production possibility frontier illustrates
the trade-offs Boeing faces in producing
Dreamliners and small jets. It shows the
maximum quantity of one good that can be
produced given the quantity of the other
good produced. Here, the maximum
quantity of Dreamliners manufactured per
year depends on the quantity of small jets
manufactured that year, and vice versa.
Boeing’s feasible production is shown by the
area inside or on the curve. Production at
point C is feasible but not efficient. Points A
and B are feasible and efficient in
production, but point D is not feasible.
, Efficiency:
- efficient in production.
- efficient in allocation.
Increasing opportunity cost
The bowed-out shape of the production possibility
frontier reflects increasing opportunity cost. In this
example, to produce the first 20 small jets, Boeing
must forgo producing 5 Dreamliners. But to produce
an additional 20 small jets, Boeing must forgo
manufacturing 25 more Dreamliners.
Economic growth is the growing ability of the economy to produce goods and services
Economic growth
Economic growth results in an outward shift of the
production possibility frontier because production
possibilities are expanded. The economy can now produce
more of everything. For example, if production is initially at
point A (25 Dreamliners and 20 small jets), economic growth
means that the economy could move to point E (30
Dreamliners and 25 small jets).
Factors of production are resources used to produce goods and services.
Technology is the technical means for producing goods and services.
production possibilities for two countries
Here, both the United States and Brazil have a constant opportunity cost of small jets, illustrated by
a straight-line production possibility frontier. For the United States, each small jet has an
opportunity cost of 3⁄4 of a large jet. Brazil has an opportunity cost of a small jet equal to 1⁄3 of a
large jet.
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