Economics and Business - (Complete Summary. 2nd Period, 2019)
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Economics and business
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Cambridge University (CAM)
Arguments covered in this document of Economics:
THE PRINCIPLE AND PRACTICE OF
ECONOMICS
ECONOMIC METHODS AND ECONOMIC
QUESTIONS
OPTIMIZATION, DOING THE BEST YOU CAN
DEMAND, SUPPLY AND EQUILIBRIUM
CONSUMERS AND INCENTIVES
SELLERS AND INCENTIVES
PERFECT COMPETITION AND...
ECONOMICS AND BUSINESS
Complete Summary (2nd, period – 2019)
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,ECONOMICS AND BUSINESS 2
Economics and Business
THE PRINCIPLE AND PRACTICE OF ECONOMICS
1. The Scope of Economics
Economic Agents and Economic Resources
An economic agent is an individual or a group that makes choices. (e.g. a consumer
chooses to eat a bacon cheeseburger or tofu burgers). Note: it doesn’t have to be an
individual, it can be a government, a firm, an university,…
Scarce resources are things that people want, where the quantity that people want
exceeds the quantity that is available. Scarcity is the situation of having unlimited wants
in a world of limited resources. Definition of Economics
Economics is the study of how agents choose to allocate scarce resources and how
those choices affect society – their multiple consequences around the world.
Positive Economics and Normative Economics
Economics can be divided into two categories:
1. Positive economics is the analysis that generates objective descriptions or
predictions about the world that can be verified with date. It describes what
people actually do, what has happened and predict what will happen.
2. Normative economics is the analysis that prescribes what an individual or
society ought to do, it generates advices both for individuals and society in
general.
,ECONOMICS AND BUSINESS 3
Microeconomics and Macroeconomics
Microeconomics is the study of how individuals, households, firms, and governments
make choices, and how these choices affect prices, the allocation of resources and the
well-being of other agents.
Macroeconomics is the study of the economy as a whole; it studies economy-wide
phenomena, like the growth rate of a country’s total economic output, the inflation rate,
or the unemployment rate.
2. Three Principles of Economics
1. The 1st Principle: Optimization
Optimization is trying to choose the best feasible option, given the available
information (Feasible options are those that are available and affordable to an economic
agent). People calculate pros, benefits, and cons, costs, before taking decisions.
Optimization means that we weigh the potential risks in a decision, not that we
perfectly foresee the future. A rational decision requires the logical approach to the
costs, benefits and risks associated with a decision. It is important to note that what we
optimized may vary and therefore the decision too.
Trade-Offs and Budget Constraints
Trade-Offs occurs when an economic agent must give up something to acquire
something else. For example, if you spend an hour on Facebook, you won’t be able to
spend it at a part-time job and therefore you gave that up.
A budget constraint shows the bundles of goods or services that a consumer can choose
given her limited budget. For example, if you have 5 free hours to either spend on
Facebook or at a part-time job, your budget constraint is 5 hours. In these hours, you’ll
have to trade-off either your part-time job or Facebook. Opportunity Cost
The opportunity cost refers to the best alternative use of a resource. For example,
assume that your family is taking a vacation over spring break. Your choices are a
Caribbean cruise, a trip to Miami, or a trip to Los
Angeles. (Assume that they all have the same monetary cost and use the same amount
of time.) If your first choice is the cruise and your second choice is Miami, then your
opportunity cost of taking the cruise is the Miami trip.
, ECONOMICS AND BUSINESS 4
Cost-Benefit Analysis
The cost-benefit analysis is a calculation that adds up costs and benefits using a
common unit of measurement, like dollars. It is used to identify the alternative that has
the greatest net benefit, which is equivalent to benefits minus costs.
2. The 2nd Principle: Equilibrium
Equilibrium is the special situation in which everyone is simultaneously optimizing, so
nobody would benefit personally by changing his or her own behavior. For example,
when grocery shopping if one checkout line is longer, the optimizer will avoid it.
However, if it is short it will favorize it. In an equilibrium, all lines
are as fast, so no lines are better. In equilibrium Out of equilibrium The Free-Rider
Problem In equilibrium, everyone is
The Free-Rider Problem define a problem when someone gets the benefit of a good or
service without incurring the cost of it. At a small case, these people will probably not
cause much problem. However, if too many people do it, the whole system might fail.
For example, if in a group work of 5 people, 1 person doesn’t do the work, the grade
will probably be the same as the other 4 will compensate for it. However, if 3 people
don’t do the work, the other 2 won’t be able to compensate.
3. The 3rd Principle: Empiricism
Empiricism is an analysis that uses data. Economists use data to test theories and to
determine what is causing things to happen in the world. They try to confirm that the
theories they came up with are actually what people do. They also try to research the
causation of events. However, sometimes this is hard to do. For example, Hot days and
crowded beaches tend to occur at the same time of the year. It is, of course, that hot
days cause people to go swimming. It is not that swimming causes the outside air
temperature to rise. Does being relatively smart cause people to go to college? Or does
going to college cause people to be relatively smart? Or do both directions of causation
apply?
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