Principles of business and economics 1 exam preparations
About: chapters 1, 2, 3, 4, 7, 11, 12, 14, 19, 27, 29, 32, 37
Chapter 1: The big ideas
1. Incentives matter
Most acts are out of self-interest mainly, or at least have incentives.
2. Good institutions align self-interest with social interest
If by pursuing self-interest the social interest is served, good things happen and the
other way around.
3. Trade-offs are everywhere
a. Opportunity costs what are the costs of not being able to do something else
with your time. (the value of the opportunities lost)
b. if one decision is made, the advantages of other decisions will expire
4. Thinking on the margin
A little bit more or a little bit less? What is favourable? We all make decisions that
involve marginal thinking.
5. The power of trade
Is the power to increase productivity because of specialization (division of labour).
Also because of trade we can benefit from economies of scale and scope.
Comparative advantages can be utilized.
6. The importance of wealth and economic growth
A certain degree of wealth is the bases of all we care about and this wealth comes
with economic growth (we value hospitals and clean environments to live in highly)
7. Institutions matter
Institutions work based on incentives and create enormous amounts of wealth in the
form of innovations which creates wealth for them in the form of money and status
and power and all that stuff, but it also creates wealth as our lives are improved by
these developments.
8. Economic booms and busts can’t be avoided but can be moderated
The deviation from the average economic growth line can be moderated by the
governments and the central banks as they have the power to influence the
economic movements by changing interest rates and government spending within a
country. This cycle cannot be stopped however.
9. Prices rice if the government prints too much money
If there is more money available the prices for a good or service will rise as the
producer of this good will have to pay more for his goods as well, as there is more
money, if prices don’t rise, demand will be too high.
10. Central banking is a hard job
Predicting the economic movements and anticipating the right way at the right time
is a very difficult and impactful job.
,Chapter 2: The power of trade and comparative advantages
3 benefits of trade:
- Trade makes people better off when preferences differ
- Trade increases productivity through specialization and the division of knowledge
- Trade increases productivity through comparative advantage
Trade and preferences
A product can have more value to one person than to another. Trade allows us to create
value to both parties.
Example: I have an old skateboard and bought a new one, the old one is worth almost
nothing to me, but it is to someone that wants to skate but has no skateboard. By trading
the skateboard for money, value is created on both sides.
Specialization, productivity and the division of knowledge
The real power of trade is in specialization. Without trade, specialization can’t be afforded.
Specialization results in higher productivity and a better quality product.
The human brain is limited to a certain degree so it only makes sense to divide knowledge
over many so it stays accessible and is used to the fullest through specialization.
Comparative advantage
The third reason for trade is to take advantage of differences. Certain environments are
suited to produce certain goods so it wouldn’t make sense spending time on producing
something that someone else can produce better, cheaper and faster. Instead, you produce
the thing that you’re relatively best at.
Example: if Brazil produces 6 shirts for the same costs as it produces 1 computer and
America produces 1 shirt for the price it produces one computer for the logical thing to do is
to have America produce computers and Brazil shirts. This way more shirts and more
computers are created for the same price as before. Trade will give both countries more
shirts and computers than before.
Everyone has a comparative advantage.
Not everyone has an absolute advantage.
A production possibilities frontier shows all the possible product combinations that a
country can produce given its productivity and supply of inputs.
Trade and globalization
The reality of changing the production in a country is much different. Stopping the
production of a product brings a lot of costs with it. Globalization has done just that.
Because producing something overseas is cheaper and thus brings more value than it loses
but it does lose value because the production company in the country itself will most likely
go out of business if it can’t compete with the counties that have a comparative advantage.
, Chapter 3: Supply and Demand
The demand curve
If the price is high, the demand is lower.
If the price is low, the demand is higher.
If the product is of high value to you, you might be willing to pay a high price for it, but
others might not, so the demand is lower than when there is a low price and everyone can
find some value in the product for such a low price. Till some point where buying another
item would bring no more value than the cost price.
Consumer surplus
The money you don’t have to pay for a product that you were actually willing to pay for it. If
an apple is 40 cents and you were willing to pay 80 cents your consumer surplus is 40 cents.
Aggregated consumer surplus is the max price someone is willing to pay for the product
minus the actual price times the demand at the actual price, divided by 2.
What shifts the demand curve
- Income
- Population
- Price of substitutes
- Price of complements
- Expectations
- Tastes
Questions that should be asked: What makes people willing to buy a greater quantity of the
good? What makes people willing to pay a higher price for the good?
Goods can be divided into 2 categories:
- Inferior goods; a good for which demand decreases if income increases.
- Normal goods; a good for which demand increases if income increases.
