Chapter 1: What is economics?
Defining economics and distinguishing its multiple forms
Living is all about making choices, seeing that not everything is always to our disposal. This is called
scarcity. Economics is the social science that studies the choices that individuals, businesses, and
governments make to cope with scarcity and incentives that influence and reconcile those choices.
Economics is divided in:
- Microeconomics: which includes the study of choices that individuals make (why are people
downloading more music?);
- Macroeconomics: which includes the study of performance of the national economy and the
global economy (why is the unemployment rate so high?).
Surplus: difference between how you benefit from a product and the cost of the product (you decide
because there is a surplus).
This summary handles two major questions including:
1. How do choices end up determining what, how, and from whom goods and services (objects
that people value and produce to satisfy wants) get produced?
- What? What we produce changes over time, technology has great influence on what’s produced.
- How? These goods and services are produced by using factors of production (resources), which
includes 4 categories:
1. Land (natural resources such as: oil, ore, gas, and air);
2. Labor (the work time and effort that people devote to producing goods and services. Quality
of this labor depends on human capital, including knowledge and skill of workers);
3. Capital (tools, instruments, and machines that businesses use);
4. Entrepreneurship (the human resource that manages the land, labor, capital, and makes
managerial decisions).
- From whom? Who are getting the goods and services that are produced, depend on the incomes
that people earn. People earn income through:
Land - rent;
Labor - wages (earns most);
Capital - interest;
Entrepreneurship - profit.
The second major question is:
2. When do choices made in the pursuit of self-interest also promote the social interest?
- Self-interest: most choices made, are in your self-interest;
- Social interest: a decision is in social interest, when the outcome is best for the society;
- Efficiency and the social interest: efficiency means that something is not possible to be
improved;
- Fair shares and the social interest: determining if profit is divided with fair shares.
Questions regarding social interest
Questions of social interest are hard ones to answer. Hence, we will take four topics for example:
- Globalization: the expansion of international trade, borrowing and lending, and investments;
- The information-age monopolies: meaning the technological change of the past 40 years
(information revolution).
- Climate change (choices concerning the use of fossil fuels and generating emissions);
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, - Economic instability (banks offering low interest rates and creating a lending spree causing the
economic crisis of 2008).
Before economists can answer the question if the social-interest is being served, we need to look into
the six key ideas of thinking of the economist:
A choice is a trade-off
With choosing in a situation of scarcity, one can see a choice as a trade-off. A trade-off is an exchange –
giving up one thing to get something else;
Making a rational choice
Economists view the choices you make as rational, meaning a choice that compares cost and benefits,
and achieves the greatest benefit over cost for the person making the choice.
Benefit: what you gain
The benefit of something is the gain or pleasure that it brings and is determined by preferences.
Economists measure benefit as the most that a person is willing to give up to get something.
Cost: what you must give up
The opportunity cost of something is the highest valued alternative that must be given up to get it.
Meaning if you go to a university, the opportunity costs includes money, and time you spend there.
How much? Choosing the margin
The choice covered in the previous key idea is not all-or-nothing. You compare the benefit from studying
and the grade, and thus decide at the margin. The benefit that arises from an increase in activity is called
the marginal benefit. The marginal cost is thus the fact you cannot party with friends when you study.
Choices respond to incentives
The central idea of economists is that we can predict the self-interested choices that people make by
looking at the incentive they face. Meaning that if your lecturer gives you a mock exam that hardly
resembles the real exam, the marginal benefit (incentive) is low.
Economics is a social science and toolkit for advising on policy decisions. Because of this, economists
want to distinguish between positive statements, and normative statements.
- Positive statements: says what is currently believed about the way the world operates. We can
test them by checking it against the facts
- Normative statements: say what ought to be. They depend on values and cannot be tested
Economists are particularly interested in positive statements about cause and effect relationships. To
answer those type of questions, they must create and test economic models (description of some aspect
of the economic world that includes only those features that are needed for the purpose at hand).
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,Chapter 1: Graphs in Economics
Studying and interpreting graphs accordingly
Graphing data
A graph represents a quantity as a distance as seen in figure 1.
Each axis has a zero point, which is shared by two axes. This
common zero point is called the origin. We can draw two lines,
called coordinates. One, called the Y -coordinate, and the other
called the X-coordinate.
Scatter diagram
A scatter diagram plots the v alue of one variable against the
value of another variable for several dif ferent values of each
valuable. The break in figure 2 skips from 0 to 100 to make the
graph clearer. With this break, graphs could become lying by applying a break in a
misleading way. An economic model is a stripped -down,
simplified description of an economy or of a component
of an economy such as a business or a household.
Variables that move in the same direction
A relationship in which two variables move in the same
direction is called a positive relationship or a direct
relationship. But all the lines in these three graphs – no
matter whether it is straight or curved – is called a curve. A
relationship shown by a straight line is called a linear relationship.
Variables that move in opposite directions
A relationship between variables that move in opposite
directions is called a negative relationship or an inverse
relationship.
The slope of a relationship
In figure 3, we can measure the influence of one variable
on another by the slope of the relationship. The slope of
a relationship is the change in the value of the variable
measured on the Y-axis divided by the change in the
value of the variable measured on t he X-axis. This
equation applies to a straight line as shown in figure 3.
The slope of a curved line can be calculated by taking a p oint
or the slope across an arc. Both examples shown in the graph:
The ceteris paribus
The ceteris paribus (often written l ike cet. or par.) means ‘if all
other relevant things remain the same’’.
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, Chapter 3: Demand and Supply
Describing multiple types of markets
A market is any arrangement that enables buyers and sellers to get information and to do business with
each other. A market consists of 2 sides including buyers and sellers and knows 4 forms:
- Goods (apples and boots);
- Services (haircuts and piano lessons);
- Resources (computer programmers);
- Inputs (memory chips and car parts).
In this summary, we will discuss the competitive market – a market that has many buyers and sellers, so
no single buyer or seller can influence the price. In everyday life, the price of an object is the number of
pounds or euros that must be given up in exchange for it. This type of price is called the money price.
The opportunity cost of an action is the highest valued alternative. For example, if you buy a coffee,
chocolate is the highest valued alternative that you miss. Therefore, the amount of chocolate is the
opportunity cost. We will show this example below:
Coffee $3
Chocolate $1
Opportunity c. 3 chocolate bars
The cost of a chocolate bar divides the cost of the coffee to find the ratio. The ratio of one price to
another is called a relative price, and a relative price is an opportunity cost.
To answer the question of: how, other things remaining the same, does the quantity demanded of a
good change as its price changes? The answer to this question lays in the law of demand, which states
that the higher the price of a good, the smaller the quantity demanded and vice versa. This happens due
to the:
- Substitution effect: meaning that consumers will choose the highest valued alternative
(opportunity cost) when the price rises;
- Income effect: naturally, when incomes decrease, quantity of demand does too.
The demand curve and demand schedule
The difference between quantity demanded and demand is that demand (illustrated by the demand
curve and demand schedule) refers to the entire relationship between the price of the good and the
quantity demanded for the good. The term quantity demanded refers to a point on the demand curve.
Demand curve Demand schedule
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