Principles of business and economics 1 exam preparatons
About: chapters 1, 2, 3, 4, 11, 14, 7, 12, 27, 29, 32, 37
Chapter 1: The big ideas
1. Incentives mater
Most acts are out of self-interest mainly, or at least have incentvess
2. Good institttions align self-interest with social interest
If by pursuing self-interest the social interest is served, good things happen and the
other way arounds
3. Trade-ofs are everywhere
a. Opporttnity costs what are the costs of not being able to do something else
with your tmes (the value of the opportunites lost)
b. if one decision is made, the advantages of other decisions will expire
4. Thinking on the margin
A litle bit more or a litle bit less? What is favourable? We all mare decisions that
involve marginal thinrings
5. The power of trade
Is the power to increase productvity because of specializaton (division of labour)s
Also because of trade we can beneft from economies of scale and scopes
Comparatve advantages can be utlizeds
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. Institttions mater
Insttutons worr based on incentves and create enormous amounts of wealth in the
form of innovatons which creates wealth for them in the form of money and status
and power and all that stuf, but it also creates wealth as our lives are improved by
these developmentss
8. Economic booms and btsts can’t be avoided btt can be moderated
The deviaton from the average economic growth line can be moderated by the
governments and the central banrs as they have the power to infuence the
economic movements by changing interest rates and government spending within a
countrys This cycle cannot be stopped howevers
9. Prices rice if the government prints too mtch 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 highs
10. Central banking is a hard job
Predictng the economic movements and antcipatng the right way at the right tme
is a very difcult and impactul obs
,Chapter 2: The power of trade and comparative advantages
3 benefts of trade:
- Trade mares people beter of when preferences difer
- Trade increases productvity through specializaton and the division of rnowledge
- Trade increases productvity through comparatve advantage
Trade and preferences
A product can have more value to one person than to anothers Trade allows us to create
value to both partess
Example: I have an old srateboard and bought a new one, the old one is worth almost
nothing to me, but it is to someone that wants to srate but has no srateboards By trading
the srateboard for money, value is created on both sidess
Specializationn prodtctivity and the division of knowledge
The real power of trade is in specializatons Without trade, specializaton can’t be afordeds
Specializaton results in higher productvity and a beter uality products
The human brain is limited to a certain degree so it only mares sense to divide rnowledge
over many so it stays accessible and is used to the fullest through specializatons
Comparative advantage
The third reason for trade is to tare advantage of diferencess Certain environments are
suited to produce certain goods so it wouldn’t mare sense spending tme on producing
something that someone else can produce beter, cheaper and fasters Instead, you produce
the thing that you’re relatvely best ats
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 shirtss This way more shirts and more
computers are created for the same price as befores Trade will give both countries more
shirts and computers than befores
Everyone has a comparatve advantages
Not everyone has an absolute advantages
A producton possibilites fronter shows all the possible product combinatons that a country
can produce given its productvity and supply of inputss
Trade and globalization
The reality of changing the producton in a country is much diferents Stopping the
producton of a product brings a lot of costs with its llobalizaton has done ust thats Because
producing something overseas is cheaper and thus brings more value than it loses but it
does lose value because the producton company in the country itself will most lirely go out
of business if it can’t compete with the countes that have a comparatve advantages
, Chapter 3: Stpply and Demand
The demand ctrve
If the price is high, the demand is lowers
If the price is low, the demand is highers
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
fnd some value in the product for such a low prices Till some point where buying another
item would bring no more value than the cost prices
Constmer strplts
The money you don’t have to pay for a product that you were actually willing to pay for its If
an apple is 40 cents and you were willing to pay 80 cents your consumer surplus is 40 centss
Aggregated consumer surplus is the max price someone is willing to pay for the product
minus the actual price tmes the demand at the actual price, divided by 2s
What shifts the demand ctrve
- Income
- Populaton
- Price of substtutes
- Price of complements
- Expectatons
- Tastes
Questons that should be asred: What mares people willing to buy a greater uantty of the
good? What mares people willing to pay a higher price for the good?
loods can be divided into 2 categories:
- Inferior goods; a good for which demand decreases if income increasess
- Normal goods; a good for which demand increases if income increasess
