This is a summary of the book Economics, Global Edition. It gives the basis principles of economics as a subject. This document is a very concise and clear summary of the book, of the Chapters 1, 4-8, 10-12, 14. The document includes all the main concepts - in bold -, an organized layout, pictures ...
Economic agent = an individual (consumer, parent, student) or a group (government, army, firm) that
makes choices.
Scarce resources = things that people want, but the quantity that people want (if the resources were
being given away for free) exceeds the quantity that is available.
- Scarcity exists because people have unlimited wants in a world of limited resources
Consumers play a key role in this resource allocation process: we choose what we do with our time
and these decisions determine how scarce resources are allocated in the economy, to the consumers
who are able and willing to pay for them.
- Resource allocation organizes the technological and human resources available for a project
Economics is the study of how agents choose to allocate scarce resources and how those choices
affect society.
Economics can be divided into two kinds of analysis:
1. Positive economic analysis – what people actually do, describing what has happened or
predicting what will happen (objective)
2. Normative economic analysis – what people should do / what they are ought to do
(subjective)
a. In the cases where agents make mistakes, normative economic analysis can help
them realize their mistakes and make better choices in the future.
Two broad fields of study in economics:
1. Microeconomics – how individuals make choices, and how those affect prices, the allocation
of resources and the well-being of other agents: a small piece of the overall economy
2. Macroeconomics – the total economy (like percentage increase in overall prices e.g.)
Economics is based on three key principles:
1. People try to optimize: they try to choose the best available option (they don’t always
succeed though), weighing out the available information/knowledge/experience given – a
rational choice. To obtain this -> an agent needs to consider many issues:
o Trade-off – arise when some benefits must be given up in order to gain others
We face trade-offs whenever we allocate our time
o Budget constraints = the set of things that a person can choose to do/buy without
breaking their budget
Economists use budget constraints to describe trade-offs
o Opportunity costs = the best alternative use of a resource
What economists focus on while evaluating trade-offs
so what you end up doing (the first choice) means that you have to give
up on what your second option/choice was, so the second option is the
opportunity cost
o Cost-benefit analysis = a calculation that identifies the best alternative
, By summing benefits and subtracting costs, both denominated/converted in
a common unit of measurement (like dollars) – so you can use them in a
calculation
Cost-benefit analysis is used to identify the alternative with the greatest net
benefit
Net benefit = sum of the benefits of one alternative minus the sum
of the costs of that alternative
“out-of-pocket” costs = direct costs originally in the measurement
unit that is used in the calculation (like plane tickets, are in dollars)
(cost-benefit analysis is somewhat identical to optimization -> it enables an
economist to determine what an individual or society would do)
2. Economic systems tend to be in equilibrium, where all economic agents are making their best
feasible choices, taking into account all of the information they have including beliefs about
behaviour of others
o In equilibrium, everyone is/all the actors are simultaneously optimizing, so nobody
would benefit by changing their own behaviour, it will not have any positive impact if
you will act differently
o Free-rider problem: free riders don’t contribute but still benefit from the investments
that others make. And equilibrium analysis helps us predict the behaviour of
interacting economic agents and understand why free riding occurs, and to design
special institutions that eliminate free riding (like financial contracts).
3. Empiricism – analysis that uses data (= evidence-based analysis). Economists use data to test
their theories, to determine whether our theories about human behaviour (like optimization
and equilibrium) match actual human behaviour, and to determine what is causing things to
happen in the world. More in Ch.2
Sunk costs = an investment already incurred that can’t be recovered.
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