Su
SUMMARY INTRODUCTION TO
ECONOMICS
,Econimics and Business: Lecture 1: Introduction (5-2-2019)
First part: Economics, Like in highscool, 25% multiple choice question on exam.
Second Part: Business question, answered using Economics. Written exam.
Economics is about all economic interaction between individuals organizations and governments.
When the interaction increases in volume there is Economic Growth. (Netflix = economic growth,
since you now have to pay to watch series increasing interaction). Economic growth is a relatively
“new” phenomenon. This is because resistance towards new developments due to the lack of
protected property rights.
Why doe economic growth exist?
- Because of productivity growth (we can make more things with the same resources/people)
Why does productivity growth exist?
- Capitalism: 1. Private property (plus protection) 2. Specialization and efficiency
Firms are methods to make transactions easier and solve coordination problems. In an ideal
economic case, everything is ruled by the market.
We are all incentivized to act productive and efficient.
Often a conflict between efficiency (size of the pie) and inequality (division of the pie). Conflict in
society.
The economy is the sum of all individual choices of people of the organizations. Everyone who sells
or buys a product should feel better of after the purchase has been completed. Governments use
laws, rules and incentives to influence economic transaction. According to traditional economics, we
make these “economic choices” in rational and in a maximizing/optimizing way (greatest utility,
relative to the price of a product). Nowadays lot of attention for bounded rationality and cognitive
biases in research because we do not always make rational choices.
The Economic problem exist of tree questions:
1. What has to be produced?
2. How should this be produced?
3. Who will receive the produced goods and services?
Resources: Land, Labour, Capital and entrepreneurship.
Reward: Rent, Wages, Interest and Profit.
Our wants are unlimited, our resources are not Scarcity. This leads to choices. Scarcity
Competition Efficiency (and inequality).
Opportunity costs: everything in the world costs money. Scarcity Choices opportunity costs.
There is no such thing as a free lunch (even if it is free, it still costs time/effort). These are the second
thing you would have bought/done if you did not choose the first (your actual) choice. The net value
of that second choice are your opportunity costs. This net value is value-costs. (value of attending a
lecture is $5,- cost = 0. Value of going to the gym for you = $20,- cost = 10 euro, the best choice is to
go to the gym ($10,- advantage).
,Opportunity costs (should) affect behaviour:
- What is the influence of your salary on attending lectures? High salary less attendance
because the opportunity costs of going to a lecture will be higher.
- What is the true price of an Ikea closet? time to build it makes it much more expensive.
Economy is not about who can make thing the cheapest, but who can make thing the most efficient.
For every choice:
- Value of that choice (utility, happiness, profit)
- Explicitly cost of that choice the price of something ($5,- for a hamburger)
- Implicit costs of that choice what do I give up?
Decision making should be based on the opportunity cost and the economic rent. Value – implicit
and explicit costs
Both the implicit and explicit costs can be opportunity costs!
Economic costs of a choice explicit costs & implicit costs
Which choice should you make? the choice which has the higher value than economic costs.
Economic rent = difference between value and economic cost.
What is the real price of buying a product? The alternative product you cannot buy. If a burger is
$4,- and a beer is $2,-: 1 burger = 2 beer. If a firm makes 100 tv’s or 70 laptops in one hour: price
laptop = 10/7 tv, price tv = 7/10 laptop.
Sunk costs = costs that cannot be recovered.
Sunk costs fallacy = wrongly taking sunk costs into account in decision making. Sunk costs affect our
emotion. (I would like to do a different study, but I have already invested so much time and effort in
this one) you should forget about what you already did.
Sunk costs should be taken out of account in decision making, because the money was already
spending.
Marginal analyses = with opportunity costs we see which choice we should make between two
alternatives. Another choice we have to make is: How much of something should we produce, buy or
spend our time on? This is rational and optimizing behaviour. Which choice yields the highest
outcome? (MO=MK)
Everything we do has a marginal return/benefits. What will be the extra return of the one extra unit
purchased? Every extra unit will give you less happiness. marginal costs = what is the costs of one
extra unit. We need to find the most efficient point. This is searching the marginal costs and the
marginal benefits are equal. This point is called the optimal quantity.
The Economic problem is solved by prices. These will determine all the 3 problems of the economic
problem.
1. What has to be produced? (Demand)
, 2. How should this be produced? (child labour, robots)
3. Who will receive the produced goods and services? (rationing device: who gets what by
determined by the willingness to pay for it)
However. Sometimes individual optimal choices “should” be influenced. Incentives influence
behaviour (lowering study cost by making students making the right choice). All these prices
influence our behaviour (price, tax, subsidies, bonus, nudging (influence behaviour without adjusting
the price (Holle Bolle Gijs)).
Lecture 2: Trade and Exchange (7-2-2019)
Price Determines the next 4 things:
1. Who makes what
2. How much is made
3. How it is made
4. Who gets it
The invisible hand determines the prices: these are demand and supply. However, sometimes
individual optimal choices should be influenced. Incentives (stumulansen) influence this behaviour.
Examples of these incentives are Prices, taxes, subsidies, bonuses and nudging. Often, these
incentives bring along unintended consequences (mortgage deduction and pension deduction, bank
deposit behaviour, assignments with bonus points).
Economic Growth = the size of the economy had increased, can be measured using Gross domestic
Product (GDP. GDP = the sum of all income/all value added in an economy in a certain period.
Production (supply) income Demand. GDP per capita = the sum of income/all value added in
an economy in a certain period divided by the number of inhabitants. This is the best way of
measuring Economic Growth. This often leads to an increase of Productivity. Markets and firms
contribute in productivity growth as well. Thanks to division of labour, specialization, technology &
economies of scale contribute to productivity growth. An indicator of Productivity growth can be
found in the amount of private properties of persons. These properties are protected by law. Private
properties can be tangible (material, physical) or intangible (non-physical, such as patents,
trademarks, copyrights etc.) Companies often poses capital goods. These are goods that are used in
producing other goods, rather than being bought by consumers.
Production Possibilities Frontier (PPF) = how much can a country (or firm, person, city etc.) produce.
Constant opportunity cost is a steady potential price to a business that occurs when a company is
not able to take advantage of a feasible chance to earn profits. The production cost of both products
is equal. A simple model with two goods is shown below.
