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PoE Principles of Economics samenvatting (CORE)
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Questions: is feasible set always mirror of production functionPrinciples of Economics
Week 1
CORE chapters: 1, 2.1-2.7
Hoorcollege - Key Concepts
Positive economics = concerns the description of economic phenomena (aims to be value
free: what-is economics)
- Focus: cause-and-effect (if-then) relations, that can be verified in theory or practice
and are captured in mathematical economic models
Normative economics = determines what the outcome of the economy/goals of policy
ought to be (aims to prescribe solutions)
- Based on: underlying judgements or values that cannot be fully tested/verified
!! every economic analysis involves an element of subjectivity
Economics = The study of how people interact with each other and with their natural
surroundings in producing their livelihoods, and how this changes over time.
Economic system = the system in which the production and distribution of goods and
services in an economy is organized.
Micro vs. Macro
Microeconomics = focus on behavior of individual economic units (households/firms)
Explains how the individual units: make decisions & interact to form larger units (markets,
industries)
Examples:
- supply and demand for one particular product/service (market): shift of preferences
and demand for consumers, impact of government actions
Macroeconomics = focus on performance of economics (national/regional) at an aggregate
level (growth, productivity, jobs)
Understand how economic factors and policies drive productivity, living standards,
unemployment, etc.
Examples
- aggregate supply and demand in an economy
- level of fluctuations of economic output (GDP)
Specialization and division of labor (Adam Smith):
● Increases productivity due to learning by doing (skill and talent difference)
● Economies of scale - cost advantages for higher production levels due to more
efficient production
Coordination of economic activities:
Large economic systems can be self-regulating even if all actors follow their self-interest
(invisible hand)
Role Government according to Adam Smith:
,3 duties of the state: national defense, provision of justice, provision of public goods
The gains of trade:
a. absolute advantage
b. Comparative advantage
Theory of value = value of a good can be measured by the amount of labor required to
produce it
Karl Marx
Economics and capitalism as matter of: power & inequalities
● In capitalist society: conflict between employers and workers: employers exert power
over workers
Limits of free markets and economic growth
● Environmental sustainability concerns and degradation
● Rising inequality, power disbalanced and social injustice
● Decreasing overall human well-being
Capitalism
Capitalism = an economic system where:
● Private property = the ownership rights over possessions, particularly non-labour
(capital) goods are important
● Markets: as a way to exchange products and services for mutual benefit.
- Unlike other types of exchange: markets are reciprocal, voluntary and
usually competitive
● Firms: are business organizations that use inputs (labor, capital, resources) to
produce outputs, and set prices to at least cover production costs
- outputs are private property
- firms use markets to sell outputs
- usually with the aim to make profit
- Unlike other institutions: firms can be born, quickly expand but also quickly
die
Political economy: governments in economic systems
Different conceptions of state-market interactions:
High state control
High market self-regulation
BOOK
Unit 1 -The Capitalist Revolution
Gross Domestic Product (GDP) = a measure of the market value of the output of the
economy in a given period (includes goods/services produced by the government: therefore
better to measure living standards)
GDP per capita = dividing the total goods/services produced in a country by the countries
population
,Disposable income = income available after paying taxes and receiving transfers from
the government (received over a given period, minus transfers the individual made to others
such as taxes paid to government)
Disposable income as measure of wellbeing:
Income has a major influence on wellbeing because it allows one to buy the goods/services
one needs.
Disposable income leaves out:
- Quality social and physical environment
- Amount of free time
- Goods/services we don't buy (healthcare/education)
- Goods/services produced within the household (childcare)
Einstein GDP
Nominal GDP = (price of product/service) x (quantity of product/service) + (price of
product/service) x (quantity of product/service) + etc.
Real GDP = takes price changes over time into account
Purchasing Power Parity = taking into account the price differences among countries
Growth rate income = the rate of change
= change in income / original level of income
Technology = a process that takes a set of materials and other inputs (work of people and
machines) and creates an output
Technological process = a change in technology that reduces the amount of resources
required to produce a given amount of the output
Capitalism = an economic system in which private property, markets and firms play an
important role
- Combines centralization and decentralization: concentrates power in the hands of
owners of firms, limits power because they face competition to buy and sell in
markets
Economic system = the institutions that organize the production and distribution of goods
and services in an entire economy
Institution = the set of laws and social customs governing the way people interact in society
Private property = that you can enjoy your possessions in a way you choose, you can
exclude others from their use if you wish, you can dispose of them/gift/sale to someone else
Capital goods = the equipment, buildings and other durable inputs used in producing goods
and services, incl. applicable any patents or other intellectual property that is used
- Raw materials used in production are referred to as ‘intermediate inputs’
Markets = a means of transferring goods or services from one person to another
“a way of connecting people who may mutually benefit by exchanging goods and services
through a process of buying and selling”
aspects that make markets differ from other ways:
, 1. are reciprocated (one person's transfer of a good is directly reciprocated by a transfer
in the other direction)
2. are voluntary (so the exchange must be beneficial for both parties)
3. Competition
Firm = a way of organizing production with the following characteristics:
● One or more individuals own a set of capital goods that are used in production
● They pay wages and salaries to employees
● They direct the employees in the production of goods and services
● The goods and services are the property of the owners
● The owners sell the goods and services on markets with the intention of making profit
(NOT firm: family businesses, non-profit org, employee owned cooperatives, government
owned entities: railway or water companies)
!! If a firm takes on unpaid students interns it is still a firm
Labour market = firm owners offer jobs at wages or salaries that are high enough to attract
people who are looking for work
- Demand side = the employers, the side on which those participating are offering
money in return for some other good or service
- Supply side = the workers, the side on which those participating are offering
something in return for money
Capitalism as an economic system
Why markets/private property are essential parts for firms:
● Inputs and outputs are private property
● Firms use markets to sell outputs
They depend on markets in which customers may purchase the products
● Private property is essential for markets: buyers will not want to pay for goods unless
they can have the right to own them
Ownership = the right to use and exclude others from the use of something, and the right to
sell the thing that is owned
Changes that came with capitalism
1. Technology
firms competing in markets had strong incentives to adopt/develop new productive
tech.
2. Specialization = the division of labor
Economies of scale = producing a large number of units which makes it more cost-effective
than producing a smaller number.
- Occurs when: doubling all of the inputs to a production process causes more than
double the output.
Absolute advantage = person/country when the inputs it uses to produce are less than in
some other person/country
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