Introduction to Economics and Business
Lecture 1 Introduction
Economics is about all economic interaction (and about choices) between individuals,
organizations and governments -> when this interaction increases, there is economic
growth
Reasons for economic growth;
Productivity growth; with the same amount of time / input we can produce more.
-> Because of capitalism; private property, & specialization & efficiency
Often a conflict between efficiency and inequality
Choices; traditional economics -> rational and optimizing behaviour is assumed. But
nowadays lot of attention for bounded rationality and cognitive biases
Economic problem;
What has to be produced, how, and who will receive the produced goods and services?
(says something about the system) (Price determines this)
Our wants are unlimited; our resources are not (time and money) -> scarcity -> choices
Scarcity-> competition -> efficiency
Scarcity -> choices -> opportunity costs
Opportunity costs; ‘There is no such thing as a free lunch, everything costs something,
even is the lunch is for free you need to go there and sit there, (time etc.)
The net value of the alternative choice that you would be doing instead of first
action
Value = value – costs
Opportunity costs should affect behaviour
For every choice:
-Value of that choice
-Explicit costs of that choice -> what does it cost?
-Implicit costs of that choice -> what do I give up?
Both implicit and explicit costs can be opportunity costs
-Economic costs of a choice -> explicit costs & implicit choice
-> Which choice to make? -> Choice, which has higher value than economic costs
Mostly we only use the implicit costs as opportunity costs. (mainly)
Economic rent: difference between value and economic costs
What is the real price of buying a product -> look at alternative product you can’t buy
Sunk costs: costs that cannot be recovered.
-> Sunk costs fallacy; taking sunk costs into account when making a decision
Marginal analysis
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,-With opportunity costs we see which choice we should make between 2 alternatives
-> Based on rational and optimizing behaviour. Which choice has the highest outcome
Marginal return / benefits
-What is the return/benefit of one extra unit
Marginal costs
-What are the costs of one extra unit (Not always constant)
Marginal analysis: look at add one extra unit and see if the benefits are more than the
costs of adding 1 extra unit. Opportunity costs could may be time in a case.
Most efficient point: Marginal returns = marginal costs, MO=MK
Net marginal analysis= net benefit – net costs, (net value of adding one extra)
Nudging; try to influence people’s behaviour, by showing behaviour that is more in line
with what society wants (positive rewards, Holle Bolle Gijs)
Lecture 2 Trade and exchange
Incentives / prices are very important, but also have unintended consequences
The size of the economy is measured using GDP -> The sum of all income/ all value
added in an economy in a certain period
Productivity growth
-Tangible and intangible to private property
-Protection
Productivity growth for markets & firms;
-Division of labor, specialization, technology & economy of scale
Production possibilities frontier -> specialization -> increasing opportunity costs
A straight line illustrates constant opportunity costs (Production possibilities Frontier)
A bowed-outward (downwards) illustrates increasing opportunity costs
Institutional possibilities frontier, not reaching our full potential, because of our society
and what we value, so no child labour, while this could be done physically. This is
different from physical possibilities frontier.
Trade and exchange
Productivity increases when people/firms etc. specialize (in what they are relatively
good at)
Therefore everybody produces more than they need, but only possible when the
surplus can be sold on markets
So the more trade and exchange on markets, the more specialization possible, the higher
the productivity, the richer we are
Absolute advantages
Who has the absolute advantage? -> who is the best at doing a certain thing
After specialization both countries have to come up with a mutual good terms of trade
-> price between the opportunity costs of both countries
Opportunity costs: Germany, 1 car = ¼ bicycle
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, France, 1 car = 3 bicycle
Potential price 1 car = ¾ bicycle (random, but within the ranges of opportunity costs)
Specialization and trading is good for both countries!
Comparative advantages; there could be absolute advantages in every case, than you
still need to look at the relative price of a good.
8 Car-2 Bicycle = ¼ car
10 Car -5 Bicycle = ½ car
So 1/4 is the comparative advantage for the one that is worst at both of them, but
relatively less bad at making the cars.
Free trade:
Trade leads to specialization
-> But because of this; industries that win and industries that lose
Losers; everybody involved in production of goods for which the country doesn’t have
comparative advantage
Winners: Everybody involved in production of goods for which the country does have
comparative advantage + everybody else through lower prices
Lecture 3 Markets
Markets are always based on efficiency
Comparative advantage do what you relatively good at. -> The real cost of producing
cars is the bicycles that must be sacrificed (opportunity costs) to produce it.
-Comparative advantage shows us who should produce what, then we need supply and
demand, which need to come together. -> Markets
Markets are seen to be as perfect markets -> homogeneous good, no market power etc.
Demand = ‘sum of willingness to pay’ of buyers
Individual willingness to pay = individual marginal benefit, how much happiness do you
get
There is a negative relation between the price of a good and the quantity demanded
Absolute vs. relative price, price changes are mostly relative, you look at other goods and
prices in order to see the real change
Change in demand vs. change in quantity demanded
If demand changes without a change in prices, the whole demand curve shift
Could be due to:
-Prices of related goods
-Income (normal goods income increase then also this increase, not with inferior
goods)
-Preferences
-Size of the population
-Expectations about the future (prices)
Elasticity -> how sensitive is the quantity demanded for a price change?
Sensitive; price elastic good
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