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Principles of Economy Summary All Chapters (plus exam examples)

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Universiteit Leiden (UL)

For the study international studies or other studies containing the course principles of economics, the summary includes all lecture slides, and an own complete summary of the book, whereas I put a lot of examples that is going to be on the exam!

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Summary Chapter 1-12
Chapter 1 & 2

Page 138 & 259

Principles

1. Individual choice

Is the decision by an individual of what to do

The choices that individuals make; do you save your money and take the bus
or do you buy a car? People must make choices, because resources are
scarce. (Resource: Anything that can be used to produce something else)

2. Opportunity cost

The real cost of an item

What you must give up in order to get an item you want.

All costs are opportunity costs → That’s because every choice you make
means forgoing some other alternative

3. Marginal decisions

Decisions about whether to do a bit more or a bit less of an activity are marginal
decisions

How much?

Trade-off: You make a trade-off when you compare the costs with the benfits
of doing something.

Marginal analysis: The study of such decisions

4. Incentives

Anything that offers rewards to people to change their behavior

Summary Chapter 1-12 1

, Exploit opportunities to make themselves better off

5. Gains from trade

People can get more of what they want through trade than they could if they tried
to be self-sufficient (zelfvoorzienend)

Trade: In a market economy, individuals engage in trade, they provide goods
and services to others and receive goods and services in return.

Specialization: An increase in output is due to specialization: Each person
specializes in the task that they are good at performing.

The economy, as a whole, can produce more when each person specializes in
a task and trades with others

6. Markets move torward Equilibrium

Equilibrium: An economic situation is in equilibrium when no individual would be
better off doing something different

No longer improve their position → when the opportunities to make
themselves better off have all been exploited

Markets usually reach equilibrium through changes in prices, which rise or fall
untill no opportunities for individuals to make themselves better off remain.

7. Avoid ‘dead weightloss’

An economy is efficient if it takes all opportunities to make some people better off
without making other people worse off

Resources should be used as efficiently as possible to achieve society’s goals

8. Markets usually lead to efficiency → Because people exploit gains from
trade

When markets don’t achieve efficiency, government can intervene to improve
society’s welfare.

9. Markets can malfunction (can fail)

Especially during an ‘economic downturn’

Summary Chapter 1-12 2

, Keynes figured out long ago, that during a bear market, fear and lack of
confidence keep the market suppressed.

The government can act as an external force to stimulate the economy back
into growth

10. Spending money becomes someone else income

11. If spending is too low, the economy can fall into a recession

If spending is too high, this can be a cause of inflation

Ideally spending should be in line with productive capacity; this means,
enough to keep workers employed, but not too much so that inflation results.

12. Governments can change spending; Keynes

Definitions

Interaction: Interaction of choices — my choices affect your choices, and vice
versa — is a feature of most economic situations. The results of this interaction
are often quite different from what the individuals intend.

Equity: Fairness → Means that everyone gets his or her fair share. Since people
can disagree about what’s ‘’fair,’’ equity isn’t as well defined a concept as
efficiency.
Variable: A quantity that can take on more than one value is called a variable.

Causual relationship: Exist between two variables when the value taken by one
variable directly influences or determines the value taken by the other variable.
Independent variable: The determining variable in a causal relationship.

Dependent variable: The variable it determines.
Positive relationship: Two variables have a positive relationship when an increase
in the value of one variable is associated with an increase in the value of the other
variable. It is illustrated by a curve that slopes upward from left to right.
Negative relationship: Two variables have a negative relationship when an
increase in the value of one variable is associated with a decrease in the value of

Summary Chapter 1-12 3

, the other variable. It is illustrated by a curve that slopes downward from left to
right.
Slope: The slope of a line or curve is a measure of how steep it is. The slope of a
line is measured by “rise over run”—the change in the y-variable between two
points on the line divided by the change in the x-variable between those same two
points.

Nonlinear curve: A nonlinear curve is one in which the slope is not the same
between every pair of points.

Reverse causality: The error of reverse causality is committed when the true
direction of causality between two variables is reversed.

using resources in the best possible way depending on our goals

Opportunity costs: What you need to give up ➗ What you want to make

Chapter 3

Quantity demanded

The actual amount of a good or service customers are willing to buy at some
specific price

Demand curve

A graphical representation of the demand schedule. It shows the relationship
between quantity demanded and price

Law of demand

Higher price for a good or service, other things equal, leads people to demand a
smaller quantity of that good or service

Summary Chapter 1-12 4

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