Samenvatting
Samenvatting Economics, Economics And Business (EBC1009)
- Instelling
- Maastricht University (UM)
Samenvatting hoofdstukken economics UM IB jaar 1
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Voorbeeld 4 van de 57 pagina's
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Chapter 1: The principles and practice of economics1.1 The scope of economics
Economics does not only study money, they mainly study choices outcome of human
behaviour. Therefore several terms apply. An economic agent is an individual or group that
makes choices. Everyone that makes a decision of any type, students or governments. Many
economists generalise groups as a single decision maker, ignore individuals involved.
Furthermore economists study the allocation of scarce resources, things that people want
where the quantity that people want exceed the quantity that is available. Scarcity exists
because people have unlimited wants in a world of limited resources, you cannot give
everyone everything they want all most all products are scarce. The resources are divided
among those who are able and willing to pay for them economists try to teach you to
make economic choices by weighing costs and benefits.
Economics is the study of how agents choose to allocate scarce resources and how those
choices affect society. Economists study original choices and all the multiple consequences
following. There are 2 key reasons to study this:
1. Positive economics: describing what people actually do. It is the analysis that generates
objective descriptions or predictions which can be verified with data. These are objective
and descriptive statements that tell us what happened or what will happen.
2. Normative economics: analysis that recommends what an individual or society ought to
do. Almost always depends on subjective judgement and people should determine
themselves which preferences to use. You focus on what a worker or individual wants when
making choices and help them choose what is in their best interest called prescriptive
economics. Normative analysis is also used for public policy, creating winner and losers and
involving ethical judgements. The question what society should do are normative economic
questions do the costs of one party equalize benefits of other.
In economics, two types are present:
1. Microeconomics: the study of how individuals, households, firms and governments make
choices, and how those choices affect prices, the allocation of resources, and the well-being
of other agents. They are called on when we want to understand a small piece of the overall
economy might be a specific industry.
2. Macroeconomics: the study of the economy as a whole, studying economy-wide
phenomena, like the growth rate of a country’s total economic output, the inflation rate or
the unemployment rate. They design government policies improving overall or aggregate
economic performance.
1.2 Three principles of economics
Economists emphasise on 3 key concepts:
1. Optimization: picking the best feasible option, given whatever (limited) knowledge,
information, experience and training the economic agent has agents try to optimize but
sometimes make mistakes, do not always pick most optimal one. Explains most choices.
2. Equilibrium: the special situation in which everyone is simultaneously optimizing, so
nobody would benefit personally by changing his or her own behaviour given the choices of
,others. They cannot do any better given the situation.
3. Empiricism: analysis that uses data- evidence-based analysis. Economists use data to
develop theories, to test theories, to evaluate the success of different government policies,
and to determine what is causing things to happen in the world.
1.3 The first principle of economics: optimization
The leading theory about how choices are made is that people try to optimize, the best
feasible option given what they know. Feasible options are available and affordable to the
economic agent. This goes beyond money. With optimization you weigh the information
that you have but cannot perfectly foresee the future. You are rational when you choose the
most feasible option given the information that is available logical appraisal, examine the
quality of your decision. Also what we optimise varies per individual and group and goes
beyond only money.
Optimization problems also include trade-offs, when an agent needs to give up one
benefit/thing to get something else. To describe these, economists use budget-constraints,
bundles of goods and services that a consumer can choose given her limited budget and not
breaking it. They illustrate and quantify trade-offs and identify feasible options shows how
you can distribute your budget.
Another critical tool is opportunity cost, the best alternative use of a resource. Whenever
we do something, something else always gets squeezed out. You can evaluate these trade-
offs and identify the best alternative which will be your opportunity cost you are giving up on
when doing another activity. Often we try to put monetary costs to these opportunity costs.
This can often be a wage for your best alternative. However, there are also non-wage
consequences involved.
When comparing a set of feasible alternatives and picking the best one you can use a cost-
benefit analysis, a calculation that identifies the best alternative, by summing benefits and
subtracting costs, with both benefits and costs denominated in a common unit of
measurement. You can identify the alternative with the best net-benefit, the sum of the
benefits of choosing an alternative minus the sum of the costs of choosing that alternative.
You list all benefits and costs involved. You can have out of pocket costs, direct costs, which
can be easily determined but you also have other costs like time saving. The cost-benefit
analysis is handy for normative economics. To an economist, optimization and this analysis
are the same thing. It mostly correctly predict choices consumers make and yields many
positive economic insights.
1.4 The second principle of economics: Equilibrium
The world consists of lots of economic agents who interact and influence one another’s
effort to optimize. Equilibrium is the situation where everybody is optimizing so nobody
benefits from changing his behaviour make best feasible choice including beliefs you hold
about behaviour of others. This choice is made mainly on your intuition, for example in
waiting lines go for shortest. All choices of all agents combined forms an equilibrium and
the analysis provides a good description of what happens when many people interact.
,However, the equilibrium leaves us with the free-rider problem, people who do not
contribute but benefit from the work and investments of other. Sometimes they are
overlooked but in many cases there are patrols or incentives to do the job. But it is still easy
to get away with it. People sometimes rather pursue their personal interest rather than the
public interest equilibrium analysis helps us predict behaviour and understand why free
riding occurs. It helps us design special institutions that reduce or eliminate free riding.
1.5 The third principle of economics: empiricism
Economists use data to analysis whether our theories about human behaviour match up
with actual human behaviour, called empiricism. We also want to know what is causing
things to happen distinguish cause and effect.
1.6 Is economics good for you?
The biggest benefit of economics is learning to make good choices. You use cost and benefits
and positive economics to predict other people’s behaviour. You will make use of normative
economics when advising others. You can use it for trade-offs, during exchange of resources
and keeping up with the world. Economics is everywhere.
, Chapter 2: Economic methods and economic questions
2.1 The scientific method
Scientific method is the name for the ongoing process that economists and other scientists
use to develop models of the world and evaluate those models by testing them with data. It
helps you separate good models, those that make predictions that are mostly consistent
with the data, from bad ones. It can help explain the past and partially predict the future.
Models are simplified descriptions of reality, also referred to as theory. They are not perfect
replicas. Scientists use the model that is best suited to analyse the problem at hand. It can
help make good plans and predictions for the future, even if some assumptions are false.
Scientific models are used to make predictions that can be checked with empirical evidence,
facts that are obtained through observation and measurement: data. Economists call
themselves empiricists as they use data to answer questions about the world and test
models. The model’s predictions are called hypotheses that can be tested with data
contradicted by data come up with new model.
All models begin with assumptions derive to other implications or predictions. You can
take general models to apply to anyone. Economic models are mostly very complex. But
these models have important properties:
1. Models are only an approximation and not exactly correct. Most of the time it is a
simplification of the relationship.
2. A model makes predictions that can be tested with data.
There are some types of data that can be used. Mean is the sum of all different values
divided by the number of values and is used for summarizing data. They also use the median
value, the middle value calculated by ordering the number from least to greatest and then
finding the value half-way through the list. When the group of numbers has one or more
extreme values the median and mean pull apart mean is affected by these outliers. When
using data, economists rely on thousands of observations strengthens the force of
empirical arguments which are more precise.
Using anecdotes or small samples of people to judge statistical relationship is wrong. It can
be concluded that higher education gives you more earnings even if there are exceptions.
Using small amount of data leads to wrong conclusion and be sceptical about such
statements. Anecdotes or examples may only be used to contradict a blanket statement
statements that say something is always the case.
2.2 Causation and correlation
However even reports relying on large data sets can be misleading general models will not
always apply to each case. There is a difference in causation and correlation which causes a
bad judgement. Causation occurs when one thing directly affects another cause-effect.
The changing factor or characteristic is the variable. Causation happens when one variable
causes another variable to change. Correlation means that two variables tend to change at
the same time there is some type of connection but not always causation. There might be
other explanations for the effect than the cause you think of. Correlation only means that
more investigation is warranted, the starting point. There are 3 categories:
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