econ

• Economics is a social science on how to deal with scarcity
• Scarcity


  The problem of having infinite wants, or unlimited desires, while having only finite resources, or limited means, to fulfil these wants
• Nine key concepts that tie together the course material

  • Scarcity
  • Choice
  • Efficiency
  • Equity
  • Economic well-being
  • Sustainability
  • Change
  • Interdependence
  • Intervention
• Opportunity cost


  The value of the next best alternative that is lost while making a choice
• Production Possibilities Curve (PPC)


  • Points inside the PPC are attainable but inefficient
  • Points on the PPC are attainable and efficient
  • Points outside of the PPC are efficient but unattainable
• Increases in output


  Illustrated by a movement of a point inside the PPC towards the PPC
• Increases in potential output


  Shown by a shift of the PPC curve, reflecting growth as combinations of output that were previously unattainable become attainable
• Increasing opportunity cost


  As we produce extra units of one good, increasing amounts of the other good have to be sacrificed
• Constant opportunity cost


  Producing more units of one good always requires the same amount of the other good sacrificed
• Circular flow of income model

  • Illustrates the exchange between households and firms
  • Includes injections (investment, government spending, exports) and withdrawals (savings, taxes, imports)
  • In an open economy with government and financial sector, change in net value of economic activity = J - W
• Factors of production and their respective income: Capital - Interest, Land - Rent, Enterprise - Profit, Labour - Wage
• Positive economics


  Built around positive statements that are objective, factual statements that can be proven true or false by scientific experiments
• Normative economics


  Value statements used in policy making that determine what the economy "should be" or "ought to be" like
• History of economic ideas

  • 18th century: classical economics
  • Early 19th century: classical microeconomics and classical macroeconomics
  • Late 19th century: neo classical economics
  • 20th century: Keynesian economics and monetarist school of thought
  • 21st century: increased interdependence between Economics and other social disciplines
• In this course we will study the economic problem in four themes
• Economic analysis


  To understand the motives behind decision-making agents
• Nudge theory


  The idea that consumers can be "nudged" to voluntarily make choices that are better for them and better for the society
• Circular economy


  Products are designed to be long-lasting, and new products are repurposed and recycled from old ones. The principles of circular economy are consistent with many of the Sustainable Development Goals (SDGs)
• The course will study the economic problem in four themes:
• The four themes


  • How can governments help solve the economic problem in different cases?
  • How is sustainability threatened, while people or companies are making an effort to solve their economic problem?
  • How does efficiency conflict with equity while people or companies are making an effort to solve their economic problem?
  • How does economic growth conflict with economic development while companies or governments are making an effort to solve their economic problem?
• The four economic domains

  • Microeconomics: the science of choosing on a small scale (individuals, companies)
  • Macroeconomics: the science of choosing on a big scale (regions, countries)
  • Global economy: the science of choosing in interaction with other countries (international economics) and in order to raise living standards (development economics)
• This guide contains a summary of the contents of the course
• In this section the microeconomic laws of Demand and Supply are discussed. Further, it is explained how Equilibrium is reached on the market. We will also see that at this equilibrium point Market efficiency is reached
• Before discussing the theory, this section will briefly go over the most important Definitions. Next the Economics of externalities will be discussed in general before dividing them into two categories: Externalities of production and Externalities of consumption. This section will close with Other sources of market failure that might exist in the economy
• The government can try to solve market failures in many different ways. This sections discusses the solutions of Indirect taxes, Subsidies and Price controls
• This section will discuss the theory of the firm in general. More specific it will discuss the determination of Production and costs, Revenues and Profit. Finally, this section will go into the different Goals of the firm, that a firm may have
• This section will go into the different market structures that can exist in an economy: Perfect competition, Monopoly, Monopolistic competition and Oligopoly.The different characteristics of these structures are explained, as well as the profitability on the long en short term and the level of efficiency
• Size of the area locked inside


  The supply curve; the horizontal line from P* and the vertical line from Q*
• The best allocation of resources is reached at the market equilibrium. At that point the community surplus (CS + PS) is maximised. (At that point marginal benefit = marginal cost, see section on market failure)
• When price is not equal to the market price

  CS + PS is smaller than at the equilibrium, the loss in producer and consumer surplus is marked in the figure
• Elasticities


  Used to measure the effect a change in some factor (income, price of a good, price of another good etc.) has on supply and demand of a good
• Price elasticity of demand (PED)


  Measures the effect a change in price has on the demand for a certain good
• Outcomes of PED


  • Perfectly inelastic demand (PED = 0)
  • Inelastic demand (0 < PED < 1)
  • Unit elastic demand (PED = 1)
  • Elastic demand (1 < PED < ∞)
  • Perfectly elastic demand (PED = ∞)
• The higher the elasticity, the more elastic PED is, the more demand will change when price changes
• PED is different at each point of the demand curve. In the middle it is equal to 1. Left of the middle of the demand curve PED will be elastic; right of the middle of the demand curve it will be inelastic
• On a completely horizontal demand curve, PED = ∞ at every point
• On a completely vertical demand curve, PED = 0 at every point
• When PED is elastic

  Firms should lower their price to get more revenue because in that case demand will increase more than the price will decrease
• When PED is inelastic


  The opposite will be the case, firms should not lower their price
• When PED = 1


  The firm should leave the price at the current level; revenue is maximised at this point