Lecture 1:
Economics is about all (economic) interaction between individuals, organizations and
governments.
→ When this interaction increases in volume there is economic growth
Causes of poverty:
- Nothing causes poverty, poverty is the starting point. The real question is what
causes prosperity. → An economist would say that the answer is property rights
Why is there economic growth?:
- Property rights
- Economic growth is caused by productivity growth.
Why is there productivity growth?:
- Capitalism:
- Private property
- Firms and markets
- Technology, specialization and efficiency
There is often a conflict between efficiency (size of the pie) and inequality (division of the
pie)
The economy is the sum of all individual choices of people and organizations. People make a
tradeoff between their individual costs and benefits.
→ Think they are better off after their choices than without their choice
How do we make these choices?:
- In traditional economics ‘rational’ and ‘maximizing/optimizing’ behaviour is assumed
- Nowadays lot of attention for ‘bounded rationality’ and ‘cognitive biases’
Government use laws, rules and incentives to influence our choices
,The economic problem:
1. What has to be produced?
2. How should this be produced?
3. Who will receive the produced goods and services
Our ‘wants’ are unlimited … our resources are not → scarcity
→ For us (simple consumers) mostly time and money
Scarcity → Choices
Choices → Competition
Competition → Optimal allocation of resources
Optimal allocation of resources → Efficiency (& inequality)
Opportunity costs: the net value of your second choice
→ What would you have been doing if you weren’t here right now? (your second
choice)
- Net value = ‘value’ of alternative choice - costs of alternative
Explicit costs: What does it cost?
Implicit costs: What do I give up?
Economic costs = explicit costs + implicit costs
Which choice do we make?:
- Choice which has the higher value than the economic costs
- Economic rent: The difference between value and economic costs
What is the real price of buying a product?:
- The alternative product you cannot buy
- Relative prices
- If a burger is 4,- and a beer is 2,-
1. Price burger = 2 beer
2. Price beer = ½ burger
,What is the real price of producing a certain product?
- The product you cannot produce because of that
- If a firm can make 100 TV’s or 70 Laptops in one hour:
→ Price laptop: 10/7 TV’s
→ Price TV: 7/10 Laptop
Sunk costs: Costs that cannot be recovered
Sunk costs fallacy: Wrongly taking sunk costs into account in decision making
Sunk costs affect our emotions, we experience them as losses
Rough rules:
- If previously incurred costs can no longer be reversed, you should not include them in
your current considerations
- If previously incurred costs can be (partially recovered, you should include the costs
to be reversed as explicit costs in your current considerations
Marginal returns / benefits
- What is the return/benefit of one extra unit
Marginal costs
- What are the costs of one extra unit
Most efficient point:
- Marginal returns = marginal costs
- Or point closest to where MR>MC
, Capitalism: → Market economy
- The economic problem is ‘solved’ using markets and prices
- Society determines through demand what is produced and how this is produced
→ individual decisions of people and organizations
- Invisible hand → prices influence our opportunity costs and optimal choices
- Governments → incentives to influence prices
Economics is about all (economic) interaction between individuals, organizations and
governments.
→ When this interaction increases in volume there is economic growth
Causes of poverty:
- Nothing causes poverty, poverty is the starting point. The real question is what
causes prosperity. → An economist would say that the answer is property rights
Why is there economic growth?:
- Property rights
- Economic growth is caused by productivity growth.
Why is there productivity growth?:
- Capitalism:
- Private property
- Firms and markets
- Technology, specialization and efficiency
There is often a conflict between efficiency (size of the pie) and inequality (division of the
pie)
The economy is the sum of all individual choices of people and organizations. People make a
tradeoff between their individual costs and benefits.
→ Think they are better off after their choices than without their choice
How do we make these choices?:
- In traditional economics ‘rational’ and ‘maximizing/optimizing’ behaviour is assumed
- Nowadays lot of attention for ‘bounded rationality’ and ‘cognitive biases’
Government use laws, rules and incentives to influence our choices
,The economic problem:
1. What has to be produced?
2. How should this be produced?
3. Who will receive the produced goods and services
Our ‘wants’ are unlimited … our resources are not → scarcity
→ For us (simple consumers) mostly time and money
Scarcity → Choices
Choices → Competition
Competition → Optimal allocation of resources
Optimal allocation of resources → Efficiency (& inequality)
Opportunity costs: the net value of your second choice
→ What would you have been doing if you weren’t here right now? (your second
choice)
- Net value = ‘value’ of alternative choice - costs of alternative
Explicit costs: What does it cost?
Implicit costs: What do I give up?
Economic costs = explicit costs + implicit costs
Which choice do we make?:
- Choice which has the higher value than the economic costs
- Economic rent: The difference between value and economic costs
What is the real price of buying a product?:
- The alternative product you cannot buy
- Relative prices
- If a burger is 4,- and a beer is 2,-
1. Price burger = 2 beer
2. Price beer = ½ burger
,What is the real price of producing a certain product?
- The product you cannot produce because of that
- If a firm can make 100 TV’s or 70 Laptops in one hour:
→ Price laptop: 10/7 TV’s
→ Price TV: 7/10 Laptop
Sunk costs: Costs that cannot be recovered
Sunk costs fallacy: Wrongly taking sunk costs into account in decision making
Sunk costs affect our emotions, we experience them as losses
Rough rules:
- If previously incurred costs can no longer be reversed, you should not include them in
your current considerations
- If previously incurred costs can be (partially recovered, you should include the costs
to be reversed as explicit costs in your current considerations
Marginal returns / benefits
- What is the return/benefit of one extra unit
Marginal costs
- What are the costs of one extra unit
Most efficient point:
- Marginal returns = marginal costs
- Or point closest to where MR>MC
, Capitalism: → Market economy
- The economic problem is ‘solved’ using markets and prices
- Society determines through demand what is produced and how this is produced
→ individual decisions of people and organizations
- Invisible hand → prices influence our opportunity costs and optimal choices
- Governments → incentives to influence prices
