Summary Economics and
Business
Chapter 1 The principles and practice of economics
Economic agent = an individual or a group that makes choices
Scarcity exists because people have unlimited wants in a world of limited resources.
Economics is the study of how agents choose to allocate scarce resources and how
those choices affect society.
Positive economics: describes what people actually do
Normative economics: recommends what people ought to do
Microeconomics = the study of individuals, firms and government
Macroeconomics = the study of the whole economy
Three principles of economics:
1. optimization = making the best choice possible with given information
2. equilibrium = a situation when no one benefits by changing his/her behaviour
3. empiricism = when economist test their ideas with evidence-based analyses
Trade-offs arise when some benefits must be given up in order to gain others.
Budget constraint = the set of things that a person can choose to do (or buy)
without breaking her budget.
Chapter 2 Economic methods and economic
questions
Causation occurs when one thing directly affects another.
Correlation means that two variables tend to change at the same time -as one
variable changes, the other changes as well.
Positive correlation: implies that two variables tend to move in the same
direction.
Summary Economics and Business 1
, Negative correlation: implies that two variables tend to move in opposite
directions.
When the variables have movements that are not related, we say that the
variables have zero correlation.
Omitted variable = something that has been left out of a study that, if included,
would explain why two variables are correlated.
Reverse causality occurs when we mix up the direction of cause and effect.
Chapter 3 Optimization: doing the best you can
Principle of optimization at the margin: if an option is the best choice, you will be
better off as you move towards it, and worse off as you move away from it.
Marginal cost = the extra cost generated by moving from one alternative to the next
alternative.
Chapter 4 Demand, supply and equilibrium
Market = a group of economic agents who are trading a good or service plus the
rules and arrangements for trading.
Market price = the price at which buyers and sellers conduct transactions.
Law of Demand = the quantity demanded rises when the price falls (holding all else
equal).
Willingness to pay = the highest price that a buyer is willing to pay for an extra unit
of a good.
Diminishing marginal benefit: as you consume more of a good, your willingness to
pay for an additional unit declines.
Conditions of a perfectly competitive market:
Every buyer pays and every seller charges the same market price (price takers)
No buyer or seller is big enough to influence that market price (no market power)
All sellers sell an identical good or service ( homogenous goods)
Free entry and exit into the market
Summary Economics and Business 2
, A shift in de demand curve happens when one of the following changes:
Tastes and preferences
Income and wealth
Availability and prices of related goods
Number and scale of buyers
Buyers’ expectations about the future
Movement along the demand curve happens when:
Price
A shift in de supply curve happens when one of the following changes:
Input prices
Technology
Number and scale of sellers
Sellers’ expectations about the future
Movement along the demand curve happens when:
Price
Chapter 5 Consumer and Incentives
Budget set = set of all possible bundles of goods and services that a consumer can
purchase with her income
Consumer surplus = the difference between the willingness to pay and the price
paid for the good
Unit elastic demand → price elasticity equal to 1, 1% price change affects the
quantity demand by 1%
Summary Economics and Business 3
Business
Chapter 1 The principles and practice of economics
Economic agent = an individual or a group that makes choices
Scarcity exists because people have unlimited wants in a world of limited resources.
Economics is the study of how agents choose to allocate scarce resources and how
those choices affect society.
Positive economics: describes what people actually do
Normative economics: recommends what people ought to do
Microeconomics = the study of individuals, firms and government
Macroeconomics = the study of the whole economy
Three principles of economics:
1. optimization = making the best choice possible with given information
2. equilibrium = a situation when no one benefits by changing his/her behaviour
3. empiricism = when economist test their ideas with evidence-based analyses
Trade-offs arise when some benefits must be given up in order to gain others.
Budget constraint = the set of things that a person can choose to do (or buy)
without breaking her budget.
Chapter 2 Economic methods and economic
questions
Causation occurs when one thing directly affects another.
Correlation means that two variables tend to change at the same time -as one
variable changes, the other changes as well.
Positive correlation: implies that two variables tend to move in the same
direction.
Summary Economics and Business 1
, Negative correlation: implies that two variables tend to move in opposite
directions.
When the variables have movements that are not related, we say that the
variables have zero correlation.
Omitted variable = something that has been left out of a study that, if included,
would explain why two variables are correlated.
Reverse causality occurs when we mix up the direction of cause and effect.
Chapter 3 Optimization: doing the best you can
Principle of optimization at the margin: if an option is the best choice, you will be
better off as you move towards it, and worse off as you move away from it.
Marginal cost = the extra cost generated by moving from one alternative to the next
alternative.
Chapter 4 Demand, supply and equilibrium
Market = a group of economic agents who are trading a good or service plus the
rules and arrangements for trading.
Market price = the price at which buyers and sellers conduct transactions.
Law of Demand = the quantity demanded rises when the price falls (holding all else
equal).
Willingness to pay = the highest price that a buyer is willing to pay for an extra unit
of a good.
Diminishing marginal benefit: as you consume more of a good, your willingness to
pay for an additional unit declines.
Conditions of a perfectly competitive market:
Every buyer pays and every seller charges the same market price (price takers)
No buyer or seller is big enough to influence that market price (no market power)
All sellers sell an identical good or service ( homogenous goods)
Free entry and exit into the market
Summary Economics and Business 2
, A shift in de demand curve happens when one of the following changes:
Tastes and preferences
Income and wealth
Availability and prices of related goods
Number and scale of buyers
Buyers’ expectations about the future
Movement along the demand curve happens when:
Price
A shift in de supply curve happens when one of the following changes:
Input prices
Technology
Number and scale of sellers
Sellers’ expectations about the future
Movement along the demand curve happens when:
Price
Chapter 5 Consumer and Incentives
Budget set = set of all possible bundles of goods and services that a consumer can
purchase with her income
Consumer surplus = the difference between the willingness to pay and the price
paid for the good
Unit elastic demand → price elasticity equal to 1, 1% price change affects the
quantity demand by 1%
Summary Economics and Business 3
