lecture 1
measuring income inequality:
measure of income
gross domestic product :the value of the output of a country’s economy in a given period
-GDp per capita: typical inhabitant
-real GDp per capita: spending power of typical inhabitant
Purchasing Power Parity = comparison of the goods people can buy in different countries
with different currencies.
comparing income within countries by looking at the income distribution
-rich/poor ratio
ratio of the average income of the tenth decile and the first decile
-90/10 ratio
ratio of the income of two individuals at the ninetieth and tenth
uitkomst; hoe lager de ratio, hoe gelijker
technological progress
technological progress has significantly increased living standards
Capital goods = durable and costly non-labour inputs used in production, no cost for user
economic system
Institutions = The laws and informal rules that regulate pol, eco and soc interactions
3 key institutions of a capitalist economy: private property, markets, firms == dynamic
Economic conditions: Firms, private property, or markets may fail.
Political conditions: regulated by the government. They also provide essential services infra
Global impacts – climate change
Local impacts – pollution in cities,
external effects
Lecture 2
When individuals pursue their self-interest, the invisible hand will spontaneously arise and
coordinate behavior yielding a socially beneficial outcome. (not always, external effects)
Social dilemma:a situation in which actions taken independently by self-interested
individuals result in a socially suboptimal outcome (Tragedy of the common)
Common-pool resources= resources that are shared, not owned by anyone. Easily
overexploited unless we control access in some way
Free riding = Benefiting from the contributions of others to some cooperative project without
contributing oneself
Game theory a set of combinations of strategic interactions
Payoff matrix = A table of the payoffs associated with every possible combination of
strategies chosen by two or more players in a game
, Dominant strategy: Action that yields the highest payoff for a player, no matter what the
other players do
Prisoners’ dilemma = A game in which the payoffs in the dominant strategy equilibrium are
lower for each player, and also lower in total
Nash equilibrium= there is no improvement for any player to deviate from the strategy, if
this isn’t the best for the players than: dominant strategy
Public policy: impose a tax or subsidy → Negative externality is now internalized.
-Social preferences are driven by self interest, so you care about your own playoff
-Players do not pay for the consequences of their actions on others.
-Players could not coordinate their actions beforehand.
Policy makers evaluate outcomes on the basis of:
• (Pareto) Efficiency = There is no alternative technically feasible allocation in which at least
one person would be better off, and nobody worse off.
Pareto criterion = A desirable attribute of an allocation is that it be Pareto efficient
Redistribution; second chance to be better off
• Fairness = Evaluation based on one’s conception of justice
-substantive judgements of fairness: based on the characteristics, How unequal they
are
-procedura judgements of fairness: How the inequalities came about, hard work or
not
• (or individual dignity and freedom, diversity, conformity to perceptions)
Policies influence what actions/preferences people decide to take via
-Prohibitions and directives
-Incentives: policy changes the benefits/costs of alternative courses/ action open to
individual.
-The information available
1. Survey questions (problem: subjective answers)
2. Statistical studies of economic behavior (problem: cannot control the decision-making
environment in which preferences were revealed)
3. Lab experiments: • Can create a control/treatment group for comparison
• Results can be replicated
4. Field experiments: • Lab experiments may not predict real-world decision making
• More realistic context in which people make decisions
measuring income inequality:
measure of income
gross domestic product :the value of the output of a country’s economy in a given period
-GDp per capita: typical inhabitant
-real GDp per capita: spending power of typical inhabitant
Purchasing Power Parity = comparison of the goods people can buy in different countries
with different currencies.
comparing income within countries by looking at the income distribution
-rich/poor ratio
ratio of the average income of the tenth decile and the first decile
-90/10 ratio
ratio of the income of two individuals at the ninetieth and tenth
uitkomst; hoe lager de ratio, hoe gelijker
technological progress
technological progress has significantly increased living standards
Capital goods = durable and costly non-labour inputs used in production, no cost for user
economic system
Institutions = The laws and informal rules that regulate pol, eco and soc interactions
3 key institutions of a capitalist economy: private property, markets, firms == dynamic
Economic conditions: Firms, private property, or markets may fail.
Political conditions: regulated by the government. They also provide essential services infra
Global impacts – climate change
Local impacts – pollution in cities,
external effects
Lecture 2
When individuals pursue their self-interest, the invisible hand will spontaneously arise and
coordinate behavior yielding a socially beneficial outcome. (not always, external effects)
Social dilemma:a situation in which actions taken independently by self-interested
individuals result in a socially suboptimal outcome (Tragedy of the common)
Common-pool resources= resources that are shared, not owned by anyone. Easily
overexploited unless we control access in some way
Free riding = Benefiting from the contributions of others to some cooperative project without
contributing oneself
Game theory a set of combinations of strategic interactions
Payoff matrix = A table of the payoffs associated with every possible combination of
strategies chosen by two or more players in a game
, Dominant strategy: Action that yields the highest payoff for a player, no matter what the
other players do
Prisoners’ dilemma = A game in which the payoffs in the dominant strategy equilibrium are
lower for each player, and also lower in total
Nash equilibrium= there is no improvement for any player to deviate from the strategy, if
this isn’t the best for the players than: dominant strategy
Public policy: impose a tax or subsidy → Negative externality is now internalized.
-Social preferences are driven by self interest, so you care about your own playoff
-Players do not pay for the consequences of their actions on others.
-Players could not coordinate their actions beforehand.
Policy makers evaluate outcomes on the basis of:
• (Pareto) Efficiency = There is no alternative technically feasible allocation in which at least
one person would be better off, and nobody worse off.
Pareto criterion = A desirable attribute of an allocation is that it be Pareto efficient
Redistribution; second chance to be better off
• Fairness = Evaluation based on one’s conception of justice
-substantive judgements of fairness: based on the characteristics, How unequal they
are
-procedura judgements of fairness: How the inequalities came about, hard work or
not
• (or individual dignity and freedom, diversity, conformity to perceptions)
Policies influence what actions/preferences people decide to take via
-Prohibitions and directives
-Incentives: policy changes the benefits/costs of alternative courses/ action open to
individual.
-The information available
1. Survey questions (problem: subjective answers)
2. Statistical studies of economic behavior (problem: cannot control the decision-making
environment in which preferences were revealed)
3. Lab experiments: • Can create a control/treatment group for comparison
• Results can be replicated
4. Field experiments: • Lab experiments may not predict real-world decision making
• More realistic context in which people make decisions
