Introduction to Economics and Business - Radboud University
Introduction:
Economic growth is measured in GDP and can exist because of;
- Productivity growth
- Physical and intellectual property rights
- Capitalism
- Want of humans to be productive and efficient due to incentives
Efficiency = the size of the economy or average income
Inequality = the distribution of the economy
Consequences of incentives:
- People abuse the system
- Incentives could cancel eachother out
- People do not care about the risk of the bank
Opportunity costs = implicit costs = net value
The economic problem
- What should be produced
- How much needs to be produced
- How is it produced
- Who should receive the product
Sunk costs fallacy = wrongly taken, or not taking, sunk costs into account
Diminishing marginal utility= the second product gives less happiness
Marginal analysis = What is the optimum quantity of a choice
(consists of marginal revenue and marginal costs)
Capitalism as an invisible hand = prices influence OC and choices
Maximum efficiency = marginal costs = marginal benefits
MAximum efficiency = where the marginal cost is the lowest
Most efficient point = closest to where marginal benefits are higher than marginal costs
Option A Option B
Explicit costs Direct payment A Direct payment B
Implicit costs (OC) OC(A) = WTP(B) - ExC(B) OC(B) = WTP(A) - ExC(A)
Economic costs ExC(A) + OC(A) ExC(B) + OC(B)
Economic rent WTP(A) -EcoC(A) WTP(B) - EcoC(B)
Trade and exchange
, GDP= sum of all income of all citizens OR the sum of all value added
GDP per capita = total value of economy / amount of people (productivity)
Real GDP per capita = GDP corrected by inflation
PPP = purchasing power parity -> indicates income
Problem using GDP = only includes products and services that we buy or sell. -> inadequate
measure of economy. Also when wealth is destroyed it does not decrease or renting for
example does in increase GDP
PPF = Production Possibility Frontier
Aim: show advantages when the production and exchange changes
- Constant line means constant OC
- Not constant means OC are increasing
- Trade and exchange cause the PPF to shift outward because there can be produced
more in the same time/ with the same resources (welfare-enhancing effect)
Autarky = no trade and lot of specialization
Exchange in the market;
- Stimulates productivity growth through specialization
- Creates more welfare
- Less opportunity costs
Absolute advantage = can produce more
Comparative advantage = can produce at a lower opportunity cost
When the price is between the OC of both producers, trade
It causes specialization
AA = both producers should produce what they are the best at and then trade to get the
optimum quantity of goods in the most efficient manner
AA in both products-> not trade
Markets
Introduction:
Economic growth is measured in GDP and can exist because of;
- Productivity growth
- Physical and intellectual property rights
- Capitalism
- Want of humans to be productive and efficient due to incentives
Efficiency = the size of the economy or average income
Inequality = the distribution of the economy
Consequences of incentives:
- People abuse the system
- Incentives could cancel eachother out
- People do not care about the risk of the bank
Opportunity costs = implicit costs = net value
The economic problem
- What should be produced
- How much needs to be produced
- How is it produced
- Who should receive the product
Sunk costs fallacy = wrongly taken, or not taking, sunk costs into account
Diminishing marginal utility= the second product gives less happiness
Marginal analysis = What is the optimum quantity of a choice
(consists of marginal revenue and marginal costs)
Capitalism as an invisible hand = prices influence OC and choices
Maximum efficiency = marginal costs = marginal benefits
MAximum efficiency = where the marginal cost is the lowest
Most efficient point = closest to where marginal benefits are higher than marginal costs
Option A Option B
Explicit costs Direct payment A Direct payment B
Implicit costs (OC) OC(A) = WTP(B) - ExC(B) OC(B) = WTP(A) - ExC(A)
Economic costs ExC(A) + OC(A) ExC(B) + OC(B)
Economic rent WTP(A) -EcoC(A) WTP(B) - EcoC(B)
Trade and exchange
, GDP= sum of all income of all citizens OR the sum of all value added
GDP per capita = total value of economy / amount of people (productivity)
Real GDP per capita = GDP corrected by inflation
PPP = purchasing power parity -> indicates income
Problem using GDP = only includes products and services that we buy or sell. -> inadequate
measure of economy. Also when wealth is destroyed it does not decrease or renting for
example does in increase GDP
PPF = Production Possibility Frontier
Aim: show advantages when the production and exchange changes
- Constant line means constant OC
- Not constant means OC are increasing
- Trade and exchange cause the PPF to shift outward because there can be produced
more in the same time/ with the same resources (welfare-enhancing effect)
Autarky = no trade and lot of specialization
Exchange in the market;
- Stimulates productivity growth through specialization
- Creates more welfare
- Less opportunity costs
Absolute advantage = can produce more
Comparative advantage = can produce at a lower opportunity cost
When the price is between the OC of both producers, trade
It causes specialization
AA = both producers should produce what they are the best at and then trade to get the
optimum quantity of goods in the most efficient manner
AA in both products-> not trade
Markets
