CHAPTER 1: WHAT IS ECONOMICS? SPOILER ALERT: EVERYTHING!
Learning goals
The economic problem
Theory of rational choice
Opportunity cost
Imperfect information: moral hazard, adverse selection
Transaction costs: search costs, negotiation and bargaining costs
THE ECONOMIC PROBLEM
In order to satisfy his/her many needs in a context of scarce resources, an economic agent needs to make choices given
the possible alternatives based on the information at his/her disposal.
MANY NEEDS VS LIMITED RESOURCES
Scarce resources…
Every society, organization, family is confronted with a problem of scarcity: the resources are limited, time is limited, and
they are insufficient to satisfy all needs and wants and realize all objectives.
Choices need to be made!
The basic question: how should the limited (or scarce) resources available be used to satisfy the existing needs, knowing
that the same resources can only be used once?
A euro can only be spent once
A minute can only be used once
… Many needs
A need refers to the feeling of a certain lack and the desire to get rid of the lack.
Basic needs
Material needs vs immaterial needs
Individual needs vs collective needs
NEEDS CHANGE BASED ON TIME, CONTEXT, …
Scarce resources and the necessity to make choices
Scarce resources have the characteristic that they can partly or entirely satisfy a need, directly or indirectly. They have a
utility
For instance:
Money buys you goods
Goods fullfill a need, they bring satisfaction, benefit or value to you
This total benefit the goods bring is called its utility
Consumers always strive to maximize utility, given the scarce resources they have
Non-scarce resources: are freely and infinitely available, for example: air.
Scarce resources: can be used in different ways, but they can only be used once.
This leads to the problem of choice.
For instance: people want to drive a nice car, live in a beautiful house, go on vacation three times a year…
Unfortunately, their budget is limited and they do not have enough budget to realize all their desires.
1
,Resources can only be used once
A € spent on a car, can not be spent on a holiday trip anymore.
Time spent watching Netflix can not be spent anymore to read a book or go out with friends.
! Everyone is confronted with scarcity, even Mark Zuckerberg, Christiano Ronaldo or Taylor Swift
Difficult choice: efficiency or equality?
Efficiency: get the maximum out of the available resources.
Equality: refers to the distribution of the advantages of the resources used.
MAKING CHOICES AND OPPORTUNITY COSTS
The same resources can only be used once
Essential insight: the true cost of a choice is nothing more than the value of the best possible alternative choice that is
given up when the choice is made.
This value is called the opportunity cost of the choice made
What is the opportunity cost of
Your choice to be here?
Your choice to pursue a bachelor’s degree?
THE STORY OF RATIONAL CHOICE
IMPERFECT INFORMATION
MORAL HAZARD
Intentional exploitation of information asymmetry one party in an economic exchange deliberately exploits the ignorance
of another party in the transaction to its own advantage and to the disadvantage of the unknowing party.
ADVERSE SELECTION
Unintentional side effect of information asymmetry
Buyers are unable to distinguish good quality from bad quality products
Parties are afraid and play on safe
Instead of high price for good quality, low price for bad quality -- average price for all
Market for good quality disappears
Solution:
Quality labels
Certificates
Guarantees
IMPERFECT OVERVIEW OF ALTERNATIVES
The best agreements are reached when all parties possess over perfect information and make a decision from their own
perspective given the information and the possible alternatives.
They will only reach an agreement if they BOTH believe the agreement will make them better off.
BUT, this requires
perfect overview of alternatives
2
, perfect information about all the alternatives: price, quality, where you can buy it, customer satisfaction ratings,
availability, etc.
Some products/services help you reduce transaction costs (search costs, negotiation and bargaining costs, etc.)
Examples: Vinted, Uber, booking.com & Instagram
CHAPTER 2: ECONOMICS TINDER: MATCHING SUPPLY AND DEMAND
learning goals:
You are able to give a good explanation of the following terms:
o Inferior goods
o Complements and substitutes
o Price elasticity of demand/supply
o Inelastic demand/supply
o Tax incidence
Give at least 4 determinants of of market demand
Explain and illustrate the shift factors of the demand curve
Give at least 4 determinants of of market supply
Explain and illustrate the shift factors of the supply curve
For a given scenario, you are able to explain how the market equilibrium is affected, based on what happens with
demand and supply curves
You are able to explain how a failed harvest still can lead to increased revenues for the producers.
Discuss the factors determining price elasticity of demand
Discuss the factors determining price elasticity of supply
Discuss the impact of indirect taxes on market equilibrium and illustrate graphically
Discuss the impact of government subsidies on market equilibrium and illustrate graphically
Discuss the impact of minimum prices on market equilibrium and illustrate graphically
Discuss the impact of maximum on market equilibrium and illustrate graphically
INTRODUCTION
THE MARKET
A market is:
a physical or virtual place
where buyers & sellers can gather
to facilitate the exchange of goods & services
types of markets: MARKET BUYER (demand side) SELLER (supply PRICE
side)
Labor market employer employee wage
Housing market House buyer House seller price of the house
Stock market Stock buyer Stock seller Price of stock
Dating app market People looking for a App providers Price of the app
only when both
date
parties agree we can Second-hand clothes Second-hand buyers Second-hand Price of the
speak of a successful market sellers clothes
exchange, if not it
failed
The market mechanism plays an important role in modern economics.
3
, The outcomes of the market mechanism are the result of the confrontation between demand (consumers) and supply
(producers).
The market prices which are the result of the confrontation of demand and supply have an important signaling function:
they reveal consumer preferences to producers to let them know how much to produce.
WHICH FACTORS DETERMINE THE PRICE OF A GOOD?
Production costs? E.g. painting, house -- Other factors? Value of consumption?
The main factors determining the price of a good:
Production costs supply side
Willingness to pay of the consumers demand side
ASSUMPTION: PERFECT COMPETITION
For simplicity, we assume that following conditions are fulfilled:
Identical products or services
Many buyers and many sellers = market atomism
No barriers to entry or exit
Perfect information
o Assumptions! Idealized situation for easier reasoning.
o The market of perfect competition
In reality:
Not all products are identical
In some cases there are not many buyers and/or sellers
Some markets have legal or economic barriers to entry/exit
Most of the time buyers and sellers don’t have the same information
If not realistic, why study the market of perfect competition?
It is a good approximation of realistic market forms.
The idealized situation gives us a frame of reference, a benchmark to compare other market forms and market
outcomes to.
MARKET DEMAND
The market demand is the total quantity that all consumers together are willing to buy from a good, taking into account
the price of the good, their income, etc…
Note: The quantity that the consumers are willing to buy ≠ The quantity that the consumers are going to buy
THE MARKET DEMAND FUNCTION
how much consumers are willing to buy is depending on numerous factors:
QDx = f (px, y, u, pz, pw, …, n, other)
QDx = the market demand for good x
4
Learning goals
The economic problem
Theory of rational choice
Opportunity cost
Imperfect information: moral hazard, adverse selection
Transaction costs: search costs, negotiation and bargaining costs
THE ECONOMIC PROBLEM
In order to satisfy his/her many needs in a context of scarce resources, an economic agent needs to make choices given
the possible alternatives based on the information at his/her disposal.
MANY NEEDS VS LIMITED RESOURCES
Scarce resources…
Every society, organization, family is confronted with a problem of scarcity: the resources are limited, time is limited, and
they are insufficient to satisfy all needs and wants and realize all objectives.
Choices need to be made!
The basic question: how should the limited (or scarce) resources available be used to satisfy the existing needs, knowing
that the same resources can only be used once?
A euro can only be spent once
A minute can only be used once
… Many needs
A need refers to the feeling of a certain lack and the desire to get rid of the lack.
Basic needs
Material needs vs immaterial needs
Individual needs vs collective needs
NEEDS CHANGE BASED ON TIME, CONTEXT, …
Scarce resources and the necessity to make choices
Scarce resources have the characteristic that they can partly or entirely satisfy a need, directly or indirectly. They have a
utility
For instance:
Money buys you goods
Goods fullfill a need, they bring satisfaction, benefit or value to you
This total benefit the goods bring is called its utility
Consumers always strive to maximize utility, given the scarce resources they have
Non-scarce resources: are freely and infinitely available, for example: air.
Scarce resources: can be used in different ways, but they can only be used once.
This leads to the problem of choice.
For instance: people want to drive a nice car, live in a beautiful house, go on vacation three times a year…
Unfortunately, their budget is limited and they do not have enough budget to realize all their desires.
1
,Resources can only be used once
A € spent on a car, can not be spent on a holiday trip anymore.
Time spent watching Netflix can not be spent anymore to read a book or go out with friends.
! Everyone is confronted with scarcity, even Mark Zuckerberg, Christiano Ronaldo or Taylor Swift
Difficult choice: efficiency or equality?
Efficiency: get the maximum out of the available resources.
Equality: refers to the distribution of the advantages of the resources used.
MAKING CHOICES AND OPPORTUNITY COSTS
The same resources can only be used once
Essential insight: the true cost of a choice is nothing more than the value of the best possible alternative choice that is
given up when the choice is made.
This value is called the opportunity cost of the choice made
What is the opportunity cost of
Your choice to be here?
Your choice to pursue a bachelor’s degree?
THE STORY OF RATIONAL CHOICE
IMPERFECT INFORMATION
MORAL HAZARD
Intentional exploitation of information asymmetry one party in an economic exchange deliberately exploits the ignorance
of another party in the transaction to its own advantage and to the disadvantage of the unknowing party.
ADVERSE SELECTION
Unintentional side effect of information asymmetry
Buyers are unable to distinguish good quality from bad quality products
Parties are afraid and play on safe
Instead of high price for good quality, low price for bad quality -- average price for all
Market for good quality disappears
Solution:
Quality labels
Certificates
Guarantees
IMPERFECT OVERVIEW OF ALTERNATIVES
The best agreements are reached when all parties possess over perfect information and make a decision from their own
perspective given the information and the possible alternatives.
They will only reach an agreement if they BOTH believe the agreement will make them better off.
BUT, this requires
perfect overview of alternatives
2
, perfect information about all the alternatives: price, quality, where you can buy it, customer satisfaction ratings,
availability, etc.
Some products/services help you reduce transaction costs (search costs, negotiation and bargaining costs, etc.)
Examples: Vinted, Uber, booking.com & Instagram
CHAPTER 2: ECONOMICS TINDER: MATCHING SUPPLY AND DEMAND
learning goals:
You are able to give a good explanation of the following terms:
o Inferior goods
o Complements and substitutes
o Price elasticity of demand/supply
o Inelastic demand/supply
o Tax incidence
Give at least 4 determinants of of market demand
Explain and illustrate the shift factors of the demand curve
Give at least 4 determinants of of market supply
Explain and illustrate the shift factors of the supply curve
For a given scenario, you are able to explain how the market equilibrium is affected, based on what happens with
demand and supply curves
You are able to explain how a failed harvest still can lead to increased revenues for the producers.
Discuss the factors determining price elasticity of demand
Discuss the factors determining price elasticity of supply
Discuss the impact of indirect taxes on market equilibrium and illustrate graphically
Discuss the impact of government subsidies on market equilibrium and illustrate graphically
Discuss the impact of minimum prices on market equilibrium and illustrate graphically
Discuss the impact of maximum on market equilibrium and illustrate graphically
INTRODUCTION
THE MARKET
A market is:
a physical or virtual place
where buyers & sellers can gather
to facilitate the exchange of goods & services
types of markets: MARKET BUYER (demand side) SELLER (supply PRICE
side)
Labor market employer employee wage
Housing market House buyer House seller price of the house
Stock market Stock buyer Stock seller Price of stock
Dating app market People looking for a App providers Price of the app
only when both
date
parties agree we can Second-hand clothes Second-hand buyers Second-hand Price of the
speak of a successful market sellers clothes
exchange, if not it
failed
The market mechanism plays an important role in modern economics.
3
, The outcomes of the market mechanism are the result of the confrontation between demand (consumers) and supply
(producers).
The market prices which are the result of the confrontation of demand and supply have an important signaling function:
they reveal consumer preferences to producers to let them know how much to produce.
WHICH FACTORS DETERMINE THE PRICE OF A GOOD?
Production costs? E.g. painting, house -- Other factors? Value of consumption?
The main factors determining the price of a good:
Production costs supply side
Willingness to pay of the consumers demand side
ASSUMPTION: PERFECT COMPETITION
For simplicity, we assume that following conditions are fulfilled:
Identical products or services
Many buyers and many sellers = market atomism
No barriers to entry or exit
Perfect information
o Assumptions! Idealized situation for easier reasoning.
o The market of perfect competition
In reality:
Not all products are identical
In some cases there are not many buyers and/or sellers
Some markets have legal or economic barriers to entry/exit
Most of the time buyers and sellers don’t have the same information
If not realistic, why study the market of perfect competition?
It is a good approximation of realistic market forms.
The idealized situation gives us a frame of reference, a benchmark to compare other market forms and market
outcomes to.
MARKET DEMAND
The market demand is the total quantity that all consumers together are willing to buy from a good, taking into account
the price of the good, their income, etc…
Note: The quantity that the consumers are willing to buy ≠ The quantity that the consumers are going to buy
THE MARKET DEMAND FUNCTION
how much consumers are willing to buy is depending on numerous factors:
QDx = f (px, y, u, pz, pw, …, n, other)
QDx = the market demand for good x
4
