Economics Lecture 1
Microeconomics is concerned with the economy at the individual level, the actions of firms and
households. Up to industry level.
Macroeconomics analyses the operation of the whole economy. Growth; Unemployment; Inflation;
Exchange Rates
Positive statement: Donald Trump is president of the USA
Normative statement: Donald Trump is the best president the USA has ever had.
A positive statement: A value-free statement which can be tested by an appeal to the facts.
A fact (wright or wrong) , but its accuracy (nauwkeurigheid) can be tested by appealing to the facts.
A normative statement: A value judgement
A statement about what ought or ought not to be, whether something is good or bad, desirable or
undesirable.
The definition of Economics
Economics is concerned with the study of how scarce resources are allocated among unlimited wants
In other words, economics is the study of how society manages its resources
In most societies, resources are allocated by the combined actions of millions of households and
firms
The economic problem: scarcity, choice and opportunity cost
The earth’s resources - & our own! - are limited in supply, i.e. they are scarce relative to our
collective wants
We have wants in terms of our desire for food, clothing, consumer goods and so on
The problem is that our wants exceed our resources. Same for firms & governments
This forces us to make choices
Choices are measured in terms of Opportunity Cost
The production or consumption of one thing involves the sacrifice (opoffering) of alternatives. This
sacrifice of alternatives in the production (or consumption)of a good is known as the opportunity
cost.
Opportunity cost The cost of any activity measured in terms of the best alternative forgone.
Increasing opportunity cost of production When additional production of one good involves ever
increasing sacrifices of another.
Microeconomic issues
-Decisions involve Trade-offs (afwegingen), e.g. pollution controls and income; job or college; higher
wages or profits
-Assume individuals are ‘optimising’ (;make the best or most effective use)
-Assumes rational economic decision making??
marginal costs and marginal benefits
MC < MB →do more
MC > MB → do less
-i.e. assume people take action only if MB > MC, we respond to economic incentives
-Behavioural Economics
Notes:
,Rational choices: Choices that involve weighing up the benefit of any activity against its opportunity
cost so that the decision maker successfully maximises their objective: i.e. happiness or profits.
-
Rational decision making Doing more of an activity if its marginal benefit exceeds its marginal cost
and doing less if its marginal cost exceeds its marginal benefit.
Marginal costs The additional cost of doing a little bit more (or 1 unit more if a unit can be measured)
of an activity
Marginal benefits The additional benefits of doing a little bit more (or 1 unit more if a unit can be
measured) of an activity
Use of Resources: Factors of Production (FOP)
Firms use FOP to produce goods and services.
Land (and natural resources) for which they pay rent
Labour for which they pay wages
Capital for which they pay interest
Enterprise for which they pay profits
FOP are inputs into the production process
They are also scarce
Factors of production or resources: The inputs into the production of goods and services.
What do economists study?
The production possibility curve
- what the curve shows
- microeconomics and the production possibility curve:
choices and opportunity cost
increasing opportunity cost
- macroeconomics and the production possibility curve:
production within the curve
shifts in the curve
Production possibility curve A curve showing all the possible combinations of two goods that a
country can produce within a specified time period with all its resources fully and efficiently
employed.
Notes:
A production possibility curve illustrates the microeconomic issues of choice and opportunity cost.
It also illustrates Increasing opportunity cost of production When additional production of one good
involves ever increasing sacrifices of another.
-
, Economics Lecture 2
Importance of S&D in a Market Economy
They determine the quantity of each good produced and consumed and…
The price at which it is sold which…
Plays a critical role in the allocation of the economy’s scarce resources and…
Can be used to predict the impact on the economy of various events and policies
The Law of Demand
Ceteris Paribus (all other things staying the same), the higher the price of a good or service, the less
will be the quantity demanded; and the lower the price of a good or service, the greater will be the
quantity demanded.
The relationship between demand and price
The law of demand When the price of a good rises, the quantity demanded will fall.
Two reasons:
1. The purchasing power of their income (their real income) has fallen. This is called the income
effect of a price rise.
Income effect The effect of a change in price on quantity demanded arising from the consumer
becoming better or worse off as a result of a price change.
2. Substitution effect of a price rise.
Substitution effect The effect of a change in price on quantity demanded arising from the consumer
switching to or from alternative (substitute) products.
The demand curve: A graph showing the relationship between the price of a good and the quantity
of the good demanded over a given time period.
-Assumptions: Other things remain equal (ceteris paribus), and a given time period.
Prices is measured on the vertical axis; quantity demanded is measured on the horizontal axis.
Individual’s and market demand curves; A demand curve can be for an individual consumer or group
of consumers, or more usually for the whole market.
Other determinants of demand are:
-Tastes
-Number and price of substitute goods
-Number and price of complementary goods
-Income
-Distribution of income (inkomensverdeling)
-Expectations
Substitute goods: A pair of goods which are considered by consumers to be alternatives of each
other. As the price of one goes up, the demand for the other rises.
Complementary goods: A pair of goods consumed together. As the price of one goes up, the demand
for both goods will fall.
Movements along and shifts in the demand curve
Microeconomics is concerned with the economy at the individual level, the actions of firms and
households. Up to industry level.
Macroeconomics analyses the operation of the whole economy. Growth; Unemployment; Inflation;
Exchange Rates
Positive statement: Donald Trump is president of the USA
Normative statement: Donald Trump is the best president the USA has ever had.
A positive statement: A value-free statement which can be tested by an appeal to the facts.
A fact (wright or wrong) , but its accuracy (nauwkeurigheid) can be tested by appealing to the facts.
A normative statement: A value judgement
A statement about what ought or ought not to be, whether something is good or bad, desirable or
undesirable.
The definition of Economics
Economics is concerned with the study of how scarce resources are allocated among unlimited wants
In other words, economics is the study of how society manages its resources
In most societies, resources are allocated by the combined actions of millions of households and
firms
The economic problem: scarcity, choice and opportunity cost
The earth’s resources - & our own! - are limited in supply, i.e. they are scarce relative to our
collective wants
We have wants in terms of our desire for food, clothing, consumer goods and so on
The problem is that our wants exceed our resources. Same for firms & governments
This forces us to make choices
Choices are measured in terms of Opportunity Cost
The production or consumption of one thing involves the sacrifice (opoffering) of alternatives. This
sacrifice of alternatives in the production (or consumption)of a good is known as the opportunity
cost.
Opportunity cost The cost of any activity measured in terms of the best alternative forgone.
Increasing opportunity cost of production When additional production of one good involves ever
increasing sacrifices of another.
Microeconomic issues
-Decisions involve Trade-offs (afwegingen), e.g. pollution controls and income; job or college; higher
wages or profits
-Assume individuals are ‘optimising’ (;make the best or most effective use)
-Assumes rational economic decision making??
marginal costs and marginal benefits
MC < MB →do more
MC > MB → do less
-i.e. assume people take action only if MB > MC, we respond to economic incentives
-Behavioural Economics
Notes:
,Rational choices: Choices that involve weighing up the benefit of any activity against its opportunity
cost so that the decision maker successfully maximises their objective: i.e. happiness or profits.
-
Rational decision making Doing more of an activity if its marginal benefit exceeds its marginal cost
and doing less if its marginal cost exceeds its marginal benefit.
Marginal costs The additional cost of doing a little bit more (or 1 unit more if a unit can be measured)
of an activity
Marginal benefits The additional benefits of doing a little bit more (or 1 unit more if a unit can be
measured) of an activity
Use of Resources: Factors of Production (FOP)
Firms use FOP to produce goods and services.
Land (and natural resources) for which they pay rent
Labour for which they pay wages
Capital for which they pay interest
Enterprise for which they pay profits
FOP are inputs into the production process
They are also scarce
Factors of production or resources: The inputs into the production of goods and services.
What do economists study?
The production possibility curve
- what the curve shows
- microeconomics and the production possibility curve:
choices and opportunity cost
increasing opportunity cost
- macroeconomics and the production possibility curve:
production within the curve
shifts in the curve
Production possibility curve A curve showing all the possible combinations of two goods that a
country can produce within a specified time period with all its resources fully and efficiently
employed.
Notes:
A production possibility curve illustrates the microeconomic issues of choice and opportunity cost.
It also illustrates Increasing opportunity cost of production When additional production of one good
involves ever increasing sacrifices of another.
-
, Economics Lecture 2
Importance of S&D in a Market Economy
They determine the quantity of each good produced and consumed and…
The price at which it is sold which…
Plays a critical role in the allocation of the economy’s scarce resources and…
Can be used to predict the impact on the economy of various events and policies
The Law of Demand
Ceteris Paribus (all other things staying the same), the higher the price of a good or service, the less
will be the quantity demanded; and the lower the price of a good or service, the greater will be the
quantity demanded.
The relationship between demand and price
The law of demand When the price of a good rises, the quantity demanded will fall.
Two reasons:
1. The purchasing power of their income (their real income) has fallen. This is called the income
effect of a price rise.
Income effect The effect of a change in price on quantity demanded arising from the consumer
becoming better or worse off as a result of a price change.
2. Substitution effect of a price rise.
Substitution effect The effect of a change in price on quantity demanded arising from the consumer
switching to or from alternative (substitute) products.
The demand curve: A graph showing the relationship between the price of a good and the quantity
of the good demanded over a given time period.
-Assumptions: Other things remain equal (ceteris paribus), and a given time period.
Prices is measured on the vertical axis; quantity demanded is measured on the horizontal axis.
Individual’s and market demand curves; A demand curve can be for an individual consumer or group
of consumers, or more usually for the whole market.
Other determinants of demand are:
-Tastes
-Number and price of substitute goods
-Number and price of complementary goods
-Income
-Distribution of income (inkomensverdeling)
-Expectations
Substitute goods: A pair of goods which are considered by consumers to be alternatives of each
other. As the price of one goes up, the demand for the other rises.
Complementary goods: A pair of goods consumed together. As the price of one goes up, the demand
for both goods will fall.
Movements along and shifts in the demand curve
