Summary Parkin

Chapter 1 what is economy?
- Scarcity
- Incentive
o Reward to encourage or penalty to discourage
- Economics: social sciences that studies choices
- Microeconomics
o Study of choices of individuals and businesses
- Macroeconomics
o Study of performance of national economy and the global economy


 Goods and services
o Objects that people value and produce to satisfy wants
 Factors of production (HOW?)
o Land
 Natural resources (oil, gas, water, wind, sunshine)
o Labour
 Physical and mental efforts of people who work
 Human capital: knowledge and skill that people obtain (quality of labour)
o Capital
 Tools, instrument, machines, etc to produce goods and services
 Financial capital: money, shares, bonds (not a factor of production)
o Entrepreneurship
 The human resources that organises labour, land and capital
 FOR WHOM?
o Land earns rent
o Labour earns wages
o Capital earns interest
o Entrepreneurship earns profit
- Self-interest
o A choice that is best for you
- Social interest
o An outcome that is best for society as a whole
- Efficient
o When a situation can’t be improved upon
o Resource use is efficient if it is not possible to make someone better off without
making someone else worse off
- Fairness and social interest examples:
o Globalisation
o The information-age monopolies
o Climate change
o Financial instability


The economic way of thinking:
 Trade-off
o An exchange: giving up something in exchange for something else
 Rational choice
 Benefit

,  Preferences: the intensity of a person’s likes and dislikes
 Opportunity cost: the highest-valued alternative that must be given up
 Margin
o Marginal benefit: the benefit that arises from an increase in an activity
o Marginal cost: the opportunity cost of an increase in an activity
 Incentive


- Positive statements
o What is
o Might be right or wrong
o Can be tested by checking facts
- Normative statement
o What ought to be
o You may agree or disagree
- Economic model
o Is a description of some aspects of the economic world that includes only those
features that are needed for the purpose at hand
o To answer positive statements


Graphs used in economic models
 Variables move in the same direction
o Positive or direct relationship
o Linear relationship; straight line
 Variables move in opposite direction
o Negative or inverse relationship
o Linear relationship (downwards)
 Variables have a maximum or a minimum
o Toppen en dalen
 Variables are unrelated


The slope of a relationship
Δy
-
Δx
- Slope of a curved line:
o Calculate the slope at a point on a curve
 Draw a straight line over one point
o Calculate the slope across an arc (piece of curve)
 Calculate the difference between 2 point on the arc


Graphing relationship among more than 2 variable
 Ceteris paribus (cet. par.)
o If all other relevant things remain the same
o When the whole curve shifts in the graph

,Equations of straight lines
o y=a+bx
o y 1 +∆ y=a+b (x1 + ∆ x )
o b=the slope
Chapter 3 demand and supply
- Competitive market: a market that has many buyers and sellers
- Money price: the price of an object
- Relative price: the ratio of one price to another and it is an opportunity cost
Demand
 Demand reflects a decision about which wants to satisfy
 Quantity demanded
o The amount that consumers plan to buy during a given time period at a particular
price
o Measured as an amount per unit of time
 Law of demand
o Other things remaining the same, the higher the price of a good, the smaller is the
quantity demanded; and the lower the price of a good, the greater is the quantity
demanded
 Why does a higher price reduce the quantity demanded?
o Substitution effect
 As the opportunity cost of a good rises, people buy less of that good and
more of its substitutes
o Income effect
 With a higher price and unchanged income, people cannot afford to buy all
the things they previously bought


- Demand
o The entire relationship between the price of the good and the quantity demanded of
the good
- Quantity demanded
o Refers to a point on a demand curve – the quantity demanded at a particular price
- Demand curve
o Shows the relationship between the quantity demanded of a good and its price when
all other influences on consumers’ planned purchases remain the same
- Demand schedule
o A list of the quantity demanded at each price
- Willingness-and-ability-to-pay curve = demand curve = marginal benefit curve
o A measure of marginal benefit
- Change in demand are caused by:
o Prices of related goods
 Substitutes: depends on prices of substitutes
 Complement: a good that is used in conjunction with another good
o Expected future prices
o Income
 Normal good: one for which demand increases as income increases
 Inferior good: one for which demand decreases as income increases
o Expected future income or credit

, o Population
 The larger the population, the greater the demand
o Preferences
- Change in the quantity demanded
o A movement along the demand curve
o Or a shift of the demand curve
Supply
 Quantity supplied
o The amount that producers plan to sell during a given time period at a particular
price
o Measured as an amount per unit of time
 Law of supply
o Other things remaining the same, the higher the price of a good, the greater is the
quantity supplied; and the lower the price of a good, the smaller is the quantity
supplied
 Supply
o The entire relationship between the quantity supplied and the price of a good
 Quantity supplied
o Refers to a point on a supply curve – the quantity supplied at a particular price
 Supply curve
o Shows the relationship between the quantity supplied and its price when all other
influences on producers’ planned sales remain the same
 The supply curve is a graph of a supply schedule
 Minimum-supply-price curve = supply curve = marginal cost curve
o The lowest price at which someone is willing to sell another unit
o This lowest price is marginal cost
 Change in supply is caused by:
o Prices of factors of production
o Prices of related goods produced
 Substitutes in production
 Complements in production
o Expected future prices
o Number of suppliers
o Technology
o The state of nature
 All the natural forces that influence production
 A movement along the supply curve shows a change in the quantity supplied
 A shift of the supply curve shows a change in supply


Market equilibrium
- Equilibrium is a situation in which opposing forces balance each other
- Equilibrium price
o The price at which the quantity demanded equals the quantity supplied
- Equilibrium quantity
o The quantity bought and sold at the equilibrium price
- A market moves towards its equilibrium because:
o Price regulates buying and selling plans
o Price adjusts when plans don’t match