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Book Summary Economics of the Global Era - IBA VU
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Summary of the course Economics of the Global Era of the study International Business Administration
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Chapter 1, The principles and practice of Economics.Economics is the study of people’s choices.
1. The first principle of economics is that people try to optimize; they try to choose the
best available option.
2. The second principle of economics is that economic systems tend to be in
equilibrium, a situation in which nobody would benefit by changing his or her own
behavior.
3. The third principle of economics is empiricism – analysis that uses data. Economists
use data to test theories and to determine what is causing things to happen in the
real world.
Economic agent = any group or individual that makes choices such as consumers, firms,
parents, politicians, etc.
Macroeconomics = study of the whole economy.
Microeconomics = the study of individuals, firms, government.
Equilibrium: a situation when no one benefits by changing his/her behavior.
The free-rider problem exists when an individual or group is able to enjoy the benefits of a
situation without incurring the costs.
Concepts Chapter 1
Economic agent: an economic agent is an individual or a group that makes choices.
Scarce resources: scarce resources are things that people want, where the quantity that
people want exceeds the quantity that is available.
Scarcity: scarcity is the situation of having unlimited wants in a world of limited resources.
Economics: economics is the study of how agents choose to allocate scarce resources and
how those choices affect society.
Microeconomics: microeconomics is the study of how individuals, households, firms and
governments make choices, and how those choices affect prices, the allocation of resources,
and the well-being of other agents.
Macroeconomics: macroeconomics is the study of the economy as a whole.
Macroeconomists study economy-wide phenomena.
Optimization: optimization means picking the best feasible option.
Equilibrium: equilibrium is the situation in which everyone is simultaneously optimizing.
,Budget constraint: a budget constraint shows the bundles of goods or services that a
consumer can choose given her limited budget.
Opportunity cost: opportunity cost is the best alternative use of a resource. This is what an
optimizer is giving up when she allocates for example, her time.
Chapter 2, Economic Methods and Economic Questions.
The scientific method is composed of 2 steps:
1. Developing models that explain some part of the world.
2. Testing those models using data to see how closely the model matches what we
actually observe.
A model is a simplified description of reality.
Causation is when one thing directly affects another. Example: when you are up all night
that will make you tired.
Correlation: when two things are related. Example: in recessions more lipstick is sold.
Positive correlation: they both change in the same direction.
Negative correlation: they change in opposite directions.
If we ignore something that contributes to cause and effect, then that something is an
omitted variable.
Reverse causality is when there is cause and effect, but it goes in the opposite direction as
what we thought.
Concepts Chapter 2
Causation: causation occurs when one thing directly affects another. You can think of it as
the path from cause to effect: turning on the stove causes the water in the kettle to boil.
Correlation: correlation means that two variables tend to change at the same time. As one
variable changes, the other changes as well. There is some kind of connection. It might be
cause and effect, but correlation can also arise when causation is not present.
Positive correlation: positive correlation implies that two variables tend to move in the
same direction.
Negative correlation: negative correlation implies that two variables tend to move in
opposite directions.
Reverse causality: reverse causality occurs when we mix up the direction of cause and
effect.
,Chapter 3, Optimization: doing the best you can
Optimizing in levels:
1. Express al costs and benefits in the same unit.
2. Calculate the total net benefit (benefits – costs) for each option.
3. Choose the option with the highest net benefit.
Decision making using marginal analysis:
What’s the net benefit of one more?
If an option is the best choice, you will be made better off as you move toward it, and worse
off as you move away from it.
Optimizing in differences:
1. Express al costs and benefits in the same unit.
2. Calculate how the costs and benefits change as you move from one option to
another.
3. Apply the principle of optimization at the margin – choose the option that makes you
better off by moving toward it, and worse off by moving away from it.
Concepts Chapter 3
Optimum: the optimum is the optimal choice.
Marginal analysis: marginal analysis is a cost-benefit calculation that studies the difference
between one feasible alternative and the next feasible alternative.
Marginal cost: marginal cost is the extra cost generated by moving from one feasible
alternative to the next feasible alternative.
Chapter 4, Demand, Supply and Equilibrium
In a perfectly competitive market, sellers all sell an identical good or service, and any
individual buyer or any individual seller isn’t powerful enough on his or her own to affect
the market price of that good or service. Every buyer pays and every seller charges the same
market price.
The demand curve plots the relationship between the market price and the quantity of a
good demanded by buyers.
The supply curve plots the relationship between the market price and the quantity of a
good supplied by sellers. The supply curve only shifts when the quantity supplied changes at
a given price.
The competitive equilibrium price equates the quantity demanded and the quantity
supplied.
, When prices are not free to fluctuate, markets fail to equate quantity demanded and
quantity supplied.
The market price is the price at which buyers and sellers conduct transactions.
The market demand curve is the sum of the individual demand curves of all the potential
buyers. It plots the relationship between the total quantity demanded and the market price,
holding all else equal.
If demanded quantity decreases, the demand curve shifts left.
If demanded quantity increases, the demand curve shifts right.
Shifts of the demand curve occur when the following changes:
1. Tastes and preferences.
2. Income and wealth.
3. Availability and prices of related goods.
4. Number and scale of buyers.
5. Buyers’ expectations about the future.
Shifts of the curve are driven by everything that is not the price. Shifts on the curve are
driven by price changes.
The competitive equilibrium is the point at which the market comes to an agreement about
what the price will be (competitive equilibrium price) and how much will be exchanged
(competitive equilibrium quantity) at that price.
Excess demand occurs when customers want more than suppliers provide at a given price.
This situation results in a shortage.
Excess supply occurs when suppliers provide more than consumers want at a given price.
This situation results in a surplus.
Concepts Chapter 4
Perfectly competitive market: in a perfectly competitive market, sellers all sell an identical
good or service, and any individual buyer or any individual seller isn’t powerful enough on
his or her own to affect the market price of that good or service.
Demand curve: a demand curve plots the quantity demanded at different prices.
Law of demand: in almost all cases, the quantity demanded rises when the price falls.
Willingness to pay: the willingness to pay is the highest price that a buyer is willing to pay
for an extra unit of a good.
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