economie voc

Chapter 1

The fundamentals of economics

Economics

the social science that studies how societies use scarce resources to produce valuable goods and services, and to distribute them among people.

Inputs

The limited resources in the world (labour, capital, natural resources, and entrepreneurship)

Scarcity

The excess of human wants over what can actually be produced.

A trade-off

Giving up one thing to get something else.

The opportunity cost

Is what you give up to get something

Rational choices

The weighing up of marginal costs and marginal benefits of any decision or activity.

Marginal changes

Describes small, additional changes to an existing plan or activity.

Marginal Benefit

The additional satisfaction, utility, or financial gain a consumer or producer receives from consuming or producing one additional unit of a good or service.

Marginal Cost

The additional cost incurred by producing or consuming one additional unit of a good or service.

Homo economicus

Is assumed to have perfect information, which enables to weigh up the benefit of any activity against its (opportunity) cost, in order to make optimal choices.

Bounded rationality

The limit to the rational choices people make, until they make irrational decisions.

Homo socialis or homo universalis

Putting forward a variety of goals that go beyond merely seeking profit maximization.

The 17 Sustainable Development Goals (SDGs)

Highlights a holistic perspective for solving societal and economic problems by integrating multiple components as a system.

Incentives

A change in marginal cost or a change in marginal benefit will change the incentives and will lead people to change their choice.

Self-interest.

Choices made to benefit oneself

Social-interest

Choices made to benefit society

The invisible hand

A metaphor for the self-regulatory effect of markets, where each individual, by acting in his own self-interest, may actually promote the collective well-being for society as a whole.

A fallacy

A flaw in logic or an incorrect assumption that leads to mistaken conclusions about how economies work.

The post hoc fallacy

Occurs when we assume that, because one event occurred before another event, the first event caused the second event.

Correlation

Indicates that two events or processes are associated in a measurable way.

Causality

Indicates that one event causes another.

The fallacy of composition

This is the mistaken assumption that what is true for one must be true for all involved.

Ceteris paribus

Means that all other variables are held constant.

The ceteris paribus fallacy

Lies in the fact that if we fail to hold the other variables constant, we may end up drawing the wrong conclusion on a certain relationship.

Microeconomics

Concerned with individual parts of the economy. It is concerned with the demand and supply of particular goods and services, and resources.

Macroeconomics

Concerned with the economy as a whole. It thus focuses on aggregate demand and aggregate supply.

Aggregate demand

The total amount of spending in the economy, whether by consumers, by customers outside the country for our exports, by the government, or by firms when they buy capital equipment or stock up on raw materials.

Aggregate supply

The total value of goods and services produced in the economy.

The Positive Approach

An objective, fact-based analysis that focuses on what is. It describes, tests, and explains economic behaviors and relationships using verifiable data and cause-and-effect statements without applying personal values or judgment.

The Normative Approach

A subjective, value-based analysis that focuses on what ought to be or what should be. It involves ethical judgments, opinions, and value choices regarding economic policies and outcomes that cannot be proven right or wrong using data alone.

Economic model

A simplified representation of an economic environment.

Consumer goods

Goods meant to consumed only once (hamburgers).

Investment goods

Goods meant to produce consumer goods (machine that makes hamburgers).

The capitalist, free market economy

Where government control is absent, and all decisions are made by individuals and firms.

The planned or command economy

Where all economic decisions are made by the state government, that collectively runs and owns the factors of production

The mixed economies

A combination of both the free and the planned economies.

Inputs

Commodities or services that are used to produce goods and services.

Outputs

Various goods or services that result from the production process and are either consumed or employed in further production.

Labours

Refers to the human time and effort that people use to produce goods and services.

Capital

The stock of equipment, machines, tools, buildings and infrastructure that that businesses use to produce goods and services.

Natural resources

They consist of the land used for farming or the land on which houses, factories, offices and roads are built; the energy resources that fuel our cars and heat our homes; and the raw materials like copper, iron ore and sand.

Entrepreneurship

The human effort that coordinates labour, capital and natural resources to produce goods and services, and the innovation of productions methods.

National income

The sum of all income categories.

The production possibilities frontier

Shows the maximum amounts of production that can be obtained by an economy, given its quantity of inputs and technological knowledge available.

Pareto efficiency

Indicates that the only way to make someone better off is to make someone worse off.

Chapter 2

The market: supply and demand

The demand curve

A schedule or graph showing the quantity demanded of a good at different prices.

The quantity demanded

The amount of the good that consumers are willing and able to purchase at a given price over a given period of time.

The law of demand

The relationship between price and quantity demanded.

A demand schedule

Lists the quantities demanded at each price when all other influencing elements remain the same

The income effect

Suggests that as the price of a good falls, the purchasing power (or real income) of consumers will increase, so they will increase the quantity demanded. Conversely, a rise in the price will reduce the purchasing power of the income and thus lead consumers to lower the quantity demanded.

The substitution effect

When the price of a good rises people will switch to cheaper alternatives or even to substitute goods.

The law of diminishing marginal utility

Suggests that the more of a product a person consumes over a given period of time, the less will be the marginal (or additional) utility or benefit gained from one extra unit of consumption.

The marginal utility

The additional utility from consuming an extra unit of a product

A self-fulfilling prophecy

When the consumer expect the price of a product to rise or fall in the future it effects their choices in which goods to buy at that time, but if for example people think the price of an apple will fall in the next few days they will wait to buy the apple and demand decreases, which might cause the producers of the apple to lower their price so demand returns.

The supply curve

A schedule or graph showing the quantity supplied of a good at different prices.

The quantity supplied

The amount that producers are willing and able to sell at a given price over a given period of time.

The law of supply

The relationship between price and quantity supplied.

The supply schedule

Lists the quantities supplied at each price when all other influencing elements remain the same.

Market equilibrium

The intersection between the supply and demand curve.

The equilibrium price

The price at the intersection between the supply and demand curve.

The equilibrium quantity

The quantity at the intersection between the supply and demand curve.

Chapter 3

Elasticity

The price elasticity

Measures how much the quantity demanded responds to a change in price.

The initial-value method

We divide the change in the value of a variable by its initial value.

The midpoint method

We divide the change in the variable by its average value, that is, the midpoint of the two values.

Perfectly inelastic demand (PED = 0)

This special case is shown by a vertical straight line. Whatever happens to the price, the percentage change in the quantity is zero

Inelastic demand (0 < PED < 1)

The percentage change in the price is larger than the percentage change in the quantity demanded.

Unit elastic demand (PED = 1)

The percentage change in the price equals the percentage change in the quantity demanded.

Elastic demand (PED > 1)

The percentage change in the price is less than the percentage change in the quantity demanded.

Perfectly elastic demand (PED = infinite)

This special case is shown by a horizontal straight line. A(n) (almost) zero percentage change in the price brings a very large percentage change in the quantity demanded.

The income elasticity of demand

Measures how the quantity demanded changes in response to a change in consumer income.

The cross (price) elasticity

Measures how the quantity demanded of one good changes as the price of another good changes.

The price elasticity of supply

Measures by how much the quantity supplied responds to a change in price.

Chapter 4

Application of supply and demand: allocative efficiency

Competitive markets

A market that consists of numerous producers and consumers.