If you want to be exposed to our personal opinions and pet theories, you'll have to buy us a drink.). You want to know some finance, but you're also busy living a very full life.
Economics: The Science of How People Deal with ScarcityPeople Deal with Scarcity
You're a high school or college student trying to supplement what you're learning in class, or you're a global citizen who realizes that a good foundation in economics will help you understand everything from business and politics to issues social problems such as poverty and environmental degradation. This book is divided into four parts to make the material easier to understand and access.
Macroeconomics: The Science of Economic Growth and Stabilityof Economic Growth and Stability
The rest of economics is just seeing how scarcity forces people to make trade-offs in more specific situations.
Microeconomics: The Science of Consumer and Firm Behaviourof Consumer and Firm Behaviour
The Part of Tens
This icon alerts you that we are explaining a really basic economic concept or fact. This book is designed so that you can jump in and understand what you are reading.
Economics: The Science of How People Deal
Economics studies how people deal with scarcity and the inevitable fact that our wants typically exceed the means available to satisfy them. The fact that life has limits may not at first seem like a good basis for an entire social science, but every government decision, every business decision, and a large part of your personal decisions all come down to deciding how to most from limited resources.
What Does Economics Study?
And Why Should You Care?
These two big facts about competitive firms are the basis of Adam Smith's famous invisible hand—the idea that when constrained by competition, each firm's greed ends up acting in a socially optimal way, as if it were led to the right thing from an invisible hand. The price of orange juice is the main thing that affects the amount of orange juice people will buy.
Cake or Ice Cream? Tracking Consumer Choices
Evaluate how happy each possible option can make you
Look at the constraints and trade-offs limiting your options
Choose the option that maximises your overall happiness
But if you're offered ice cream or chocolate cake, you're going to take the cake. But you are willing to do it because the opportunity cost of the ice cream is lower than the benefits of the chocolate cake.
Marginal utility is for the birds!
In the following paragraphs we will discuss three of the most common selection mistakes, but don't be too worried when you read them. The costs and benefits are absolute, but people make the mistake of thinking of the costs and benefits of driving to the next city in terms of percentages or proportions.
Producing the Right Stuff in the Right Way to Maximise
Human Happiness
The society must figure out all the possible combinations of goods and services that it can produce given its limited resources and the cur-
The society must choose one of these possible output combinations – presumably, the combination that maximises happiness
But if you start at point D, where you are already producing a lot of oranges, you have to give up a lot of apples to get just a few more oranges. For example, suppose you are considering a PPF where the two output goods are wheat and steel.
Communism, long lines and toilet paper
Government intervention is a powerful force to turn economic activity around, but it does not necessarily make the economy better. Government intervention must therefore be carefully thought through, in case it makes the situation worse rather than better. In the real world, few societies choose an extreme type of economy, such as one that is entirely market-based or one that has constant and ubiquitous government intervention.
Instead, most societies opt for a mix of markets, government intervention, and what economists call traditional production.
The wine lakes
The result is that most mixed economies today are a mixture of the other two pure types: the command economy and the market economy. The exact nature of the mix depends on the country, with the United Kingdom and the United States having more emphasis on markets, while France and Germany, for example, have more emphasis on government intervention. At the end of the day, all government interventions – both good and bad – are the result of a political process.
In a democracy, the measure of government intervention is, in general, a reflection of the will of the people.
Catching up quickly
In particular, the patents granted by governments provide a great economic incentive for both individuals and businesses to innovate. For the first time in world history, there was a secure financial incentive to use your brain to innovate. Far more art is produced when artists know they can make a living from their products.
Smart new technologies require smart, well-educated researchers, and you won't get them without good education systems.
Macroeconomics
The Science of Economic Growth
Keynesian model to illustrate the policies that economists believe can best be used to combat recessions. Finally, we touch on the factors that economists believe are essential to fostering sustainable economic growth and rising living standards.
Measuring the Macroeconomy
How Economists Keep Track of Everything
Figure out how much tax people have to pay. For simplicity, assume that the only tax is an income tax and that the income tax rate is given
Economists say that Heather has an absolute advantage over Adam in producing both goods, meaning that she is the more efficient producer of both; with the same amount of labor input (one working day), she can produce more than her brother. Ricardo pointed out that this argument based on absolute advantage is false and that Heather should in fact never fix bikes despite being the most efficient bike repairer. And Adam should specialize in bicycle repair because he is the lower cost producer of bicycle repair.
However, what matters in life is not inputs, but outputs - the things people actually want to consume.
Inflation Frustration: Why More Money Isn’t Always a Good Thing
The supply of money is under government control and the government can very easily print more money anytime it wants. For any given supply of money, supply and demand interact to set a value for each unit of money. If money is scarce, every piece of money is very valuable; fewer pieces of money translate into fewer chances to avoid having to participate in bartering.
Prices and the value of money are inversely related, meaning that when the value of money rises, prices fall (and vice versa).
Beating barter: Show me the money!
But if the government vastly increases the money supply, each individual unit of money loses value because it is easy to raise enough money to avoid barter. If a government increases the supply of money at the same rate as the demand for money increases, prices do not change. If the government increases the money supply faster than the demand for money grows, inflation results because money becomes relatively more abundant and each piece of money becomes relatively less valuable.
If the government increases the supply of money more slowly than the demand for money grows, deflation results because each piece of money becomes relatively more valuable.
Croesus and Kublai: The kings of money
As you learn more about these three reasons for increasing the money supply, keep in mind what we discussed in the previous section: if the supply of money increases faster than the demand for money, inflation results. And this is true for good reasons, such as wanting to help the economy out of a recession, and for bad reasons, such as helping debtors repay their loans with less valuable money. Until very recently, printing new bills was difficult because most of the world's paper currencies were backed by a valuable metal, such as gold.
Under this system, every piece of paper money circulating in the economy could be converted into a certain amount of gold, so anyone who had cash was able to redeem their cash for gold whenever they wanted.
Hyperinflation and Hitler
This so-called gold standard made it difficult for the government to devalue the currency by printing a lot. Even if the government isn't trying to use inflation to avoid raising taxes, one group in particular is always pressuring it to circulate more money. We get into monetary policy in detail in Chapter 7, but the basic idea is that if the economy is in recession, the government can print some new money and spend it.
In addition, all those companies that received money from the government can now spend this new money themselves.
Inflation, angry farmers and The Wizard of Oz
As we explained in the earlier section “Buying Inflation: The Risks of Too Much Money,” the value of money is determined by the interaction of the supply of money with the demand for money. In the example from the previous section (based on data from Table 5-1), inflation between 2005 and 2006 is 8.8 percent, which means that the cost of living for a typical student with a bachelor's degree increased by 8.8 percent have increased. You get better beer for the same price, but this quality is not reflected in the data.
For example, if the inflation rate in the previous example turns out to be 9.3 percent, the real rate of return is 0 percent.
Understanding Why Recessions Happen
SRAS
Because prices are set at Po in the short run, the economy's first response is to move from point A to point B. They remain high despite the fact that there is less demand for output in the economy. This is an underlying reason why the economy moves horizontally from point A to point B in Figure 6-5 after the negative demand shock.
He was inspired by the terrible state of the economy during the Great Depression of the 1930s.
What makes a recession a recession?
NX stands for net exports – the value of our exports minus the value of our imports. If you look closely, you will see that this equation shows that the total planned expenditure on goods and services in the economy (PE) depends on the total income in the economy (Y). PE = A + c(1 – t)Y (5) The variable A represents autonomous expenditure, by which economists mean the part of planned expenditure that does not depend on income (Y).
As you can see, PE2 > Y2, which means that planned expenditure is greater than production in the economy.
Putting it all together: The economics of the credit crunch
The Bank buys government bonds in order to increase the money supply
The increased money supply causes interest rates to fall because the prices of bonds get bid up
Consumers and businesses respond to the lower interest rates by taking out more loans and using the money to buy more goods
This situation causes a problem: If people believe that an increase in the money supply will cause inflation, they increase their money demand because they expect to need more money to buy things at higher prices. So, although the increase in the money supply tends to lower interest rates, as shown in Figure 7-4, the increase in money demand caused by inflationary fears tends to increase interest rates. Because higher interest rates tend to decrease investment, any increase in interest rates caused by inflation fears counteracts the stimulus that the bank is trying to apply to the economy by increasing the money supply.
As a result, the bank these days only moderately increases the money supply when it wants to stimulate the economy.
What do we do now?
Microeconomics
The Science of Consumer and
In this section we show that economic models assume that individuals make decisions in an attempt to maximize happiness, and that firms make decisions in an attempt to maximize profits. The pleasant but surprising thing is that in the context of competitive markets, corporations pursuing profit and individuals pursuing happiness ultimately use society's limited resources in the most efficient way possible – meaning that well-functioning competitive markets provide the best combination of goods and services produce. from society's limited resources. However, markets are not always set up correctly, so we also cover situations such as monopolies and 'lemon markets' to show you what happens when things go wrong, and how they can be resolved.
Supply and Demand Made Easy
As Figure 8-1 shows, the demand curve slopes downward, reflecting the inverse relationship between the price of cabbage and the number of cabbages people want to buy. Since the price is the same for both points, you know that something other than price caused the change in quantity demanded. Remember that anything other than price that affects quantity demanded shifts the demand curve.
Compare how a £1 change in the price of sherbet causes a much larger change in your friend's quantity.
