Economics for IB summary (Final exam)

This is a summary for the course Economics for International Business at the University of Groningen.

The document contains thorough summaries for chapters 1to 13 of the book Principles of Microeconomics, third european edition by M. McDowell, R. Thom, I. Pastine, R. Frank and B. Bernanke. These chapters are asked for in the Final exam for international marketing.

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Economics for IB – Book summary

Chapter 1 – thinking like an economist
Economics – the study of how people make choices under conditions od scarcity and of the
results of those choices for society. Scarcity principle – (no free lunch principle) although we have boundless needs and wants, the
resources available to us are limited, so having more of one good thing usually means having
less of another. Cost-benefit principle – an individual (or a firm, or a society) should take action is, and only if,
the extra benefits from taking that action are at least as great as the extra costs.
- An individual (or firm/society) should take an action if, and only if, the extra benefit
from taking the action is at least as great as the extra cost.
- The benefit of taking any action minus the cost of taking the action is called economic
surplus from that action.

Rational person – someone with well-defined goals, who fulfils those goals as best she can. Economic surplus – the economic surplus. From taking any action is the benefit of taking that
action minus its costs Opportunity costs – the opportunity cost of an activity is the value of the next best alternative
that must be foregone in order to undertake the activity. Pitfall 1: measuring costs and benefits as proportions rather than absolute money amounts
- Do not look at the proportion, look at the absolute money amount
- E.g save 1% or save $10

Pitfall 2: ignoring the opportunity costs
- Do not ignore the value of foregone opportunities

Pitfall 3: failure to ignore sunk costs
- Sunk costs – a cost that is beyond recovery at the moment a decision must be made
o E.g. a non-refundable flight ticket that has already been paid for, sunk cost
- The only costs that should influence a decision about whether to take an action are
those that we can avoid by not taking the action.

Pitfall 4: failure to understand the average marginal distinction
- Marginal costs – the increase in total cost that results from carrying out one additional
unit of activity
- Marginal benefit – the increase in total benefit that results from carrying out one
additional unit of an activity.
- When wanting to discover the proper level at which to pursue an activity, the cost-
benefit rule is to keep increasing the level as long as the marginal benefit of the activity
exceeds its marginal costs.
- Average costs – the total cost of undertaking n units of an activity divided by n.
- Average benefit – the total benefit of undertaking n units of an activity divided by n.

Microeconomics – the study of individual choice under scarcity, and its implications for the
behavior of prices and quantities in individual markets. Macroeconomics – the study of the performance of national economies and the policies that
governments try to use to try to improve that performance Chapter 2 – markets, specialization and economic efficiency
Absolute advantage – one person has an absolute advantage over another if an hour spent in
performing a task earns more than the other person can earn in an hour in that task Comparative advantage – one person has a comparative advantage over another in a task if his
or her opportunity cost of performing a task is lower than the other persons opportunity costs.
- Everyone does best when each person (or country) concentrates on the activities for
which his or her opportunity cost is lower

Production possibilities curve – a graph that describes the maximum amount of one good that
can be produced for every possible level of production of the other good.
- Attainable point – any combination of goods that can be produced using currently
available resources
- Unattainable point – any combination of goods that cannot be produced using currently
available resources
- Inefficient point – any combination of goods for which currently available resources
enable an increase in the production of one good without a reduction in the production
of the other
- Efficient point – any combination of goods for which currently available resources do
not allow an increase in the production of one good without a reduction in the
production of the other.

The principle of increasing opportunity costs (low hanging fruit principle) – in expanding the
production of any good, first employ those resources with the lowest opportunity cost, and
only afterwards turn to resources with higher opportunity costs Chapter 3 – markets, supply, demand and elasticity
Market – the market for any god consists of buyers or sellers of that good Demand curve – a schedule or graph showing the quantity of a good that buyers wish to buy at
each price