What is Economics

Def economics → “keeping your house in order”

Textbook def → how ppl interact with everything to create their livelihood and how that changes w/ time

Microeconomics → individuals
Macroeconomics → global/international…

3 main “participants” in economics:

U = utility, π = profit
1.​ households/individuals/consumers: goal is to max U
2.​ firms/businesses/producers: max π
3.​ Governments: maximize welfare of society

Overall goal: max satisfaction

Satisfaction = utility

Choices and costs are the basis for all economics

Def theory → the “how”, an abstract statement to understand a part of reality

Positive vs. Normative Statements:

Positive statements describe behaviour as it appears (based on facts/numbers/real measurable things that can be
proven)
Normative statements prescribe behaviour as it should be (based on opinion/generalizations/can be true or false
depending on person/evidence…)

Modern Economics:

Def free market → transactions are self-organizing. Sellers choose the prices of their product. A system based on
supply and demand, little government control.

Def institutions → the structures/rules that govern prices/choices/legal rights/the economy

In everyday life, people make marginal decisions. These are decisions where you weigh the benefit of
consuming/producing one more product.
​ For example, if you buy 3 doughnuts, the decision as to whether it is worth buying a fourth doughnut.
Conversely, if you are a supplier, if you produce 100,000 of your product, the choice as to whether you should
produce more, or would that decrease demand.

Demand

Law of Demand: Price and quantity demanded are inversely related.

For example, if the price of a product is very high, consumers have a low demand for the product, because not as
many people would pay that price for a product.

Demand curves always have a downward slope, as price increases because:

1.​ Demand and price are inversely related
2.​ Income effect: as the price of a product decreases, the actual income of a consumer increases (because they
have to spend less to get the product, which means they have more money to spend). This lends more
 money to spend on other goods, which increases the demand for other products. Therefore, as price
decreases, demand increases, and as price increases, less income, so demand decreases.
3.​ Law of marginal utility: Satisfaction/utility of a consumer decreases as more of the product is consumed by
the consumer. So, consumers will only buy the product if the price matches the lower marginal utility.
Therefore, as the price decreases, they will consume more (more demand).

5 determinants of demand:
1.​ Consumer’s income
2.​ Inferior vs normal goods
a.​ Inferior goods are goods where, as the income increases, demand decreases (such as poor quality
items)
b.​ Normal goods are goods where, as the income increases, demand increases as well (such as staple
groceries)
3.​ Price of Services/Goods
a.​ There are two types of services/goods. 1. Substitute goods. These are goods where you don’t care
what brand you get, and you will choose the cheaper one. 2. Complementary goods. These are
goods that go hand in hand, so if you buy one, you tend to buy the other (ex, Bread and butter).
b.​ For substitute goods, if the price of the item increases, demand decreases because you buy the
other item. For complementary goods, as the price decreases, demand for both products increases,
because you buy more of both products.
4.​ Consumer Expectations
a.​ Consumers expect prices to fall at certain times, so demand is dependent on the time of year
b.​ Example. If you want candy, you can expect the price to fall right after Halloween
5.​ Number of buyers

Def GDP
GDP is the total amount of FINISHED goods/services produced/provided within a country in a certain time period
(usually a year). ​
Note → per capita means per “person”

Def Disposable income → income to be spent after taxes

Nominal gdp vs real gdp:

Nominal gdp is the gdp of a country numerically, in a year. While real gdp is the gdp relative to inflation (the
value of the currency). ​
​
This means that if I have a change in nominal gdp, we cannot know if this is due to a greater/lesser amount of
production or if this is due to inflation/deflation. However, real gdp means that it takes into account inflation of
the currency.

Calculating change in nominal or real gdp:

( New - old/old)*100
Normative and Positive Statements:
Normative statements are statements that describe behaviour as it should/ought to be (ie. statements that arent based
solely on fact)

Positive statements are statements that can be proven by a stat (a positive statement does not have to be true)

Opportunity Cost
The value of the next best alternative that is given up
OC = what you sacrifice / what you gain

Divide the second number (the value u are not calculating opportunity cost for) by the first number (the one you are
calculating OC for)
Reservation Options
Next best option

Economic Cost
The cost of smth, taking into account opportunity cost (so the actual cost given that you will lose money by not doing the
reservation option)

Cost of smth + opportunity cost

Economic Rent
Net benefit (benefit - price) - opportunity cost (value of reservation option)

PPF curves
Def ppf curves → curve that shows the maximum amount that two goods can be produced at the same time. Anything on
the curve is the ideal and most productive; anything below is attainable but not the most efficient, and anything above is
unattainable for many reasons.

Factors that shift/affect PPF curves

-​ Main cause for ppf shifts is an increase in technology, which increases the amount you can produce, so the frontier
shifts to the right

Innovation Rents
The extra money a company makes when it adds new technology, and therefore increases production

Innovation rent = profits from using a new technology - profits if you used the same tech as your competitors

When to specialize
When people do very specific tasks as part of an overall project to be more efficietn

Absolute vs Comparative Advantage

An absolute advantage is when you can produce the same amount with fewer resources

Comparative advantage is when you have a lower opportunity cost than a competitor
​ → if asked if someone has a comparative advantage, find the opportunity cost for each competitor for that
product (divide the other thing by the actual thing), and find whichever one has the lower opp cost

Book Notes

Individuals act to maximize their utility

-​ Though this may seem like “common knowledge” to some, it is important to note that
utility, differs from person to person.

-​ It does not make sense economically to impose our preferences on others.

-​ What one person might prioritize economically might be very different from what
another person does.

-​ For example, in the book, they talk about how someone from a first-world
country, who is relatively well off and educated, might see the issue of
deforestation very differently than someone who has to chop down a tree in a
third-world country just to feed their family.

-​ In this case, your background influences how you might feel on economic issues.
The first person had the capacity and privilege to care about long-term
environmental effects, while for the other person it made more sense to think
short-term, for a brief economic profit.

-​ People, depending on their background, make trade-offs every day (money vs buying
smth)

-​ Also talks about the different economic systems, capitalism vs. communism

-​ Capitalism is the economic system in which people are free to set their own
prices, usually based on supply and demand, and competition

-​ Communism is the economic system where prices are set by a government or a

leading body, independent of competition or demand.

-​ Talks about his experience in Cuba, where at every store, the price of
cigars was the exact same

1.​ Firms act to maximize profit

-​ A “firm” is not only a company, it can also be a business person who works to maximize their
own profit

-​ Firms, and the prices they choose when trying to make the most money in the long term,
influence careers, consumer spending… They run the market.

So overall, his main thoughts about how the market works are:
 1.​ Given that firms act to maximize profit, they have to provide customers with goods that
they demand to make a profit. Therefore, the market works to make our lives better (works
if you are a firm or if you are a consumer).

2.​ All market transactions make all parties better off (because everyone works towards utility,
and utility can be defined differently for everyone)

GOVERNMENT AND ECONMY:

Government and Economy go hand in hand.

-​ A good government is needed to have a strong economy, while a bad government can lead to the
demise of a country

-​ The government theoretically tries to improve life by creating government institutions, this is
paid for by taxes, which all go hand in hand with the economy

-​ The government also sets the rules for firms and individuals (with taxes), which provides legal
framework for the market

-​ The government regulates some goods so that the private sector cannot provide them. For
example, parks, law enforcement…

-​ Too much government intervention can also lead to a collapse of an economy, or just negative
outcomes (ex. communism).

-​ Sometimes, government policy, such as tax systems, can lead to high levels of wealth inequality
in a nation. This is why it is important to set the “right” amount of taxes. However, there is no
perfect amount of taxes.

INFORMATION:

-​ In real life, no one has perfect information, so we make economic choices without all the
information.

-​ Def adverse selection → an economic concept when the consumers and sellers each have
different information

-​ Statistical (rational) discrimination happens when people judge others based on general statistics,
which usually leads to inequality

-​ Statistically, most women take maternity leave after having a child, so an example of
statistical discrimination is when people just assume they will automatically take
maternity leave for every scenario.

-​ Another example is if you assume a black person has a criminal record.

-​ These are usually just based on internalized biases and/or stereotypes that are very
harmful
 -​ The key example they talk about in this chapter is “McDonald’s didn’t create a better
hamburger.”

-​ In this example, they talk about how people like McDonald’s for its predictability, instead
of its taste or quality

-​ This idea talks about how companies have to have a specific brand to sell their product

-​ A lot of things are sold by word of mouth - if you hear a friend recommend a product,
you are much more likely to buy the product

INCENTIVES:

-​ People commit crimes when the rewards are greater than the risk.

-​ Incentives drive behaviour

-​ “Free riding” is when some firms or individuals benefit from something without helping to
contribute to it (whether that is manually, economically…)

-​ People work harder when they are compensated based on performance

-​ For example, artists and/or people paid by hour not just a general contract

-​ They give the example of teaching, because they are not paid for their performance specifically,
sometimes teachers can get very burnt out

-​ A key incentive is also taxes:

-​ If something is taxed more, people are less likely to do it

-​ For example, there is higher taxes on cigarettes

-​ Tax breaks (donations) incentivize people to donate

PRODUCTIVITY AND HUMAN CAPITAL: ​

-​ .
-​ .

CONVERSATION NOTES

Tell me about the book and the most interesting concept

 -​ Naked Economics is a general book that uses very simple language to teach about how markets work, and
overall how economies work in general. Charles Wheelan uses a lot of anecdotes, and his writing style or
language is very engaging, which makes the book very interesting.

-​ The thing I found most interesting about the book was the chapter about how markets work, because it is
very easy to relate it to my everyday life. He talks a lot about how firms, governments, and even individuals
make decisions, and how each and every decision we make leads to the economy we see today. (I think I
also found this really interetsing because it ties into stuff we talked about in econ class in unit 1 about
supply and demand, so because I had that background knowledge, it made this chapter easier to digest).

-​ The most interesting thing they talked about was utility, and the idea that utility is different for everyone,
and that is why we are able to say that everyone works to maximize their utility. So he places a lot of
emphasis on the fact that what makes one person happy, and what one person might think is worth it in
terms of a purchase, might be very different from what another person might believe.

-​ He gives this interesting example which I think is really simplified in a way that it makes it very easy to
conceptualize. He talks about how a rich person in a developed country might care about deforestation, so
to maximize their utility they might think about long term ennviornmental effects. However, someone from
a poorer country who needs to chop down trees to feed his family, might prioritize that. I think this shows
how the goals, and what people prioritize is different, and thus everyone’s utility is difefrent.

def utility → utility is an individual’s satistifcation

Who is your author? What are their areas of expertise and biases?

-​ Charles Wheelan is a relatively young author, hes 60, but published this book in his 30s. He is a really
interesting guy, because he was a founder of this organization called Unite America, which is a nonprofit
that is trying to push for nonpartisan elections (elections where the candidates running don’t affiliate with
any political party, to eliminate political bias). He has worked closely with centrists, inclduing people who
identify as leaning more left or right. I think this shows he probably has minimal bias when it comes to his
economic writing. He has also written books about centrist ideologies.
-​ He does however, in the book, seem to favour capitalism and free market systems, as that is what I felt like
he talked more positively about.
-​ He graduated from Dartmouth and a phD from princeton and since has worked in many economic papers,
and economic sectors, such as being a journalist for the ecnomist. So he has a lot of experience with
economics.

What did you learn that was particularly interesting or surprising?

-​ Something I found really interesting about the book how people are motivated by their incentives.
-​ So if governments want to push for something, or firms really want to sell something, they have to find
what motivates people.
-​ What I found very interesting about this was how it delves into strategy, and how firms can manipulate
their ads and strategies by finding what motivates people.
-​ I started noticing when wathcing tv how ads mostly focus on issues in peoplesl lives, because this is whats
gonna motiviate them the most.
 -​ Another part of incentives that the book talks about is how people respond to the rewards and punishments
built into the system. So because committing a crime could have a high punishment, many people wouldn’t
commit crimes.
-​ Something interesting abotu this which surprised me is he doesnt really talk abuto the moral aspects, and
how sometimes morals can be stronger than incentives.

What concept did you understand better after reading the book?

-​ Communism
-​ Cuban example
-​ Shows how lack of freedom in the market can incentivize people less, and can also make the market less
efficient and innovation. (there is no incentive to improve quality, and imporve a product)

What did you find difficult to understand and need to return to?

-​ How governments interact with the economy

-​ Gorvernments should provide rules and a legal framework (taxes, rules for firms…)
-​ But then on the other hand, too much intervention can lead to economic collapse
-​ And too many taxes can be really bad for the people, and lower a gdp
-​ So id love to learn more about how a government can find the middle ground between the two

What parts of the book did you enjoy the most?

The most interesting thing they talked about was utility, and the idea that utility is different for everyone, and that is
why we are able to say that everyone works to maximize their utility. So he places a lot of emphasis on the fact that
what makes one person happy, and what one person might think is worth it in terms of a purchase, might be very
different from what another person might believe.

He gives this interesting example which I think is really simplified in a way that it makes it very easy to
conceptualize. He talks about how a rich person in a developed country might care about deforestation, so to
maximize their utility they might think about long term ennviornmental effects. However, someone from a poorer
country who needs to chop down trees to feed his family, might prioritize that. I think this shows how the goals, and
what people prioritize is different, and thus everyone’s utility is difefrent.

What parts of the book did you enjoy the least?

-​ International economics

Is there anything you find hard to believe or want to challenge?

-​ Can either talk about how they say incentives fuel everything, and the crime example, but i think morals
also play a big factor
-​ Or can talk about:
-​ All market transactions make everyone better off
-​ Even though this is true in theory, especially since he stresses the idea that utility differs based on
the person.
 -​ In real life some people have much less power, so they are scammed, and therefore not all market
transactions make evryone better.

What field(s) do you want to learn more about?

I would love to learn more about communism, and capitalism, and the specific effects these have on people or the
economy.