Read the summary and the most important questions on Modern Principles of Economics | 9781319182045 | Tyler Cowen; Alex Tabarrok

• 1 The Big Ideas

• 1.2 Two: Good institutions align self interest with the social interest

• How do good institutions align self-interest with social interest?

  In a well functioning market, individuals that pursue their own interest, also help the social interest

• 1.3 Three: Trade offs are everywhere

• What is the great economic problem when looking at trade-offs?

  The great economic problem is that there is a scarcity of resources, which means that not all our needs are satisfied. We should try to arrange these scarce resources to satisfy as many of our needs as possible

• 1.8 Eight: economic booms and busts cannot be avoided but can be moderated

• How can the government moderate economic booms and busts?

  The government can do this by:
  

  • Fiscal policy: increasing government expenditure or decreasing taxes
  • Monetary policy: lowering interest rates and increasing money supply

• 2 The power of trade and comparative advantage

• What are the three benefits of trade?

  1. Trade makes people better off when preferences differ 
     
  2. Trade increases productivity through division of labour, specialization and economies of scale
  3. Trade increases total production through comparative advantages - the difference in (human) capital

• 2.2 Specialization, productivity, and the division of knowledge

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• Why does specialization increase productivity?

  • Specialized people know more about a subject
    
  • Specialized people can afford to invent / invest in machines to increase productivity since they sell their products in large quantities. 

• 2.3 Comparative advantage

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• What is an absolute advantage?

  The ability to produce the same good using fewer inputs than another producer. 
  

  • Even when a country has the upper hand, it can still be good to trade (Comparative advantage)

• 2.3.1 The production possibility frontier

• How is a production possiblities frontier calculated?

  Production possibilities frontier: all the combinations of goods that a country can produce given its productivity and supply of inputs.
  
  1. Mexico has 24 units of labour:
  

  • It takes Mexico 12 units of labour to produce one computer
  • And 2 units of labour to produce one shirt
    

  2. Mexico can therefore produce 2 computers and 0 shirts, or 0 computers and 12 shirts
  
  - The PPF is a line with a downwards slope because if you want to produce more shirts, you have to produce fewer computers. 

• 2.3.3 Comparative advantage and wages

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• How do you calculate wages for a country when looking at comparative advantage?

  You can calculate wages: 
  - The total value of consumption/ number of workers. 
  
  Let's assume that computers sell for 300€ and shirts for 100€. (You can trade 1 computer for 3 shirts) 
  
  If there is no trade: 
  - The value of Mexican consumption is:
  

  •  1 x 300 + 6 x 100 = €900
    
  • 900/ 24 workers = 37.5€ wage
    

  
  
  - The value of US consumption: 
  

  • 12 x 300 + 12 x 100 = €4800
    
  • 4800/ 24 = €200
    

  
  
  If there is trade: 
  - The value of Mexican consumption is: 
  

  • 1 x 300 + 9 x 100 = €1200
  • 1200/ 24 = €50 

  
  
  - The value of US consumption is: €216.67

• 2.3.4 Adam Smith on trade

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• In what three ways does specialization increase productivity?

  1. Learning on the job: it increases the dexterity (behendigheid) of every worker. People get really good at what they're doing. 
  2. Elimination of switching costs: it saves time not constantly having to switch between tasks. Your mind has to adjust to the idea of the new task. 
  3. It encourages the inventions of new machines to increase productivity. 

• 3 Supply and Demand

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• 3.2 Consumer surplus

• What is the consumer's surplus?

  The consumers surplus is the consumers gain from an exchange. It's the difference between the highest price that a consumer is willing to pay and the actual market price.
  
  
  CS = (Pmax - P*) x Q* / 2 (area of a triangle)
  
  - Total consumer surplus: all consumer surpluses of all customers added together