Cracking Economics (Tejvan Pettinger, 2017)

Introduction

• Oikonomia
• Greek word: to manage your household.
• Mercantilism
• Maximise the exports and minimise the imports for an economy. It promotes imperialism, colonialism, tariffs and subsidies on traded goods to achieve that goal.
• Zero sum game
• Classical economics
• Free market and free trade increase efficiency and prosperity.
• Adam Smith: competition produce cheaper goods.
• Marxism
• The effect of capitalism on labor, productivity, and economic development and argues for a worker revolution to overturn capitalism in favour of communism.
• Keynesian
• The government should increase demand to boost growth.
• Neo-Keynesian
• Economic growth and stability rather than full employment.
• Monetarism 
• The total amount of money in an economy is the primary determinant of economic growth.
• Mixed economic
• Combines aspects of both capitalism and socialism.
• Behavioural, environmental, happiness, development.

Markets

• Supply and demand
• Primary driver in the market and why house become so expensive.
• The invisible hand
• Adam Smith, The Theory of Moral Sentiments, 1759: unintended greater social benefits and public good brought about by individuals acting in their own self-interests.
• Will result in equilibrium.
• Underground market
• Paradox of the war on drugs.
• Utility maximisation
• Seek to get the highest satisfaction from their economic decisions.
• Paradox of value, diamond–water paradox
• Although water is on the whole more useful, in terms of survival than diamonds, diamonds command a higher price in the market.
• Irrational behaviour
• Bounded rationality, impulse buying, altruism, optimism bias.
• Veblen goods
• Higher priced goods must be better than the lower priced goods.
• Nudging
• Upselling, e.g. "would you like to make it a combo?"
• Opportunity cost
• Giving up something to gaining something.
• Elasticity of demand
• To maximise profit from the rise of price vs. the drop in demand.
• Inferior goods
• Something you will buy less when income rise.

Market failure

• Externalities
• Unregulated free market cause inefficiency and fail to provide optimal outcome.
• Congestion, bank runs, unemployment, pollution, artificially high prices.
• Public goods
• Benefit everyone but does not need to pay explicitly.
• National defence, cleaning up the environment, street lighting, law and order
• Tragedy of the commons
• User act independently according to their own self-interest and, contrary to the common good of all users, cause depletion of the resource through their uncoordinated action.
• Meadow overfed, ocean overfishing. 
• Pigouvian tax
• Assessed against private individuals or businesses for engaging in activities that create adverse side effects for society.
• Revenue neutral: tax on sugar is relieve by less tax on socially beneficial items, main aim is not to profit from such tax.
• Agriculture
• Highly supported by government.
• Increase in supply may have a drop in demand.
• Government failure
• Law of unintended consequences: government intervention caused a greater inefficiency and a waste of resource.
• Lobbying: farmers does not want to lose their extra benefits.

Labour Markets

• Wage determination
• Supply and demand of the role
• Economic rent: amount of money earned that exceeds that which is economically or socially necessary. 
• Division of labour
• Separation of tasks in any economic system or organisation so that participants may specialise.
• Minimum wages
• Government regulation to prevent companies from paying less than stipulated per hour rate.
• Monopsony
• One potential employer which the employer can pay low wages.
• Lump of labour fallacy
• Amount of work is fixed, one foreigner take a job means a local will lose it.
• Gender inequality
• Salary of women is less than men's.
• Economics of an ageing population
• Tax revenue, rise in entitlement spending, budget deficit, shortage of workers, changing sectors within the economy, saving.
• Solutions: raise retirement age, semi-retirement, immigration
• Income and substitution effect
• People work more when it is attractive while work less when the incentive is too high.

Business economics

• Efficiency
• Optimal production and distribution of resources.
• Economies of scale
• Higher output reduces long-run average costs.
• Price discrimination
• Different price to different groups of consumers.
• Barriers to entry
• Increase difficulty for competitors to enter the market.
• Minimum efficient scale, brand loyalty, advertising, multiple brand
• Monopoly
• One company operating in a particular industry.
• Standard Oil, Rockefeller 1911, broke up into 34 smaller companies.
• Collusion
• Illegal means for a group of company to set higher price to maximise profits.
• Explicit (cartel) and implicit
• Objectives of companies
• Sales maximisation, altruistic motives
• Creative destruction
• The forces of capitalism cause constant change.
• State support of industry
• Government intervention for distress corporations.

Concepts

• Paradox of thrift
• Recession can become self-fulfilling.
• Paradox of toil
• People work more creating more supply and pushes down the demand.
• Lifecycle hypothesis
• Student borrow, working class save, retiree run down.
• Multiplier effect
• Injection of $1b can end up spending of $1.5b.
• Marginal propensity to consumer: billionaires' spending are not affected much by tax cut.
• Negative multiplier effect: workers made redundant cannot support the business in town cause a domino effect.
•  Luddite fallacy
• Labour-saving technology does not lead to higher unemployment.
• Moral hazard
• Individuals will take more risks if they are insured against their consequences.
• Trickle-down economics
• If the wealthy enjoy an increase in income, the rest of the society will be benefitted too.
• Laffer curve
• The optimum tax rate that people will continue to work.
• Bush "voodoo economics": tax cut increases tax revenue.
• On the other hand
• Economist don't live in a black and white world.
• Irrational exuberance
• Overeager buyer push up the price of assets beyond their fundamental value.
• Diminishing returns
• Increasing a certain input factor will only lead to diminishing improvements.
• Hysteresis
• History will affect future events.

Macroeconomics

• Inflation
• Rise in the cost of living and decline in the value of money.
• Demand pull inflation or devaluation.
• Printing money
• Does not always cause inflation.
• Hyperinflation
• >100% of inflation and require the continuous printing of money.
• Deflation
• Value of money increase.
• May cause economics problem in term of delay buying.
• Unemployment
• High economic and social costs, major cause of poverty.
• Structural unemployment, real-wage unemployment, inflexible labour market.
• Budget deficit
• Government to borrow from the private sector.
• National debt
• Total amount the government borrows through bonds and securities.
• Economic growth
• Measure using the GDP
• Chinese economic miracle
• China growth rate is 10% while other developed cities only clock 2%.
• Economic cycle
• It is common to have peaks and troughs.
• Secular stagnation
• Happens after the boom and bust.
• Recession
• Negative economic growth.
• Real business cycle
• Recessions are natural and inevitable, can be caused by supply-side factors.
• Balance of payments
• Measurement of a country's transaction as compared to the world.
• Current account & financial/capital account.
• China keep buying US assets to keep yuan weak and exports more competitive.
• Current account deficit
• Value of import is greater than the value of export.
• Balance of payment crisis
• A country cannot buy essential imports or pay the interest on its debt.
• Will lead to rapid and destabilising depreciation ins the currency.
• Exchange rates
• One currency to trade for another.
• Devaluation
• Not necessary bad as export increase, economic growth tends to rise and jobs are more secure.
• Purchasing power parity
• The effective exchange rate where a goods should have the same value.

Economic policy

• Monetary policy
• To target low inflation and steady economic growth.
• Quantitative easing
• Central bank borrow money from Federal reserve.
• Helicopter money drop
• Central bank printing and giving individual money to spend.
• Fiscal policy
• Changing taxation and government spending levels to influence the rate of economic growth.
• Crowding out
• Higher government borrowing leads to higher public sector spending.
• Austerity
• Reducing government borrowing during a period of low growth.
• Independent central banks
• Important economic decisions are taken by unelected experts.
• Economic forecasting
• It has never been accurate.
• Happiness economics
• Well-being, satisfaction and general happiness.

Financial economics

• Money - function and uses
• It is just a medium of exchange.
• Fiat money
• Latin "let there be".
• A legal tender by central bank.
• Bitcoin - digital money
• Scam and unregulated.
• Bond market
• Where debt is bought and sold.
• Stock market
• For public companies to sell their shares and as a barometer of economic well-being.
• Stock market crashes
• Stock market predicted 9 out of 10 recessions due to ripple effect.
• 1929 Wall Street crash
• Ordinary workers able to afford motorcars and people borrow to buy shares.
• Great depression
• Unprecedented global drop in output and period of mass unemployment.
• Housing market
• A crash in US and UK in the 2000s.
• Banks did not access the person's credit.
• Credit crunch
• Shortage of money in the financial system and hence restrict borrowings.

Global economy

• Globalisation
• Increase integration and interdependence.
• Free trade
• So a country does not need to produce everything they need.
• Protectionism
• Protect domestic industries from cheap imports through tariffs and other measures.
• Infant industry argument
• New industries in developing economies require protectionism before they can gain sufficient economies of scale to compete in international setting.
• Beggar my neighbour
• A country seek to gain an advantage at the expense of other countries.
• Global savings glut
• Desired savings is greater than desired investment.
• Cash hoarding.
• The Euro
• Experiment single currency in 1999.
• Downsides: austerity, recession, high unemployment.
• Optimal currency zone
• The dollar, 18th century, is easy to move.
• Economic development
• Effectively promote standard of living, social wellbeing and the quality and quantity of economic growth.
• Washington consensus
• Free-trade market-based policies.
• Macroeconomic stability, free markets, deregulation, competitive/floating exchange rates, privatisation.
• Paradox of plenty
• Countries that are rich in resources (e.g. oil, diamonds) are poor in GDP.
• Breaking the cycle of poverty
• Cancelling 3rd world debt