About our ebook

What is distinctive about CORE?

CORE is based on recent developments in economics and other social sciences, with a focus on:

  • Economic actors as both self-interested and ethical
  • Why supply and demand are sometimes not equal, especially in markets for labour and credit
  • Not only equilibria, but also on how prices, quantities, and technologies change
  • The importance of economic rents for the working of a modern capitalist economy
  • How institutions differ among economies, and what difference this makes for macroeconomic performance

CORE is empirically motivated and illustrated: students learn models motivated by facts from history, experiments and data.

CORE is a collaborative project using insights on the economy from a wide range of historical, geographical, disciplinary and methodological perspectives.


1. The capitalist revolution

How capitalism revolutionised the way we live, and how economics attempts to understand this and other economic systems

  • There have been dramatic changes in living standards in different countries in the last 1,000 years
  • In many countries these living standards began to rise rapidly at the time of the capitalist revolution
  • Advances in technology and a distinctive economic system contributed to this revolution
  • Economics is the study of how people interact with each other, and with the natural environment, in producing their livelihoods
  • Capitalism is an economic system in which private property, markets and firms play a major role
  • The rise in living standards has been accompanied by changes in population and the way people live, by environmental impacts, and by changes in inequality between countries and within countries
  • There is great variation across countries in their success in raising incomes, and in the degree of inequality in living standards within them
1 The capitalist revolution

2. Technological change, population and economic growth

How improvements in technology happen, and how they sustain growth in living standards

  • Economic models help explain the Industrial Revolution, and why it started in Britain
  • Wages, the cost of machinery and other prices all matter when people make economic decisions
  • In a capitalist economy innovation creates temporary rewards for the innovator, and this provides incentives for improvements in technology to reduce costs
  • These rewards are destroyed by competition when innovation diffuses throughout the economy
  • Population, the productivity of labour, and living standards may interact to produce a vicious circle of economic stagnation
  • The permanent technological revolution associated with capitalism allowed some countries to make a transition to sustained growth in living standards
2 Technological change, population and economic growth

3. Scarcity, work and choice

How individuals do the best they can, given the constraints they face, and how they resolve the trade-off between earnings and free time

  • Decision-making under scarcity is a common problem because we usually have limited means available to meet our objectives
  • Economists model these situations: first by defining all of the possible actions
  • … then evaluating which of these actions is best, given the objectives
  • Opportunity cost describes an unavoidable trade-off in the presence of scarcity: satisfying one objective more means satisfying other objectives less
  • This model can be applied to the question of how much time to spend working, when facing a trade-off between more free time and more income
  • This model also helps to explain differences in the hours that people work in different countries and also the changes in our hours of work through history
3 Scarcity, work and choice

4. Social interactions

A combination of self-interest, a regard for the wellbeing of others, and appropriate institutions can yield desirable social outcomes when people interact

  • Game theory is a way of understanding how people interact based on the constraints that limit their actions, their motives and their beliefs about what others will do
  • Experiments and other evidence show that self-interest, a concern for others and a preference for fairness are all important motives explaining how people interact
  • In most interactions there is some conflict of interest between people, and also some opportunity for mutual gain
  • The pursuit of self-interest can lead either to results that are considered good by all participants, or sometimes to outcomes that none of those concerned would prefer
  • Self-interest can be harnessed for the general good in markets by governments limiting the actions that people are free to take, and by one’s peers imposing punishments on actions that lead to bad outcomes
  • A concern for others and for fairness allows us to internalise the effects of our actions on others, and so can contribute to good social outcomes
4 Social interactions

5. Property and power: Mutual gains and conflict

How institutions influence the balance of power in interactions among economic actors, and how this affects the fairness and efficiency of the allocations that result

  • Technology, biology, economic institutions and people’s preferences all matter as determinants of economic outcomes
  • Interactions between economic actors can result in mutual gains, and also in conflicts over how the gains are distributed
  • Power is the ability to do and get the things we want in opposition to others
  • Institutions influence the power and other bargaining advantages of actors
  • Outcomes may be judged according to their efficiency and their fairness
  • Economics can clarify ways of applying the criteria of efficiency and fairness to evaluate economic institutions and outcomes
5 Property and power: Mutual gains and conflict

6. The firm: Owners, managers and employees

How the interactions among the firm’s owners, managers and employees influence wages, work, and profits, and how this affects the workings of the entire economy

  • The firm is an actor in the capitalist economy, and a stage on which interactions among the firm’s employees, managers and owners are played out
  • The balance of bargaining power among employees, managers and owners affects how the mutual gains created in the firm are distributed
  • Hiring labour is different from buying other goods and services, and the contract between the employer and the employee does not cover what the employer really cares about: how hard and well the employee works
  • Firms do not pay the lowest wages possible. Instead they set wages to motivate employees to work effectively, to stay with the firm, and to make it practical for the firms to recruit new workers when they need them
  • The wages that firms pay their employees are influenced by the supply and demand for labour, and other factors that change the balance of bargaining power among the firm’s actors
  • The wage curve shows the relationship between wages and unemployment in the economy as a whole
6 The firm: Owners, managers and employees

7. The firm and its customers

How a profit-maximising firm producing a differentiated product interacts with its customers

  • Differentiated products, the product demand curve and the firm’s marginal cost
  • Technological and cost advantages of large-scale production favour large firms
  • How a firm without close competitors chooses the price and quantity that maximises its profits and how it increases its profits through product selection and advertising
  • How the gains from trade are divided between consumers and owners of the firm
  • The responsiveness of consumers to a price change is measured by the elasticity of demand, which affects the firm’s price and profit margin
  • How economic policymakers use elasticity of demand to design tax and competition policy
7 The firm and its customers

8. Supply and demand: Price-taking and competitive markets

How markets operate when all buyers and sellers are price-takers

  • Competition can constrain buyers and sellers to be price-takers
  • The interaction of supply and demand determines a market equilibrium where both buyers and sellers are price-takers, called a competitive equilibrium
  • Price and quantity in the market equilibrium change in response to supply and demand shocks, in the short run and the long run
  • Price-taking ensures that all gains from trade in the market are exhausted at a competitive equilibrium
  • The model of perfect competition describes idealised conditions under which all buyers and sellers are price-takers
  • Real world markets are not typically perfectly competitive, but some policy problems can be analysed using the demand and supply model
  • Similarities and differences between price-taking and price-setting firms
8 Supply and demand: Price-taking and competitive markets

9. Market disequilibrium, rent-seeking and price-setting

How prices change, and how markets for labour and financial assets work

  • People take advantage of rent-seeking opportunities when competitive markets are not in equilibrium, often eventually equating supply to demand
  • Excess supply—unemployment—is a feature of labour markets even in equilibrium
  • Prices are determined in financial markets by trading mechanisms and can change from minute to minute in response to information and beliefs
  • Price bubbles can occur, for example in markets for financial assets
  • Governments and firms sometimes set prices and adopt other policies so that markets do not clear
  • Economic rents help explain how markets work
9 Market disequilibrium, rent-seeking and price-setting

10. Market successes and failures

Why many, but not all, goods are bought and sold in markets. How markets can work well, but sometimes fail

  • That the functioning of markets depends on the establishment of property rights and enforcement of contracts by governments
  • How market competition provides incentives for innovation
  • Market failure arises from a lack of competition, or external effects such as pollution and knowledge creation
  • How these external effects can result in the misallocation of resources
  • How private bargaining, government policy, or a combination of the two might improve this allocation
  • That the distribution of income among individuals depends on what they own (including their skills), and on the prices at which these endowments are traded
  • That for moral and political reasons some goods and services are not traded on markets, but are allocated by other means
10 Market successes and failures

11. Credit, banks and money

How credit, banks and money expand opportunities for mutual gain, and what limits their capacity to accomplish this

  • How by borrowing, lending, investing and saving people can rearrange the timing of their opportunities to consume and invest
  • That while mutual gains motivate credit market transactions, there is a conflict of interest between borrowers and lenders over the rate of interest, the prudent use of loaned funds and their repayment
  • Why people with limited wealth are sometimes unable to secure loans or can do so only at high rates of interest, or if the project they wish to finance is exceptionally productive
  • That money is a medium of exchange consisting of bank notes, cheques, credit—or whatever else one can purchase things with—that is accepted as payment because others can use it for the same purpose
  • That banks are profit-maximising firms that produce money by supplying credit and that set the lending interest rate
  • That a nation’s central bank is a part of the government that produces money by issuing legal tender (notes and coins) and lending to banks at the policy rate of interest, which it sets
  • How price bubbles (for example in housing) and financial market failures may occur
11 Credit, banks and money

12. Economic fluctuations and unemployment

How economies fluctuate between booms and recessions as they are continuously hit by good and bad shocks

  • How fluctuations in the total output of a nation (GDP) affect unemployment, and how unemployment is a serious hardship for people
  • How statisticians measure the size of the economy using the national accounts, and how to use these measures to track economic fluctuations
  • How households respond to shocks by saving, borrowing and sharing to smooth their consumption of goods and services
  • Why, due to limits on people’s ability to borrow (credit constraints) and their impatience, these strategies are insufficient to eliminate shocks to their consumption
  • Why investment spending by firms (on capital goods) and households (on new housing) fluctuates more than consumption
12 Economic fluctuations and unemployment

13. Unemployment and fiscal policy

How governments can moderate fluctuations in employment and income

  • That fluctuations in aggregate demand affect GDP through a multiplier process, because households face limits to their ability to save, borrow and share risks
  • Why an increase in the size of government following the second world war coincided with smaller economic fluctuations
  • What fiscal policy is, how governments can use it to stabilise the economy, and how bad policy can destabilise it
  • Why government debt goes up, and why this can be a problem
  • How every economy is embedded in the world economy, which is a source of shocks, both good and bad, and which places constraints on the kinds of policies that can be effective
13 Unemployment and fiscal policy

14. Inflation and monetary policy

How unemployment and inflation are related, the challenges this poses to policymakers, and how this knowledge can support effective policies to stabilise employment and incomes

  • Why, when unemployment falls, inflation tends to rise and when unemployment rises, inflation falls
  • Why policymakers and voters prefer low unemployment and low inflation but typically cannot have both. Instead they face a trade-off: less unemployment meaning more inflation
  • What monetary policy is, and the channels through which it affects aggregate demand and inflation
  • Why an oil price increase, or some other adverse shock, can lead to higher unemployment and higher inflation
  • Why there is a stable inflation rate of unemployment, and how an inflation spiral develops if unemployment is kept lower than this
  • Why monetary policy is described as inflation targeting, and why governments have given responsibility for monetary policy to central banks
14 Inflation and monetary policy

15. Innovation, unemployment and living standards in the long run

How long-term trends in differences in living standards and unemployment between countries are the result of technological progress, institutions and policies

  • How the increasing use of machinery and other capital goods in production on the one hand, and technological progress on the other, are complements in the growth of a capitalist economy, each providing conditions for the advance of the other
  • How the resulting creative destruction of older ways of producing goods and services affects standards of living in the long run
  • How this process has produced continuous job loss as well as job creation, but not higher unemployment in the long run
  • That institutions and policies differ among countries in two respects: the success with which they match unemployed workers to vacant jobs, and their capacity to sustain high levels of employment and increases in real wages in the long run
15 Innovation, unemployment and living standards in the long run

16. The nation in the world economy

How the integration of national economies into a global system of trade and investment provides opportunities for mutual gains, as well as conflicts over the distribution of the gains

  • Globalisation includes the integration of markets in goods and services and investment, while labour markets remain largely national
  • Globalisation of goods and services has led to the prices of goods being more similar in different countries, but wages show no corresponding tendency towards convergence
  • Nations tend to specialise in the production of the goods and services in which they are relatively low cost producers because of their abundance of resources, skills or for other reasons
  • This allows for mutual gains among trading countries, and that the distribution of these gains may favour countries with superior bargaining power
  • Within nations some sectors of the economy and the owners of some factors of production benefit while others lose, at least in the short run
  • Fully exploiting the mutual gains, and distributing them fairly, in the long run depends on the institutions and policies that nations adopt
16 The nation in the world economy

17. The Great Depression, the golden age of capitalism and the global financial crisis

Since the end of the first world war three periods of downturn and instability have punctuated the economic history of the advanced capitalist economies. Economists have learned different lessons from each of them

  • That there have been three distinctive economic epochs in the century after the first world war—the roaring twenties and the Great Depression; the golden age of capitalism and stagflation; and the great moderation and subsequent financial crisis of 2008
  • That the end of each of these epochs—the stock market crash of 1929, the oil price shock of 1973, and the financial crisis of 2008—was a sign that institutions that had governed the economy to that point had failed
  • That the new institutions marking the golden age of capitalism—increased trade union strength and government spending on social insurance—addressed the aggregate demand problems highlighted by the Great Depression and were associated with rapid productivity growth, investment and falling inequality
  • That the golden age ended with a crisis of profitability, investment and productivity followed by stagflation
  • That the policies adopted in response to the end of the golden age restored high profits and low inflation—but did not restore the investment and productivity growth of the previous epoch, making economies vulnerable to debt-fuelled financial booms and the crisis that occurred globally in 2008
17 The Great Depression, the golden age of capitalism and the global financial crisis

18. Economics and the environment

How economic activity affects life on a planet with limited resources and a fragile environment

  • How the economy affects the environment
  • How the physical limits of the Earth’s biosphere in turn affect the economy
  • How these effects can be accounted for when measuring economic activity
  • Why the opportunity cost of enhanced environmental quality may be reduced consumption, and how citizens and policymakers may manage the resulting trade-offs
  • How well designed economic incentives may help to protect the environment
  • How unavoidable national and international conflicts of interest impede the solution of local and global environmental problems
18 Economics and the environment

19. Economic inequality

Economic disparities are mostly a matter of where you are born and who your parents are; changes in policies and institutions can reduce inequalities

  • How we measure the extent of inequality of income and wealth
  • That inequality declined within most countries during most of the 20th century, a trend that has reversed in many of them since the 1980s
  • That inequality among the citizens of the world increased increased between the early 19th century and the end of the 20th century and has declined since due to the rapid economic growth of China and India
  • That inequalities arising from unfair treatment such as discrimination based on race, gender, or religion are considered unjust, as are inequalities arising from unequal opportunity
  • That, while inequalities may provide incentives for hard work and risk-taking, they may also incur costs that impair economic performance
  • That differences in wealth, education, ethnic group and gender as well as luck are major sources of inequality in living standards within most countries
  • That government policies can limit economic inequality while also providing conditions for rapid growth in average living standards
19 Economic inequality