ECON 1B03 Study Guide - Final Guide: Microeconomics, Opportunity Cost, Sport Utility Vehicle
Microeconomics:+
Video+1:+Introduction+
Things+to+consider+
• What+are+the+main+concepts+in+microeconomics+
• Economic+choices?+
• What+does+it+really+cost+for+me+to+come+to+McMaster?+
What+is+Economics?+
Economics:+the+study+of+how+society+allocates+scarce+resources+to+satisfy+society’s+unlimited+
wants++
Scarcity:+means+that+society+has+limited+resources+and+therefore+cannot+produce+all+the+goods+
and+services+people+wish+to+have.++
Microeconomics:+Focuses+on+the+individual+parts+of+the+economy.+How+households+and+firms+
make+decisions+and+how+they+interact+in+specific+markets+
Macroeconomics:+looks+at+economy+as+a+whole.+Economy-wide,+inflation,+unemployment,+and+
overall+growth+
Market+Economy:+allocates+resources+through+the+decentralized+decisions+of+firms+and+
households.+Households+decide+what+to+buy+and+who+to+work+for.+Firms+decide+who+to+hire,+and+
how+much+to+produce.++
Basic+Principles:+
Every+economic+issue+involves+individual+choice++
Households:+who+will+work?+Attend+university?++
Firms:+what+goods+and+how+much+will+be+produces?+What+resources+should+be+uses?+At+what+
prices?+
We+assume+that+when+people+are+making+decisions+they+are+acting+rationally+
Economic+rationality:+systematically+and+purposefully+using+information+to+make+the+best+
decisions+for+oneself+to+achieve+one’s+objectives.++
Perfect+information:+everyone+knows+everything+with+no+uncertainty+(can’t+make+the+wrong+
decisions,+you+know+all+the+facts)+
Asymmetrical+information:+when+someone+knows+more+about+something+than+someone+else+
does+
Eg.+Chef+knows+if+salmon+is+fresh+but+a+prospective+buyer+does+not+
Resource;+anything+that+can+be+used+to+make+something+else+
Resources+are+called+factors+of+production+or+inputs+
The+big+4+resources:+Labour,+land,+capital,+entrepreneurship.++
Opportunity*Costs:*
Most+of+the+time,+to+get+one+thing,+we+usually+have+to+give+up+something+else:+full-time+
schooling+vs+full+time+employment+or+leisure+time+vs+work+or+reading+week+in+Cuba+vs+Cancun++
Always+one+or+the+other.+Everything+you+give+up+for+something+else+is+your+opportunity+cost.+
Explicit+costs:+books,+tuition,+rent,+etc++
Implicit+costs:+things+that+you+could+have+gotten+for+this+time+
+
+
+
Marginal+Thinking+
Marginal+changes:+Small,+incremental+changes+
Economically+rational+thinkers+make+decisions+at+the+margin.++
Eg.+If+I+buy+one+more+orange,+how+will+my+total+satisfaction+with+my+purchase+change?+
+
Adam+Smith:+father+of+economics:+we+all+act+in+our+own+self-interest+(invisible+hand)+we+create+a+
demand+for+goods+and+services+that+compels+others+to+supply+those+goods+and+services+in+the+
most+efficient+manner.+If+the+market+is+left+to+operate+freely,+the+I.H.+will+bring+buyers+and+
sellers+together+and+a+price+will+result+where+buyers+and+sellers+all+benefit.++
Efficiency:+using+resources+as+best+as+possible+to+meet+society’s+goals.+Free+markets+lead+to+
efficiency+(involving+economic+decision)++
Equity:+a+fair+allocation/distribution+of+resources+(Fairly.+Political+decisions)+
Time+Periods:++
2+time+horizons++
SR+(short+run):+Present.+Not+everything+can+change.+Firms+can’t+adjust+their+business+plans+to+
any+great+degree;+consumers+can’t+change+their+buying+strategies+to+any+great+degree+
LR+(long+run):+Future.+The+time+period+way+down+the+road+where+everything+can+change.+Firms+
and+consumers+can+react+quickly+to+economic+events.++
+
Positive+VS+Normative+Statements+
Positive+statements:+statements+about+what+actually+is,+facts.+
Eg.+High+interest+rates+reduce+the+demand+for+mortgages++
Normative+statements:+statements+about+what+should+be;+opinions+and+value+judgements.++
Eg.+The+bank+SHOULD+raise+the+interest+rate+to+discourage+consumers+from+taking+mortgages+
Economic+Models:+
Economists+use+models+for+many+reasons.+
We+try+to+model+human+behaviour+so+we+can+make+accurate+predictions+about+potential+
economic+outcomes.+Assumptions+based+on+theory.+We+use+models+to+help+us+explain+how+the+
economy+works.++
+
Unit*2.1:*Production*possibilities**
Things+to+consider:+
• What+constraints+do+economies+face+when+deciding+what+and+how+much+to+produce?+
• How+do+opportunity+costs+fit+in+to+production+decisions?+
Economic+constraints+
1. Resource+endowment++
an+economy+at+any+point+in+time+only+has+so+many+resources+available+for+production+
2. Current+technology+
it+has+one+best+way+to+produce+and+that’s+that.+
+Think+of+these+constraints+as+If+we’re+taking+a+snapshot+of+the+economy.+Overtime,+
these+can+change.++
Productive+economy:+when+all+resources+(including+people)+are+used+to+their+fullest+
potential+
Production+possibilities+frontier:+
PPF:+a+graph+that+shows+various+combinations+of+output+an+economy+can+produce+using+its+
current+resource+endowment,+given+the+technology+available.+It+shows+the+best+an+economy+
can+do+if+it+uses+all+its+resources+efficiently,+given+current+technology.+(looks+like+a+¼+circle+and+
any+point+on+the+graph+is+the+best+they+can+do)++
• Every+point+on+PPF+is+productively+efficient++
• However,+you+can+be+on+the+PPF+but+producing+a+combination+of+goods+that+society+
doesn’t+want+–wrong+comboàYou+would+be+producing+at+a+point+that+is+socially+
inefficient+
• Efficiently,+then+includes+productivity+efficiency+(on+the+PPF)+and+social+efficiency+
(producing+the+combo+of+goods+that+society+wants.+
+
Unit+2.2:+PPF+and+opportunity+costs+
In+general,+for+any+goods+X+and+Y,+X+is+on+horizontal+axis)+the+|slope+of+PPF|+=+opportunity+cost+
of+X+
Why+do+opportunity+costs+increase+as+we+produce+more+of+a+good?+
• we’re+moving+resources+from+the+X+(good)+sector+to+the+Y+(aren’t+as+good)+[resources+
aren’t+perfectly+mobile]++
Opportunity+costs+can+also+be+constant+
• an+economy+always+gives+up+the+same+amount+of+one+good+for+more+of+another+at+the+
same+rate+
• eg+you+always+give+up+50+X+for+12+Y+if+opportunity+costs+are+constant,+the+PPF+will+be+
linear+(negative)+
Shifts+in+the+PPF+
à+any+changes+to+the+amount+of+available+resources,+their+productivity+or+changes+to+the+
available+technology+will+shift+the+PPF.+
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ECON 1B03 Full Course Notes
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Document Summary
Economics: the study of how society allocates scarce resources to satisfy society"s unlimited wants. Scarcity: means that society has limited resources and therefore cannot produce all the goods and services people wish to have. Microeconomics: focuses on the individual parts of the economy. How households and firms make decisions and how they interact in specific markets. Market economy: allocates resources through the decentralized decisions of firms and households. Households decide what to buy and who to work for. Firms decide who to hire, and how much to produce. We assume that when people are making decisions they are acting rationally. Economic rationality: systematically and purposefully using information to make the best decisions for oneself to achieve one"s objectives. Perfect information: everyone knows everything with no uncertainty (can"t make the wrong decisions, you know all the facts) Asymmetrical information: when someone knows more about something than someone else does. Chef knows if salmon is fresh but a prospective buyer does not.