ECON 1B03 Lecture Notes - Planned Economy, Economic Equilibrium, Market Failure

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ECONOMICS NOTES
CHAPTER 1: Basic Principles of Microeconomics
Economics
the study of how society allocates its resources to satisfy people’s wants
resources are scarce, meaning they are usually limited
resources are what are used to produce something else (goods and services ie. labour, land, machinery)
there is a limit on how much production of goods and services can occur do the scarcity of resources
Micro: focuses on individual parts of the economy- how households and firms interact
Macro: focuses on the economy as a whole- how inflation, unemployment and economic growth affect economy
Different Types of Economy
Market Economy
allocates resources through the decentralized decisions of firms and households
households decide what to buy and who to work for
firms decide how much to produce and who to hire
Command/ Centrally Planned Economy
all production and distribution decisions are made by a central authority (ie. government)
Mixed Economy
a combination of both market and command economy
Opportunity Costs
everything you have to give up in order to attain a certain something
the cost of the best foregone alternative
example: to attend McMaster it costs 25,000 a year; you could have spent that money on something else, such
as a car
o implicit costs
o explicit costs
Marginal Thinking
marginal changes are small, incremental adjustments to an existing plan of action
example: a firm will wonder “what will happen to the profit if we decide to produce one more good?”
people make decisions by comparing marginal benefits to marginal costs
when marginal benefits exceed marginal costs, a decision is proved worth it
Adam Smith
observed that households and firms act as if they are guided by an “invisible hand”
consumers choose freely what they buy
producers choose freely what they produce and sell
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the market settles on a product distribution and prices that are beneficial to all the individual members of an
economic community
greed drives people towards beneficial behaviour
greed pushes people to maximize profits (by perhaps undercutting competitors with low prices and making
smart investments)
students decide to pay an upfront cost of attending school because they believe it will eventually provide them
with a higher income
effects take place dynamically and automatically
Markets Move Towards Equilibrium
Economic Equilibrium
when there is no incentive for any economic actors to change their behaviour
profits have been maximized and no changes will benefit the actor
markets usually reach equilibrium through changes in prices
prices guide decision makers to reach outcomes that maximize the welfare of an economic community
Gains From Trade
in an market economy, people engage in trade with one another
we specialize in tasks we do best and trade with others for the things they can provide
we have gains from trade
Efficiency and Equity
efficiency is when an economy`s resources are used efficiently when they are used to maximize the welfare of a
society (economics decisions)
markets that are left to operate freely usually lead to efficiency
equity involves the fair distribution of resources (political decisions)
market failure occurs when the market fails to allocate resources efficiently
when failure occurs, the government can intervene to promote efficiency and equity
Causes of Market Failure
an externality- the impact of one person or firm’s actions on the well-being of a bystander
market power- the ability of a single person or firm to unduly influence market prices
some goods simply aren’t suited for the market and do not succeed (ie. organ donations)
Economists Roles
1. Scientists- when they are trying to explain the world
2. Policy Advisors- when they are trying to change the world
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Document Summary

Micro: focuses on individual parts of the economy- how households and firms interact. Macro: focuses on the economy as a whole- how inflation, unemployment and economic growth affect economy. Allocates resources through the decentralized decisions of firms and households. Households decide what to buy and who to work for firms decide how much to produce and who to hire. All production and distribution decisions are made by a central authority (ie. government) A combination of both market and command economy. Everything you have to give up in order to attain a certain something. Example: to attend mcmaster it costs 25,000 a year; you could have spent that money on something else, such the cost of the best foregone alternative as a car implicit costs: explicit costs. Marginal changes are small, incremental adjustments to an existing plan of action. Example: a firm will wonder what will happen to the profit if we decide to produce one more good? .

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