ECON 1B03 Lecture Notes - North American Free Trade Agreement, Economic Equilibrium, Emo

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Published on 16 Apr 2013
School
McMaster University
Department
Economics
Course
ECON 1B03
Professor
Econ 1B03
Exam Review 2009
Lecure 1- Introduction to Economics
Chapters 1, 2 Basic Principles of Microeconomics
Economics- the study of how society allocates its scare resources to satisfy peoples unlimited wants.
Microeconomics- focuses on the individual parts of the economy
Macroeconomics- focuses on the economy as a whole
Market Economy- decentralized allocations of resources by firms and households
Command/ Centrally Planned – planned by a central authority
Mixed - Canada has mixed economy
Resource – anything that can be used to produce something else ( labour , land)
Opportunity Cost – what you have to give up to get it
Marginal Changes small incremental adjustments to an exsistant plan , usually by 1
Adam Smith – the wealth of nations , invisible hand
Equilibrium- no incentive to change
Efficiently - when resources are best used
Equity - fair use of resources
Market Failure - when the market fails to properly distribute resources
Market Power – the ability of a single entity to unduly influence the market
Externality- additional factors not compensated for in traditional models.
Positive Statements - world as is
Normative Statements - world as it should be
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Lecure 2- Production Possibility Frontier
Chapters 2
PPF - a graph that shows the possible combinations of output that the economy can possibly produce
given all the available factors
The ppf is always possible , but only certain combinations of product are socially desirable. It also very
neatly demonstrates opportunity costs.
For example: to get 600 cars, you give up 800 computers
So to get 1 car you give up 800/600 = 1.33 computers
However
From 700 to 1000 , you give up 2000 computers
So 300 cars for 2000 computers
2000/300= 6.67
The slope of ppf x , is the opportunity cost of x.
Change in production choices are demonstrated by a slide along the production possibilities frontier.
However changes in production capabilities are demonstrated with a changing of the line. In this
example a rubber shortage will mean that fewer tires and car parts will be available, however the
production of computers is not affected so the change looks like this:
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Lecure 3- Comparative advantage and Gains from Trade
Chapters 3
In this chapter we explore how the advantages of trade can allow individuals to produce beyond their
individual production possibility frontiers. In this hypothetical situation we are introduced to Peyton
and Brett , two farmers on an isolated island.
Oppertunity Cost Potato
Oppertunity Cost Meat
Peyton
¼ Meat
4 Potatoes
Brett
½ Meat
2 Potatoes
-We say that Peyton has a comparative advantage in potatoes: he has a lower opportunity cost.
-We say that Brett has comparative advantage in meat because he has a lower opportunity cost.
Therefore each individual should specialize in the production of the product that they have a
comparative advantage in , and then should trade with eachother to consumer more goods.
Name
Produce
With Trade
Gains
Peyton
Potatoes
16
17
+1
Meat
4
5
+1
Brett
Potatoes
24
27
+3
Meat
12
13
+1
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Document Summary

Economics- the study of how society allocates its scare resources to satisfy peoples unlimited wants. Microeconomics- focuses on the individual parts of the economy. Macroeconomics- focuses on the economy as a whole. Market economy- decentralized allocations of resources by firms and households. Command/ centrally planned planned by a central authority. Resource anything that can be used to produce something else ( labour , land) Opportunity cost what you have to give up to get it. Marginal changes small incremental adjustments to an exsistant plan , usually by 1. Adam smith the wealth of nations , invisible hand. Market failure - when the market fails to properly distribute resources. Market power the ability of a single entity to unduly influence the market. Externality- additional factors not compensated for in traditional models. Normative statements - world as it should be. Ppf - a graph that shows the possible combinations of output that the economy can possibly produce given all the available factors.

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