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econ 1bo3 lecture notes.docx

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Hannah Holmes

Econ 1B03thLecture 1 Monday January 6 there will be two tests 30 each and a final exam worth 40there are bonus quizzes you can do online which are added to the test marksththFirst test Saturday February 8 200300 Early write Thursday February 6 at 78ththSecond test Saturday March 8 at 78 200300 Early write Thursday March 6bonus quizzes there are 3 quizzes correspond to each test They are 20 multiple choice questions can attempt up to three times but it takes the average of the 3 Could get an additional 2 marks added to your mark on the test Become active one week prior to their due dates and close for submission on Mondays at 1100pm rdDue dates Monday February 3 chapters 1234 and economics clinics Mondays through Thursdays 101 KTH 306AthLecture 2 Wednesday January 8 Chapters 12 partial Basic Principles and Glossary of TermsWhat is EconomicsEconomics the study of how society allocates scarce resources to satisfy peoples unlimited wantsScarcity society has limited resources and therefore cant produce all the goods and services people wantMicroeconomics focus on the individual parts of the economy households and firms We look at individuals individual firms how does a firm decide how much to produce What to produceMacroeconomics looks at the economy as a whole The issues we deal with tend to be economy wide issues eg Inflation unemployment economic growthMarket economy we get to make the decisions there is nobody telling us what we can cant buy All the decisions are made at a decentralized level It allocates resources through the decentralized decisions of firms and households Command economy this is in contrast This is when all production and distribution decisions are made by a centralized authority usually the government An example is the former Soviet Union all the firms producers satellite countries were under strict direction by the Soviet government about what they could produce how much they could produce etcTraditional economy economic decisions are based on traditions customs beliefs religion etc Basic Principles of EconomicsA household and an economy face many decisions who will workwhat goods and how much will be producedwhat resources should be used in productionat what price should goods be soldEvery economic issue involves individual choice We need to make a couple of assumptions We assume that when people are making decisions they are acting rationally This is economic rationalityeconomic rationality make decisions that maximize the benefits of the decision maker from their choice This simply says that we want the best decision eg buying a car youre going to buy a car that makes you the happiest not a piece of junk A firm will make decisions to maximize profit Perfect information we assume everyone knows everything about everything eg all prices best technology etc How can you make a bad decision if you know everything Asymmetrical information we do not always have perfect information Asymmetrical information happens when someone knows more about something than someone else eg used cars salesmen they know exactly how many times the car has been in an accident you do not Resources are scarce A resource is anything that we use to make something else We also call resources factors of production or inputs we are going to use them to make output that we can sell The three big resources are land labour and capital physical anything that is not land or labour that can be used to make something not portfolio or financial Refer to example of the first year economics lecture Recently we have been including entrepreneurship as a resource To get one thing we usually have to give up something else Example full time schooling vs full time employment food vs clothing leisure time vs work leisure is anything that is not paid work every hour you are doing nothing you are giving up an hour that you could have been making money Making decisions requires trading one goal for another Opportunity CostsOpportunity cost the opportunity cost of something is everything you have to give up to get it If you want to come to school full time you have to give up a job If you are going to pursue one activity you are often giving up more than one thing The cost of the best foregone alternative we are narrowing it down not focusing on every little thing we give up Example you decide to come to Mac Your tuition costs 8000 books cost 1000 and your apartment costs 6000 Your total explicit costs anything you can get a receipt for are 15000 This is not all youre giving up to come here you could have spent that money to get a car the loss of that car is a foregone alternative it is an implicit cost of coming to Mac You cannot get a receipt for this But there are other things you give up when you come to Mac You could have lived at home for free and held a full time job and earned 28000 this is a larger foregone alternative and implicit cost So what is the opportunity cost of coming to mac It is the value of the best foregone alternative the lost wages value of 28000 vs 15000 car plus the 15000 spent on tuition books and accommodations So it is 43000Marginal ThinkingMarginal changes small incremental changes What if I just one more It is the idea of one more The idea is that people make decisions by comparing marginal benefits to marginal cost If the benefitcost you do it Marginal changes in cost or benefits motivate people to respond Example a firm wants to maximize its profits If I produce and sell one more good I will sell it for ten dollars it will cost me two dollars to make that good The firm will produce this good because they are making a profit The invisible hand Adam Smith father of economics This hand guides all the buyers and all the sellers together to actually buy and sell something Prices control how much to buy how much to sell Invisible hand brings buyers and sellers together to agree on the appropriate price In a free market buyers and sellers settle on prices and quantities that are beneficial to everyone Efficiency resources are used to the best of their ability to meet societys goals Everybody who can be out there working and producing is doing that everything is being used Efficiency is economic decisionsEquity the fair distribution of resources Not what is best but what is fair These are political decisions Positive versus Normative StatementsPositive statements attempt to describe the world as it is We call this descriptive analysisNormative statements how the world should be value judgements opinions etc A normative statement could be something like we should raise minimum wage some people wont be able to get jobs but those earning minimum wage will make more money Reflect prescriptive analysisThe government needs both when making decisions they need to know what will happen thLecture 3 Thursday January 9 Economic ModelsEconomists use models for many reasons we try to model human behavior so we can make accurate predictions about potential economic outcomes The best models are the ones that are the most concise We need to keep them small and manageableInvolves making assumptions based on theoryWe use models to help us explain how the economy works
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