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ECON 1BB3 (535)


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Bridget O' Shaughnessy

Lecture 1 Ten Principles of Economics How People Make Decisions 1. People face tradeoffs Equity (division of resources) versus efficiency (increase productivity) 2. The cost of something is what you give up to get it Also known as opportunity costs 3. Rational people think at the margin Compare costs and benefits Only additional costs and additional benefits All additional costs and additional benefits 4. People respond to incentives Governments and organizations do this to change your behaviour How People Interact 5. Trade can make everyone better off Trade makes some people better off, while others suffer However, the benefits outweigh the costs/suffering 6. Markets tend to increase efficiency Centrally planned economies, for example, Cuba, Soviet Union Everyone works and everyone shares however, not efficient because there is no incentive Markets work well when prices change because people respond to price changes and incomes When markets are inefficient, governments step in 7. Sometimes the government can eliminate market inefficiencies Caused by an externality (outside effects on the purchase of the certain good or service) Positive (vaccines and education) and negative (cigarettes and alcohol) externalities can be caused How the Economy as a Whole Works 8. A countrys standard of living depends on its productivity We do not know how to increase productivity 9. Prices increase when the government prints too much money Zimbabwes inflation rate is the highest 150% Canadas inflation rate was around zero, before the recession was 2.5% 10. There is a short-run trade-off between inflation and unemployment Cannot achieve lower inflation and unemployment at the same time in the short-run, but in the long-run, one can lower them slowly Lecture 2 What is more Dangerous: A Gun or a Swimming Pool? 1. Why is economics difficult? Express ideas in economics o English language o Algebra and equations o Diagram and graphs Translate between each different form of communications 2. Economics is a social science It is the study of people on the basis of their interactions and decisions with regards to the economy and government Social = people Science = use scientific method i. Observe ii. Theorize iii. Test theory 3. Microeconomics versus macroeconomics Microeconomics deals with individuals households and firms and how they interact Macroeconomics deals with economy-wide phenomena such as interest rates, unemployment, money and growth 4. Efficiency versus equity Efficiency is the size of the pie Equity is how the pie is divided 5. Positive versus Normative analysis Positive the world is as it is Normative the world as it should be (value judgement) Economists place a high value on efficiency compared to equity 6. Model = simplification Diagram or equations Assumptions (always use simple assumptions first) Variables (variables decrease the more specific one goes) 7. Classify Variables Real variables (measured in physical quantities without including prices) versus nominal variables (measured in dollars) Stock variables (snapshot, in that specific time spot) versus flow variables (over a unit of time) both relate to time Circular Flow Diagram, an example of a model What is more dangerous: a gun or a swimming pool? Freakonomics: A rogue economist explores the hidden side of everything by Steven D. Levitt and Stephen J. Dubner Nudge: Improving decision about health, wealth and happiness by Richardson Lecture 3 Why Doesnt Tiger Woods Mow His Own Lawn? Comparative Advantage Exercise Group A (Group B) Trucks Computers Canada 600(600) 3000(3000) Mexico 300(1000) 1000(1000) The Production Possibilities Frontier (PPF) PPF the combinations of output that the economy can produce given the available factors of production and production technology Any point on the PPF is attainable and feasible; a point outside or above the PPF is unattainable; and any point inside or below the PPF is attainable but inefficient Feasible a combination that lies on the PPF or inside the PPF Infeasible a combination that lies above the PPF One is better off if you have at least the same amount of one good and more of the other good. One is better if you can consume outside the PPF. Lecture 4 Should you and your roommate divide household chores evenly? Example 1 There are two interior decorators that can paint and wallpaper. They have 40 hour weeks. Martha can paint 20 rooms or wallpaper 5 rooms; Stewart can paint 10 rooms or wallpaper 8 rooms. Hours Done in Forty Hours* Paint Wallpaper Martha 20 5 Stewart 10 8 *want the greater number because it is more productive Number of Hours Needs to do One Room* Paint Wallpaper Martha 2 8 Stewart 4 5 *want the smaller number because it is more efficient Opportunity Cost of One Room Paint Wallpaper Martha 4 Stewart 4/5 5/4 Marthas opportunity cost of 20 painted rooms is 5 wallpapered rooms Marthas opportunity costs of 1 painted room is wallpapered rooms* *make the situation a ratio and figuring out opportunity cost will be easier because one must just simplify Opportunity cost whatever must be given up to obtain some item (example, going to university instead of working. Measured in one unit of a good, compared to the other good. Absolute advantage the ability to produce a good with a smaller quantity of inputs Comparative advantage the ability to produce a good with a smaller opportunity cost. Autarky produces and consumes at mid-point on the production possibilities frontier One cannot have comparative advantage in both goods because there is no country that is better in everything than other countries. Comparative advantage reflects the relative opportunity cost Example 2 There are two interior decorators that can paint and wallpaper. They have 40 hour weeks. Martha can paint 20 rooms or wallpaper 5 rooms; Stewart can paint 10 rooms or wallpaper 4 rooms. Hours Done in Forty Hours Paint Wallpaper Martha 20 5 Stewart 10 4 Number of Hours Needs to do One Room Paint Wallpaper Martha 2 8 Stewart 4 10 Opportunity Cost of One Room Paint Wallpaper Martha 4 Stewart 2/5 5/2 Lecture 6 What affects your decision to go to the movies? Demand Quantity Demand(Qd) the amount of a good that buyers are willing and able to purchase The variables that influence how much buyers want to buy are: 1. Price 2. Income
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