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ECN 104 Lecture Notes - Natural Resource, Market Failure, Taco

Course Code
ECN 104
Tsogbadral Galaabaatar

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Economics is about
Scarcity: The Limited nature of society’s resources
Natural resource, land and worker’s time re all limited in its availability
Economics is about how the society manages its limited resources.
Firms: what to produce, how much to produce, how many workers to hire, etc
How people make Decisions
Principle #1 People face tradeoffs
-To get one thing, we usually have to give up something else.
-Think of the allocations of your time and money.
If you buy a new iPhone today, you have to wait before buying a new laptop
!IF you invest in a stock, you are giving up other forms of investments, such as
!RESP and bonds.
!For Every hour you spend on studying, you could have worked
Society faces the tradeoff between efficiency and equity.
Efficiency: Getting the most out of resources.
Equity: fairness of economic allocation/prosperity
Efficiency can be referred to the economic pie, and equity to how the economic pie is
divided amount society’s members.
Principle #2 The cost of something is what you give up to get it
Opportunity cost: What you give up to obtain something.
!To become a doctor, you need to go to medical school. In addition, you are giving
!up other career paths.
!Waiting in a long line for a free item costs your time.
!!!There is no such thing as a free lunch
Principle #3: Rational People think at the Margin
Rational People: Someone always tries to do their best to achieve their objectives.
In economics, we usually assume the firms’ objective is to maximize its profit and
consumers’ objective is the achieve the highest level of satisfaction/
Marginal changes: Small incremental adjustments to an existing situation or plan.
Rational people make decisions by comparing Marginal benefits and Marginal costs
!Suppose you have already eaten 3 tacos. weather to have an extra taco depends
!on the price of the taco (Marginal cost) and the extra satisfaction it gives
!(marginal benefit)
To study one more hour the night before the exam has benefits and costs (less sleep)
Principle #4 People Respond to incentives
Incentive: something, such as a punishment or reward, that includes action.
Rational people resound to incentive
When: government changes a rule or regulation, It gives an incentive to (some) people
to change their action.
When the government didn’t think thoroughly about all the incentives, unintended
consequences can happen.
Set belt law changes how people drive. As a result there were no change in the
!number of driver deaths.
Some say, to decrease the number of concussions in the NFL, you need to stop !the
!use of helmets.
Principle #5: Trade can make everyone better off
Trade allows each individual to specialize in the activities she or he does best. By doing
so everyone will be better off (than being self sufficient)
Similarly, countries benefit from trade and specialization.
Principle #6: Markets are usually a good way to organize economic activity
Market economy: An economy that allocates resources through market forces.
!In a market economy, firms and households make self interested decisions
guided by the market price.
Price reveals the buyer’s valuation of the good and the seller’s cost of producing it.
Principle #7: Government can sometimes improve market outcomes
Market Failure: refers to a situation where allocation of resources of market outcome is
not efficient. It can happen if there is:
Externality: One person’s action affects bystander positively or negatively. EX. pollution
Market power: an ability of a single (or a small number of) firm (or buyer) to
influence market price. Example: Monopoly
-If there is market failure, GOvernment can intervene in the economy and improve the
market outcome. In this case, Government intervention is promoting efficiency
-Government also can take actions that promote equity. Income tax and welfare
systems are examples of such action.
One of the most important government roles is to enforce property rights by law.
Principle #8: A community’s standard of living depends on its ability to produce
goods and services
Living standards vary a lot across countries and over time.
The main determinant of living standard is productivity, the quantity of goods and
services produced from each our of a worker’s time
Productivity depends on technology, skills of workers and equipment/machinery.