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Lecture 1

ECN204 Lecture 1: Chapter 1 Intro to Economics

Course Code
ECN 204
Xingfei Liu

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Chapter 1
What is Economics?
Economics: the social science that studies how individuals, institutions, and
society make optimal choices under conditions of scarcity.
- Human wants are unlimited, but the means to satisfy the wants are
The Ten Key Concepts
The Individual
Facing Trade-o"s
- Ex. To attend lecture in the morning you need to wake up early
(sacri%ce sleep time) but you get to learn economics
Opportunity Cost
- To come to lecture you must give up working time (wage)
Choosing a Little More or Less
- Marginal cost
The In+uence of Incentives
- Decisions made based of preferences
Interaction Among Individuals
Specialization and Trade
- most advanced way to gain e0ciency is to specialize in production and
based o" that do trade
The E"ectiveness of Markets
- monopoly, oligopoly, perfect market etc.
The Role of Governments
- make sure we use resources in most e0cient way to boost economic
The Economy as a Whole and the Standard of Living
Production and the Standard of Living
- in+ation, income levels etc.
Money and In+ation
- what are the values of the goods and services in the absence of
money? two products give di"erent monetary values ie. distortion
- what is the relationship between the two?

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The Features of the Economic Way of Thinking
Scarcity and Choice
- resources can only be used for one purpose at a time
- scarcity requires choices to be made
- the cost of any good, service, or activity is the value of what must be
given up to obtain it (opportunity cost)
- are there really “free goods” why?
Rational Behaviour (purposeful)
- Rational self-interest entails making decisions to achieve maximum
oconsumer purpose is maximum utility, and for an organization
purpose is maximum pro%t
- Utility is the pleasure or satisfaction obtained from consuming a good
or service
- Di"erent preferences and circumstances (including errors) lead to
di"erent choices.
- Rational self-interest is not the same as sel%shness.
Marginal Analysis: bene%ts and Costs
- Most decisions concern a change in current conditions; therefore, the
economic perspective is largely focused on marginal analysis
- Each option considered weighs the marginal bene%t against the
marginal cost.
- Whether the decision is personal or one made by business or
government, the principle is the same
- The marginal cost of an action should not exceed its marginal bene%ts.
There is “no free lunch”
- Con+icts between long and short-run objectives may result in decisions
that appear to be irrational, when in fact they are not.Example, fast
food line ups.
Theories, Principles and Models
The Scienti%c Method:
1. Observe the world (real data, prices, quantities, GDP)
2. Formulate hypotheses
oThe formulations of explanations or cause and e"ect
relationships (hypotheses) based upon the facts
3. Test by comparing actual outcomes to the hypothesized predictions
4. Accept, reject, modify hypotheses as indicated
5. Continue testing against the facts
Deriving Theories
- Theories, principles, and models are “purposeful simpli%cations”
- Principles are used to explain and/or predict the behaviour of
individuals and institutions
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