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Chapter #1 notes.doc

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Ryerson University
ECN 104
Halis Yildiz

Chapter #1 Notes Cont. Purposeful Behaviour PG.#4  Economics assumes that human behaviour reflects “rational self-interest” which means that people seek for opportunities that would help them make the most out of that opportunity (UTILITY) … the pleasure or satisfaction of consuming a good  Different types of people have different purposes • Consumers are purposeful in deciding what goods and services to buy • Businesspersons are purposeful in deciding what products to produce and how to produce them • Gov’t are purposeful in deciding what public services to provide and how to fund them  PURPOSEFUL BEHAVIOUR: people make decisions with some desired outcome in mind Marginal Analysis: Benefits and Costs  Economics’ MAJOR focus is on MARGINAL ANALYSIS: comparisons of marginal benefits and marginal costs.  MARGINAL= EXTRA, ADDITIONAL, A CHANGE IN  Most choices are based on the changes in the status quo  Each choice will have marginal benefits and marginal costs • EG. You and your fiancé are shopping for an engagement ring. Should you buy a quarter, half, three-quarter carat diamond, or a larger one? The marginal cost of the larger diamond is the added expense beyond the smaller diamond. The marginal benefit is the greater lifetime pleasure (UTILITY) form the larger stone. If the marginal benefit of the larger diamond exceeds its marginal cost, you buy the larger stone. But if the marginal cost is more than the marginal benefit, but the smaller diamond instead, even if you can afford the larger stone. • Scarcity plays a big role as the marginal benefit associated with some specific option always includes the marginal cost of achieving something else • Spending money on a larger ring may cost you a honeymoon or a big wedding A QUALIFICATION: INTERNATIONAL TRADE - Production possibilities change with international specialization and trade - International trade, the output limits imposed by its domestic production possibilities curve - International specialization means directing domestic resources to output that a nation is highly efficient at producing - Specialization and trade enable a nation to get more of a desired good at less sacrifice of some other good - Expansion of domestic production possibilities and international trade are two separate routes for obtaining greater output QUICK REVIEW - Economics examines how individuals, institutions, and society make choices under condition of scarcity - The economic way of thinking stresses ….. when choosing among the alternative, people incur opportunity costs o Resources scarcity and the necessity of making choices o The assumption of purposeful or rational behaviour o Comparisons of marginal benefit and marginal cost - Economists use the scientific method to establish economic theories—cause—effect generalizations about the economic behaviour of individuals and institutions - Positive economics deals factual statements (what is); normative economics involves value judgments (what ought to be) - Because wants exceed incomes, individuals face an economic problem: they must decide what to buy and what to forgo - A budget like (budget constraint) shows the various combinations of two goods that a consumer can purchase with a specific income - Straight-line budget constraints imply constant opportunity costs associated with obtaining more of either of t
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