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University of Waterloo
ECON 102
Fiona Rahman

Chapter 1 Ten Principles of EconomicsDecember2109412 PMPrinciple 1 People Face TradeoffsPrinciple 2 The Cost of Something Is What You Give Up to Get ItPrinciple 3 Rational People Think at the MarginPrinciple 4 People Respond to IncentivesPrinciple 5 Trade Can Make Everyone Better OffPrinciple 6 Markets Are Usually A Good Way to Organize Economic ActivityPrinciple 7 Governments Can Sometimes Improve Market OutcomesTwo reasons why markets might fail in order to come up with the most efficient outcome Externality An effect either good or bad on parties not directly involved in the production or use of a commodityMarket Power The ability of a firm to influence the price of a product or the terms under which it is soldGovernment may alter market outcome to promote efficiencyor Government may alter market outcome to promote equityPrinciple 8 A Countrys Standard of Living Depends on Its Ability To Produce GoodsServices Assume that only the things we can produce matter to usOutput per hour per worker is greater here in Canada than in Nigeria That is why standards of living very between countriesPrinciple 9 Prices Rise When the Government Prints Too Much MoneyIn the long run inflation is almost always caused by excessive growth in the quantity of money which causes the value of money to fall Slow and steady inflation is necessary for an economy that functions wellPrinciple 10 Society Faces a ShortRun Tradeoff between Inflation and UnemploymentPrices are sticky in the shortrunIn the shortrun 1 2 years This is when the prices are sticky many economic policies push inflation and unemployment in opposite directionsECON 102 Page 1 Chapter 2 Thinking Like An EconomistJanuary0710301 PMEconomists play two rolesScientists try to explain the world but it is hard since they cannot control people But they create modelsPolicy advisors try to improve itIn the first role economists employ the scientific method the dispassionate development and testing of theories about how the world worksThe CircularFlow Diagram A visual model of the economy shows how dollars flow through markets among households and firms The Factors of Production are the resources that the economy uses to produce goodsservices Land Labour and CapitalThe Production Possibilities Frontier PPF A graph that shows the combinations of two goods the economy can possibly produce given the available factors of production and the available production technology FOP and Technology is fixedIf the PPF is a straight line the assumption is that there is a seamless tradeoff between producing two goods when in reality is very rare The PPF could be a straight line or bowshaped depending on what happens to opportunity cost as the economy shifts resources from one industry to the otherIf the opportunity cost remains constant the PPF is a straight line If opportunity cost of a good rises as the economy produces more of the good which is more likely the case then the PPF is bowshaped So PPF is bowshaped when different workers have different skills which results in different opportunity costs of producing one good in terms of the other The PPF would also be bowshaped when there is some other resource or mix of resources with varying opportunity costs Principles of Economics illustrated by the PPFScarcity cannot produce outside the PPFEfficiency producing on the PPF is more efficient than producing inside the PPFTradeoffs more of one good can be produced only if some units of another good are given upOpportunity Cost increasingly more of one good requires giving up even more of another goodEconomic growth over time the PPF can shift outwardMicroeconomics and MacroeconomicsMicroeconomicsis the study of how households and firms make decisions and how they interact in markets Macroeconomicsis the study of economywide phenomena including inflation unemployment and economic growthAs scientists economists make positive statements which attempt to describe the world as it is They are DESCRIPTIVEAs policy advisors economists make normative statements which attempt to prescribe how the world should be They are PRESCRIPTIVEPositive statements can be confirmed or refuted normative statements cannot Appeal to the facts to prove or disprove versus beliefs opinions etc ECON 102 Page 2 Chapter 5 Measuring a Nations IncomeJanuary1210223 PMGDP It is the market valueof all finalgoodsservicesproducedwithin a countryin a given period of timeMarket Value Goods are valued at their market prices so GDP measures all goods using the same units eg dollars in the Canada rather than adding apples to oranges Things that dont have a market value are excluded eg housework you do for yourselfFinalFinal goods are intended for the end userIntermediate goodsare used as components or ingredients in the production of other goods GDP only includes final goods as they already embody the value of the intermediate goods used in their production Ex Do not want to engage in double counting so you do not count tires but count a car as a wholeGoods and ServicesGDP includes tangible goods like DVDs mountain bikes beer and intangible services dry cleaning concerts cell phone serviceProducedGDP includes currently produced goods not goods produced in the pastWithin a CountryGDP measures the value of production that occurs within a countrys borders whether done by its own citizens or by foreigners located thereGiven period of timeUsually a year or a quarter 3 months Measured on an annual basis but reported quarterly Quarterly reports are then annualized If the annual increase is 1 then it means in each quarter had an increase of 025 It is an annualized figure until then figure out the actual in each quarter during the next yearThe Components of GDPConsumption C Housing is included in both consumption and Includes imputed rental value service for living in your own house for people who investment It is an investment when built but it is own their own homes It is not the purchase price or mortgage paymentsthen consumption for living in it Investment IBy convention spending on new housing is Spending on goods and services that will be used in the future to produce more included in the investment category Housing goods by businesses and firms It includes capital equipment structures and provides an ongoing services Housing becomes inventories part of the capital stock of the economyGovernment Purchases GIf there is inventory in a new year from a previous year and it is bought the inventory decreases and All spending on the gs purchased by local provincial and federal governments Gexcludes transfer payments such as Canada pension Plan benefits or employment the consumption increases So it cancels out and does not effect GDP It is counted in the previous insurance benefits These payments represent transfers of income not purchases of gs and do not represent production year in both categories So when the inventory is bought or sold it does not effect GDPNet Exports NXEXIMTransfer payments Direct transfers of money to NX exports imports individuals where no production is involved Exports represent foreign spending on domestically produced the gs exWelfare pensions etc which are excludedImports are the portions of C I and Gthat are spent on gsproduced abroad These components add up to GDP denoted YYCIGNXGDP measures two thingsTotal income of everyone in the economyTotal expenditure on the economys output of goodsservicesFor the economy as a whole income equals expenditure because every dollar of expenditure by a buyer is a dollar of income for the sellerReal versus Nominal GDPInflation can distort economic variables like GDP so we have two versions of GDP One is corrected for inflation the other is not Nominal GDPvalues output valued at current prices It is not corrected for inflation Real GDPvalues output valued at constant prices of a base year Real GDP is corrected for inflation Real GDP uses constant or base year prices and current year quantitiesGDP is calculated in practice asiiPX Qi20082008If in the following year GDP increased then either price increased or quantity increasedECON 102 Page 3
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