Page 1 of 7
ECON 311 Jan 7 th
Chapter 1 Economic Issues and Concepts
1.1The complexity of the Modern Economy
The Self-Organizing Economy
Who provides the goods and services that individuals desire?
Early economists noticed that the interaction of self-interested people (e.g.,
buyers and sellers) creates a spontaneous social order– and in that sense the
economy is self-organizing.
Individual self-interest, not benevolence, is the foundation of economic
- Loosely speaking, efficiency refers to organizing available resources to produce the
goods and services that people most value and when they most want them with the
least possible resources.
Main Characteristics of Market Economies
Self-interest guides individuals: An individual’s consumption or production
decision is guided by his/her own self interest.
Individuals respond to incentives: Consumers want to consume more when
prices are low.
Prices and quantities are set in (relatively) free markets in which individuals
Institutions, created by the state, protect private property rights and enforce
contractual obligations. Laws are passed by legislatures (members of
parliament) and enforced by police and courts.
People respond to incentives
- LA Laker basketball star Kobe Bryant chose to skip college and go straight to the
NBA from high school when offered a $10 million contract.
- Fertility rate went up in Quebec between 1988-1997 in response to “baby bonus.”
Should the bonus be higher for the first or second baby ?
1.2Scarcity, Choice, and opportunity cost
Economics studies how we can use scarce resources to satisfy unlimited human
wants in the best possible way.
A society’s resources consists of land, labour, and capital. These resources
are called factor of production or simply inputs.
The final products ready for consumption are outputs: such as goods
(tangibles) or services (intangibles).
In a Market Economy, households and business firms determine what to buy,
who to work for, who to hire and what to produce. It allocates scarce
resources (both inputs and final outputs) among competing users in the best
possible ways. Page 2 of 7
Interaction between households and businesses is as if guided by an
“invisible hand.” Households and firms look at prices when deciding what to
buy and/or sell.
The puzzle is that in a market economy everybody is guided by his/her own
self- interest and yet it promotes overall economic well being.
Opportunity Costs: The cost of something is what you give up to get it
Decisions require comparing costs and benefits of alternatives. You carry out
that action only when its benefits outweigh costs.
Going to university vs. going to work.
Opportunity Cost is what you give up from one alternative (choice) to get
what you want from another choice.
– What is the opportunity cost of going to university for Hokey Star Joe
– What is the Opportunity Cost of Econ 101?
Production Possibility Boundary
Production Possibilities Boundary or Frontier (PPB)…is a graph that shows
the various combinations of output that the economy can possibly produce
given the available factors of production and technology.
For example, given the resources (and technology) Canada has, what is the
combination of so many different goods and services that it can possibly
Consider the choice that must be made by a child who has only 50 cents to
spend. She wishes to spend it all on two types of candy. Bubble gums cost 5 cents
each and lollipops cost 10 cents each.
- With 50 cents, combination A is unattainable.
- Combination B is attainable.
The negatively sloped line provides a boundary between attainable and
unattainable combinations. Page 3 of 7
The opportunity cost of getting 1 more lollipop is the 2 bubble gums that must be
The PPB illustrates:
• Choice and trade off
• Opportunity cost
• Economic growth
• Point d shows scarcity; it is unattainable with current resources.
• Both choices a and b are attainable and are the best combinations of two
goods that can possibly be produced. In that sense both a and b are efficient.
Production Possibilities Boundary
To increase cars production from 700 to 900, 1000 computers must be given up.
Opportunity Cost of next 200 cars is 1000 computers.
Four Key Economic Problems
1. What is Produced and How?
a. The production of every good requires resources such as labor. How
much resources you allocate for the production of a particular good
determines the quantities of production of that good.
b. In terms of our previous illustration, what combination of civilian and
military goods will be chosen?
c. Will the economy be inside the production possibilities boundary and
use resources inefficiently? Or will it lie on the boundary?
2. What is consumed and by whom?
a. What determines how economies distribute total output among the
consumers? Why do some people get a lot while others get only a
b. Will the economy consume exactly what it produces? Page 4 of 7
c. Microeconomics is the study of the allocation of resources as it is
affected by the workings of the price system.
d. To achieve an efficient allocation of outputs, they should fall on the
hands of those who value them most. For example, if John values a pen
at $10 but Lisa at $8, then this pen should be allocated to John.
3. Why are resources sometimes idle?
a. An economy is operating inside its production possibilities boundary
if some reso