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EC1021 Sept 11

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Western University
Economics 1021A/B
Bruce Hammond

“Common sense made difficult” – The study of choices that people make when our wants exceed our resources – – fundamental economic problem – scarcity. The Economic Problem – What to produce? – How to produce? Example: is it necessary to hire lots of people or machines for construction? Cost vs. speed – For whom to produce? Who gets it and how do certain countries get it – allocate using money (buying a nice car)? Need (healthcare in Canada)? – Where to produce? – When to produce? Right away, mass produced or takes a few weeks, months, specially designed? Example: selling 5 Maybachs a year – not necessary to mass produce it Planned economy – no matter how hard they are told to work, they receive the same amount, not extra. People do not receive extra money, so no motivation to work harder. Production Resources – Factors of Production Land – resources from nature (land, raw materials like minerals, water) Capital – the processed materials, equipment, buildings, used in production – Need financial capital to get physical capital Labour – Human effort to make things Entrepreneurship – initiative, management, risk-taking Putting items into categories: Information – capital Knowledge – labour – not just physical, it's mental Chapter 1 Scarcity – our inability to get everything we want. Incentive – a reward that encourages an action or a penalty that discourages one. Example: Prices. price of a laptop. If a laptop is too expensive, more will be offered that people want to buy. Too low = less laptops for sale than people want to buy. Economics – the social science that studies the choices that individuals, businesses, societies and governments make as they cope with scarcity and the incentives that influence and coexist well together with these choices. Microeconomics: the study of the choices that individuals and businesses make, the way these choices interact in the markets, and governments' influence. – Individual units within the overall economy – Individual products, companies Example of questions : Why are people downloading more movies? If the price of rent goes up, what will happen to a single family's savings? Determining to price of a bottle of water. How many people should a company hire? Macroeconomics: the study of national and global economics. - Economic problems based on the nation as a whole. Example of questions: Why is the Canadian unemployment rate so high? If people have to pay more taxes, what will happen to national savings? How many hours are worked in a given year in Canada? What Economists Do Normative Statements – What should be – Opinion Positive Statements – What is – Can be proven to be true or false. To do this, one must define the parameters. Ex. Comparing basketball players or pro hockey players making more money – What time in their career? How much experience do they have? – Observation and measurement – Model building – ceteris paribus – other things being equal – Testing models Copy to slides: A Picture of an Economy Scarcity and me: I want to have time to do everything I would like to outside of homework such as lots of time for hobbies, being with friends, but I am unable to because there are only 24 hours in a day. Examples in the news of scarcity: oil scarcity in Nigeria is causing vandalism of the pipeline in Arepo. Two Big Economic Questions 1. How do choices end up determining what, how, and for whom goods and services are produced? 2. Can the choices that people make in the pursuit of their own self-interest promote the broader social interest? Goods and Services – the objects that people value and produce to satisfy human wants. Produced by using productive resources called factors of production. Four categories: – Land – Labour – Capital – Entrepreneurship Land – resources from nature (land, raw materials like minerals, water) – Earns rent. Capital – the processed materials, equipment, buildings, used in production – Need financial capital to get physical capital – tools, instruments, machines, buildings used to produce goods and services. – Earns interest Labour – Human effort to make things. Physical and mental efforts of all people who work on farms, construction sides, factories, shops, offices – Earns wages Entrepreneurship – initiative, management, risk-taking – Human resource that organizes labour, land and capital – Earns profit. MyEconLab Illustration 1.1 – Agriculture is smaller in Canada, a rich country, moderate in Brazil, a moderate country, and larger in China, a poorer country. – Services – much larger in Canada Labour earns the most income. Can the Pursuit of Self-Interest Promote the Social Interest? Self-Interest – A choice is in your self interest if you think the choice is the best for you. Example: you order a pizza because you're hungry, not because the delivery person needs an income. Social Interest – If a choice leads to an outcome best for society as a whole. – Two dimensions: efficiency and equity (fairness) Efficiency is achieved when the available resources are used to produce goods and services at the lowest possible cost and the quantities that will give the greatest value/benefit. Globalization – the expansion of international trade, borrowing and lending, and investment. – In self-interest of consumers who buy low-cost goods or services produced by other countries – In the self-interest of the firms who produce in low-cost regions and sell in high cost regions. However, is it in the self-interest of a low-wage worker in Malaysia who sews new running shoes? Information Revolution – Technological change of the last 40 years. In my self interest – cell phone, laptop, apps, Internet Self-interest of Bill Gates, Gordon Moore, Steve Jobs Example: Chips and Windows – Intel Chips and Windows the only things available for a long period of time. Absence of competition gave them the ability to sell much higher than the manufacturing price. Climate Change – Choices in self-interest such as using electricity and gas contribute to the carbon footprint. – Example: Burning fossil fuels power airplanes, cars, trucks, but put 28 billion tonnes of carbon dioxide into the atmosphere each year. Economic In
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