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Lecture notes chapters 1 and 2.pdf

6 Pages

Course Code
ECON 1000
Shadab Qaiser

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Chapter  1:  What  is  economics?     • Economy:   o The  word  economy  comes  form  the  Greek  word  for  “one  who  manages  a  household”   o Economics  is  the  study  of  how  society  manages  its  scarce  resources   o It  is  important  to  manage  resources  because  resources  are  scarce   • Economics  –  the  social  science  that  studies  the  choices  that  individuals,  businesses,  governments,  and   entire  societies  make  as  they  cope  with  scarcity   o The  study  of  how  society  allocates  its  scare  resources  to  satisfy  peoples’  unlimited  wants     o Wants  are  unlimited  and  resources  are  limited   • Scarcity  –  the  inability  to  satisfy  all  of  our  wants   o Scarcity  causes  choices,  choices  depends  on  the  incentives  we  face   • Incentive  –  a  reward  that  encourages  an  action  or  a  penalty  that  discourages  an  action       Definition  of  economics:   Economics  is  divided  into  two  main  parts:   • Microeconomics  –  the  study  of  choices  that  individuals  and  businesses  make,  the  way  those  choices   interact  in  markets,  and  the  influence  of  governments   o Micro  focuses  on  the  individual  parts  of  the  econo my   o How  households  and  firms  make  decisions  and  how  they  interact  in  specific  markets   • Macroeconomics   –  the  study  of  the  performance  of  the  national  and  global  economies   o Economy  wide  phenomena,  including  inflation,  unemployment,  and  economic  growth       • Resource  –  anything  that  can  be  used  to  produce  something  else   o Types  of  resources  include  land,  labour,  physical  capital  (building,  machinery,  etc.)   • Basic  principles  of  economics:   o A  household  and  an  economy  face  many  decisions:   § Who  will  work?   § What  goods  and  how   much  will  be  produced?   § What  resources  should  be  used  in  production?   § At  what  price  should  goods  be  sold?   • Every  economic  issue  involves  individual  choices     • Two  big  economic  questions  that  summarize  the  scope  of  economics:     1) How  do  choices  end  up  determining  w hat,  how,  and  for  whom  goods  and  services  get  produced?   • What,  how  and  for  whom:   o What?   § Goods  and  service  –  the  objects  that  people  value  and  produce  to  satisfy  human  wants   § What  determines  the  quantity  of  goods  and  services  that  we  pro  ? o How?   § Goods  and  services  are  produced  by  using  productive  resources  called  factors  of  production   (four  categories):   • Land  –  “gifts  of  nature”  that  we  use  to  produce  goods  and  services     • Labour  –  the  work  time  and  work  effort  that  people  devote  to  producing  goods  and   services   o Human  capital  –  defines  the  quality  of  labour;  the  knowledge   and  skills  that   people  obtain  from  education ,  on-­‐the-­‐job  training,  and  work  experience   • Capital  –  the  tools,  instruments,  machines,  buildings,  and  other  constructions  that   businesses  use  to  produc e  goods  and  other  services   • Entrepreneurships  –  the  human  resources  that  organize  land,  labour,  and  capital   o For  whom?   § Who  gets  the  goods  and  services  depends  on  the  incomes  that  people  ern   • Land  earns  rent   • Labour  earns  wages   • Capital  earns  interest   • Entrepreneurship  earns  profit     2)  When  do  choices  made  in  the  pursuit  of  self -­‐interest  also  promote  the  social  interest?   • Self-­‐interest  –  choices  that  you  think  are  best  for  you   o You  make  choices  that  are  in  your  self -­‐interest     • Social  interest  –  choices  that  are  best  for  society  as  a  whole     o An  outcome  is  in  the  social  interest  if  it  uses  resources  efficiently  and  distributes  goods  and   services  fairly     The  big  question:   • Is  it  possible  that  when  each  one  of  us  makes  choices  that  are  in  our  self0interest,  it  also  turns  ou t  that   these  choices  are  also  in  our  social  interest?   o Most  of  the  time,  economic  agents  acting  purely  out  of  their  own  self -­‐interest  also  promote  social   interest  through  what  Adam  Smith  calls  as  the  “Invisible  hand”   § “It  is  not  from  the  benevolence  of  the   butcher,  the  brewer,  or  the  baker  that  we  expect  our   dinner,  but  from  their  regard  to  their  own  interest.”   –  Adam  Smith,  The  Wealth  of  Nations   • Sometimes  a  conflict/tension  may  occur  between  self -­‐interest  and  social  interest   o Examples:   § Globalization   § The  information-­‐age  economy   § Global  warning   § Natural  resource  depletion   § Economic  instability     The  economic  way  of  thinking:   • Choices  and  trade-­‐offs:   o Scarcity  requires  choices  and  choices  involve  trade -­‐offs   o Trade-­‐off  –  giving  up  one  thing  to  get  something  else;  an  exchange   § The  big  trade-­‐off  –  when  governments  redistribute  income  from  the  rich  to  the  poor  it   becomes  a  trade-­‐off  between  equality  and  efficiency   o Examples  of  trade-­‐offs  that  determine  our  income:   § Trade-­‐off  between  enjoying  current  consumption  and  future  consumption   • If  we  save  more  money  and  consume  less  today,  we  can  buy  more  capital  and   increase  our  future  income   § Trade-­‐off  between  leisure  and  education   • If  we  take  less  leisure  time,  we  can  educate  and  train   ourselves  to  be  able  to  become   more  productive  and  earn  higher  income  in  the  future   § Trade-­‐off  faced  by  firms  between  more  production  and  research   • If  business  produce  less  today  and  devote  resources  to  research  and  developing  new   technologies,  they  can  produce  more  in  the  future   o The  choices  we  make  in  the  face  of  such  trade -­‐offs  determine  the  pace  at   which  our  economic  condition  improves   • Efficiency  vs.  equity   o Efficiency  –  means  society  gets  the  most  that  is  can  from  a  scarce  resource   o Equality  –  means  the  benefits  of  those  resources  are  distributed  fairly  among  the  members  of   society   • Opportunity  cost  –  the  highest-­‐valued  alternative  that  we  must  give  up  to  get  something  or  do  something   o Thinking  about  a  choice  as  a  trade -­‐off  emphasizes  cost  as  an  opportunit y  foregone   • Choosing  at  the  margin  –  people  make  choices  at  the  margin,  which  means  that  they  evaluate  the   consequences  of  making  incremental  changes  in  the  use  of  their  resources   o Marginal  benefit   –  the  benefit  from  pursuing  an  incremental  increase  in  an  ac tivity     o Marginal  cost  –  the  opportunity  cost  of  pursuing  an  incremental  increase  in  an  activity     • Choices  bring  change :   o What,  how,  and  for  whom  goods  and  services  get  produced  change  over  time  and  this  affects  the   quality  of  our  economic  lives   o But  the  quality  of  out  economic  lives  and  the  rate  at  which  they  improve  depends  on  choice  that   involve  trade-­‐offs   • Responding  to  incentives:   o Out  choices  respond  to  incentives   o For  any  activity,  if  marginal  benefit  exceeds  marginal  cost  people  have  an  incentive  to  do  mor e  of   that  activity   o If  marginal  cost  exceeds  marginal  benefit  people  have  an  incentive  to  do  less    that  activi
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