Define economics and distinguish between micro and macroeconomics
explain the two big questions of economics
micro is the analysis of the behavior of the smaller units within the market place that deals with consumers,
labour pool, entrepreneurs, firms, industry, and markets.
Macro reflects the fact that the big issues can be best understood by recognizing by their composed smaller
Study of economics is based on individual behaviors
The consumers who decide the quantity to buy
labor pool who choose which jobs they get
Entrepreneurs and choosing their workers from the labor pools, and integrating them with technology and
Micro eco is the study of the function, from the individuals that influence the market as a whole.
explain the key ideas that define the economic way of thinking
explain how economists go about their work as social scientists and policy advisers
at the end of the chapter, the questions that you should know are there.
goods is something you can touch, services are something you can’t.
2 Characteristics of labor force:
Mental aspect Labor Capital – hardcore buildings of tools
Financial capital money
Production – anything that’s being made. Factors of production and user services, and of using the goods
and services to satisfy the wants is called consumption.
Resources are seen as scarce, or, insufficient to satisfy true productions, all of the goods and services, that
To allocate these available resources, we dictate price, because price determine the positive or negative
choices of purchase.
Economics is the study of mankind in the ordinary business of life
Economic arises out of the scare resources to satisfy human wants.
*Economics is the study of the ways that humans organize themselves to make the
necessary choices about how scare resources are used to produce goods and services,
necessary to satisfy human needs and wants.
Two Big Economic Questions
Two big questions summarize the scope of economics:
How do choices end up determining what, how, and for whom goods and services get produced?
When do choices made in the pursuit of selfinterest also promote the social interest?
Goods and services are the objects that people value and produce to satisfy human wants What?
In Canada, agriculture accounts for 2 percent of total production, manufactured goods for 20 percent, and
services for 78 percent.
Identify the benefits and costs, incentives (positive and negatives), of choices, and their job is to show the
costs of the choice analysis.
Goods and services are produced by using productive resources that economists call factors of
Land – reusable resources
Labour – both physical and mental. Little equipment, high skills.
Capital – tools and components that help produce the goods and services: financial capital important role,
but not used in the production process physically, so it’s not considered a productive resource.
Entrepreneurship – human resource to the equation, organizes the labor, land, and capital. The inventor
and innovator that is the critical portion on how to produce. They take the risks.
Who gets the goods and services depends on the incomes that people earn. The more you earn, the more
of the economy you get.
Land earns rent
Labour earns wages
Capital earns interest
Entrepreneurship earns profit.
Can the pursuit of Self interest promote the social interest? Do we produce the right things in the right quantities?
Do we use our factors of production in the best way?
Do the goods and services go to those who benefit most from them?
Self interest: Making choices that are in your selfinterest that you think are best for you
4 primary topics that generate discussion that illustrates the tension between selfinterest and social interest
The informationAge economy
The technological change of the past 40 years have been called the information revolution
Clearly serves self interest (phones, laptops, etc)
Served the selfinterest of Bill Gates and Steve jobs, which is part of social interest (giving back money and
Leaving your carbon footprint regarding transportation and emissions
Incomes in Canada increased by 30 percent and incomes in Chine tripled.
Choices of US banks to borrow and lend and the choices of people and businesses to lend to and borrow
from US banks are made in selfinterest
Means expansion of international trade, borrowing and lending, and investment
Globalization is in the selfinterest of consumers who buy lowcost imported goods and services and in the
self interest of multinational firms that produce in lowcost regions and sell in high price regions Walmart has 85% part time employees, so they don’t get benefits
Also has consignment with producers, so they don’t get money until it sells.
A rational choice is one that compares costs and benefits and achieves the greatest benefit over cost for
the person making the choice
Only the wants of the person making a choice are relevant to determine its rationality
the idea of rational choice provides an answer to the first question.
People choose rationally by the benefits and costs of their answers
The benefit of something is the gain or pleasure that it brings and is determined by preferences
preferences are what a person likes and dislikes
The opportunity cost is something that is the highest valued alternative that must be given up to get.
Has two components
Things you can’t afford to buy if you purchase X
Things you can’t do with your time if you go to the concert
How Much? Choosing at the margin
You can allocate the next hour between studying and instant messaging your friends
The choice is not all or nothing, but you must decide how many minutes to allocate to each activity
To make the decision, you compare the benefit of a little bit more study time with its cost, you make your
choice at the margin
Marginal benefit is the incremental benefit to one activity or another
Marginal cost is opposite. It is important because it is incremental change
We can predict how choices will change by assessing interest
Choices respond to Incentives
A change in the marginal cost or a change in marginal benefit changes the incentives that we face and
leads us to change our choice
the central idea of economics is that we can predict how choices will change by looking at changes in
incentives are the key to reconciling selfinterest and social interest.
Think of every choice as a tradeoff – losing something to gain
Ceterus Peretus – Lets us freeze all things we don’t want to influence our model.
Output is dependent on how the production and resources
Production possibility boundary – the curve on the chart that shows the limits of the produced units given
the resources to produce them.
Production efficiency is found when we are on the curve, despite being able to produce INSIDE the curve
because it is inefficient.
The graph illustrates 4 concepts:
4 concepts found in a production probability frontier? 09/16/2013
marginal cost and marginal benefit
Marginal benefit (good incentive) – benefit you receive from consuming one more product/unit. It is the
amount of money the person is willing to pay for the additional unit of the commodity.
The more we have of something, the less willing you are to pay for that additional unit. As one unit
increases, the amount people are willing to pay goes down.
Convert a table to a chart.
Two things that influence growth
capital of accumulation
Simply the growth of capital
Comparative advantage – someone has an comparative advantage in an activity if that person can perform
the same activity at a lower opportunity cost than everyone else
Absolute advantage: When one person is more productive than another person in several or even all
doesn’t have a comparative advantage in any activity 09/16/2013
To reap the gains from trade, the choices of individuals must be coordinated.
To make coordination work, 4 complimentary social institutions have evolved over the centuries:
Property Rights – property, intellectual, financial, etc. When it’s enforced, people have the will to specialize
and then have a comparative advantage. Without these rights, nothing will move forward.
Money – A means, a commodity, of which to exchange for goods and services. Based on a common
requirement of exchange of our commodities without a common need.
Circular flow model
Firm chooses the quantity of production.
Households provides the labor, lands, capital, and entrepreneurship to the firm.
Firm in turn, rents or hires, and pays wages, interests, and profits, to the household.
Firms will output goods and services.
Households expenditure on goods and services.
Firm exists to transform resources into things people want, goods and services.
A singular goal of a firm is to make a maximized profit.
Money price is price in dollars that must be given in exchange for the goods
Relative price is the ratio of one price to another.
This is an opportunity cost
If we would predict the price will fall, it is relative price we predict will fall. Session 3 – The Economic Context 09/16/2013
Basic concepts: Session 3 – The Economic Context 09/16/2013
Business > Refers to individuals and organizations that seek to make a profit > by satisfying needs.
They do this by selling goods and services.
Also “Not For Profit” businesses. They produce goods and services for the social good and benefiting the
welfare of society’s.
Activities of business
Management > Plan > Developing Goals
Management also leads > motivates employees
Management also organizes work, and controls resources, budgets, and evaluates the performance of
Marketing > responsible for gathering research
Finance: concerned with;
Obtaining money for the firm + using it to grow the firm.
Economics > Study of how resources (Factors of production) are used in the production of goods/services,
with a social system Session 3 – The Economic Context 09/16/2013
Factors of Production Key components:
When a firm isproductive , it outputs goods and services, more than the inputs.
All economic systems must answer key question:
1) What goods/services/how much?
2) How will the goods and services be produced? Who will produce them?
3) How will the goods and services be distributed?
Activities of Business:
Communism > a society in which people regardless of class owned all the nations resources.
Shortages of goods/low standards of living. Little personal freedom.
Key note of communism was a centrally planned economy: gov’t driven who decides
what and where gets produced
Socialism – The gov’t owns and operates basic industries > education/healthcare, equal distribution of
Higher level of taxes/unemployment, the more socialist the country is.
More socialist, the more unemployment.
Capitalism (Free Enterprise) > Session 3 – The Economic Context 09/16/2013
Individual owns and operates most of the businesses that provide goods and services.
Gov’t own certain businesses/industries
Competition, supply and demand, are the key drivers in determining which products are produced.
What’s hard to keep technological companies alive, is keeping it cool.
Pure Capitalism (true free market system)–
All economic decisions are made without gov’t intervention.
A Mixed Economy – Has elements from more than one economic system
Activities of Business:
Individuals can own property
Individuals have the right to earn and use profits, within the law.
Individuals have the right to decide how their business should operate.
Individuals have the right to decide on career choice.
As price down up, quantity increases/
As prices go down, demand increases.
The cross of these on a chart is called an equilibrium. n
*Demand is the quantity of goods and services, that consumers are willing to buy, for different prices, at a
specific time Session 3 – The Economic Context 09/16/2013
Quantity is the quantity of goods and services that businesses are willing to sell at certain prices at a
specific time. Businesses sell more at higher prices.
WE have twice as more unions than US.
4 Types of Competitive Environments:
Pure Competition – many small businesses selling one standardized product. No one seller has the ability
to influence the price of the product.
Monopolistic – fewer businesses than in pure competition. The difference between products are small.
Oligopoly – Very few firms sell the product. Expensive for new firms to enter. (banking, beer, oil).
Monopoly – One producer of the product in a given market. Canada Post and LCBO.
Measuring the Economy:
GDP – Gross Domestic Product
Value of Goods and Services produced by a country in a year.
GNP – Gross National Product
Factors the help/hurt the growth of the economy: Session 3 – The Economic Context 09/16/2013
Balance of trade: Value of exports – Value of imports
Trade deficits: imports are greater than exports
Trade surplus: Exports are greater (Canada is this)
Money flows out of the country, can’t use money for investing locally
> accumulation of annual budget deficits of the government.
Budget deficit: Gov’t takes taxes and spends it on social programs
Recessions increase budget deficits and therefore increase the national debt.
Gov’t Fix IT by cutting spending in social programs, infrastructure/jobs, and raise taxes.
National debt affects national growth negatively:
gov’t has to borrow more money, less money available for other businesses to borrow.
Economic stability > a key goal
Occurs when the money available, and the quantity of goods and services available are growing at the
Inflation: Gov’t always tries to control inflation
Occurs when money available for borrowing, outstrips the output of goods and services.
Prices go up, higher prices > decrease money available to buy goods and services.
purchasing power of the dollar then declines. Session 3 – The Economic Context 09/16/2013
Gov’t controls inflation by raising interest rates.
CPI or Consumer Price Index – measures the change in price of a basket of consumer goods, year over
Deflation – amount of money available in the economy lags behind increases in goods and services.
Prices may then fall due to lack of demand, because consumers have high debt levels, which can lead to a
recession or depression.
Gov’t keep the interest rates low at banks.
The % of people who are unemployed, out of the total available labor force, and are actively seeking work.
Frictional Unemployment – normal market turnover (not due to an economic turnover).
This applies to people who are laid off, students graduating from uni, etc.
Cyclical Employment – Geared towards business cycles.
Structural Employment – Harder to fix, because the jobs available and skills of the labor force do not match.
(lowskill jobs are no longer needed due to higher tech jobs that no longer require their services.
Seasonal Employment – Due to nature of seasonal work.
Midterm Questions: Coltan Mining Case Study Session 3 – The Economic Context 09/16/2013
Who are the Stake holders and how are the affected?
1. Consumers (address primary and secondary consumers) Higher prices for phone
2. Good for MNC’s (multinational corporations – higher sales/revenues for companies.
3. Shareholders – Make higher profits
4. EE’s (Employees) (African) – Child labor, poor health in camps, environmental impacts.
5. African gov’t and economy revenues are profiting (Rwanda and Congo).
Secondary Stakeholders are activists that are trying to prevent these practices.
How does the practice of coltan mining reflect issues of corporate social responsibility? (Analyze using the
Companies responsible from an Economic, Legal, Ethical, and Philanthropic.
(Y) Economic: Companies are responsible for providing the goods and services needed and selling the
phones at a fair price, shareholders are profiting. Session 3 – The Economic Context 09/16/2013
(?) Legal: Contravening labor laws through child labor, but it may not be a legal issue in Rwanda and
Congo, where there’s no child labor laws per say.
(N) Ethical: Environmental abuse, poor labor conditions, child labor, promoting a war.
(N) Philanthropic: Money earned by companies may go back to charities, but they are not doing so.
Should corporations be compelled to act in a socially responsible manner? Support your answer by
providing arguments for and against CSR.
Yes, to keep gov’t snooping away from them.
To increase sales and image to a keen eyeing consumer basis.
Don’t make a personal viewpoint. Just say this is the model, and this case applies in such ways… The
external factors are affecting the firm in these ways –
Read CH 9, Case study Lululemon. 09/16/2013
Resource allocation methods
Scarce resources might be allocated by:
How does each method work?
When market price allocates a scarce resource, what determines what you’re going to buy?
Amongst those that are able to get the scarce resources, there are those that can afford to buy but choose
There are those financially incapable and simply cannot afford. It is critical for these people to pay for
school fees, medical insurance, as well as necessities
Told what to do. 09/16/2013
Clearly defined and activities can be monitored, but doesn’t work well when the range of activities are large.
Works well with the decisions being made affecting large numbers of individuals, because self interest of
the individuals are suppressed to make the resources used effectively. The social interest of the group is
played out instead.
The resource being the price. The resources are allocated to the winner.
Such as sporting events. The opportunity to win a big prize motivates people to work hard.
The process motivates people to work harder to get people to win, to do more, to be the best salesperson,
to win a product.
Total production of input is much greater in a contest than not.
Who can produce the most and fastest?
Firstcome, First served
Scarce resource is allocated to you if your first. First in, first out.
Independent on picking and winning, for a reward.
People with the right characteristics get the resources
Such as a getting a job, which is a source of resources. 09/16/2013
Positive side: You get a force through our tax and benefit system, where it becomes an efficient way of
transferring wealth from those who have and don’t.
Negative side: Military force. Destruction to achieve the end goal.
When your valuing something most highly, you’re considering benefit. It happens when marginal benefit =
marginal cost. To determine if the competitive market if efficient, you must see if they produce efficient
quantities to create that equality.
Statement for money is just value and price.
Value is what we get, price is what we pay.
We measure marginal benefit by maximum price willingly paid for another unit. Willingness to pay
Therefore, the demand curve is the marginal benefit curve.
Market demand is made by combining all the individuals demands for the units. Becomes a marginal social
benefit curve (market demand)
Consumer surplus is the value or marginal benefit of a good – the price paid for.
Surplus is marginal social benefit made from the participants of the market itself. This is consumption.
Supply reflects marginal cost. For market demand, must keep market and cost.
Demand is value, production is cost.
Cost is what they give up, price is what they receive. 09/16/2013
Cost of producing one more unit is marginal cost , the minimum price they must pay to receive one more
unit. Therefore, supply is the marginal cost curve. Supply curve is the marginal cost curve.
At equilibrium, buyers and sellers promote social interest because MSC and MSB are equal.
If we’re not efficient, we’re inefficient. It’s described as market failure.
Is the competitive market price efficient?
In competitive markets, underproduction, or overproduction arise when there are
price and quantity regulations (IMPORTANT)
taxes and subsidies (IMPORTANT)
public goods and common resources
high transaction costs
These cause over or under production
Quantity productions that limit an amount is inefficient.
Taxes and subsidies
increase prices by buyer and lower prices received by seller. Taxes can decrease quantity being produced,
known as underproduction.
Subsidies give back to producers. Decrease prices by buyer, and increases prices received by seller. Can
lead to increased quantity production, which is overproduction. Examples are agriculture. Lots of farmers
are paid by subsidies. 09/16/2013
Cost or benefit that affects everyone other than buyer or seller.
Can arise when and electrical utility contaminates the air, which creates an external cost. The result is then
Reduces the risk to the owners. It’s the public services that would be needed if they’re put in.
Creates an underproduction.
Public goods and common resources:
Monopoly (just recognize it.
Goal is to make more profit. Producers pay too little, charge too high.
This is underproduction
High Transactions costs
When market is deemed inefficient, can one of our original methods or alternatives generate the conclusion
Self interest is expressed as social interest. You are in position of the minority.
Efficiency is highest price, least cost, equals equilibrium.
Equity is fairness. How are we going to share the benefits of our economy.
Something is not fair if the results or rules are not fair.
We should try to achieve the greatest happiness for the greatest number of participants. The key ingredient
is income. Income needs to be transferred from the wealthy to the poor, to the point of equality, where
there’s neither rich nor poor.
The greater a persons income, the smaller the marginal social benefit.
Equity pertains to fairness and unfairness. 09/16/2013
Prices and quantity regulations 09/16/2013
Taxes and subsidies
A housing market with a rent ceiling
Because the legal price cannot eliminate the shortage, other mechanisms operate:
increased search activity
A black market
With the shortage, someone is willing to pay up to maximum price.
Deadweight loss shrinks producers and consumers surplus.
According to the fair rules view, a rent ceiling is unfair because it blocks voluntary exchange.
According to the fair results view, a rent ceiling is unfair because it doesn’t generally benefit the poor.
A rent ceiling decreases the quantity of housing and the scarce housing is allocated by
Ceilings don’t eliminate scarcity, just eliminates what’s available and makes markets ration the small
The alternatives are lottery, first come first serve, discrimination, to have fairness.
Lottery is based on luck
First come first serve, based on foresight, and they will get chosen first 09/16/2013
Discrimination, based on the views of selfinterest on the owner or parties. Based on who he wants to
choose. Self interest owners can allocate some of the criteria for fairness, making it towards family and
Ceilings are not fair outcomes. They’re not efficient, but fair? That depends.
Rent ceilings exist to allow those less fortunate to have the ability to pay for a house. This is government
controlled. If it was a free market, they’d be fucked.
Minimum wage: In the labor market. Labor market influences the market we get and wages we earn from
the two parties or players. The firm decides how much labor to demand, and the lower the wage, the
greater the quantity demanded, and the household decides how much to supply. Market adjusts to make
the market demanded equal to the supply.
When a minimum wage is set above, it decreases the quantity of labor being employed.
A deadweight loss arises
The potential loss from increased job search decreases both workers surplus and firms surplus
The full loss is the sum of the red and grey areas.
minimum wage was to give everyone a standard of living to afford, but also then raises prices on
everything, since firms need to pay more, they charge more.
Tax incidents – DO