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ECN 104 Midterm 1 notes

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ECN 104
Thomas Barbiero

• Accept, reject, modify hypotheses as warranted by C H .1 LIMITS , ALTERNATIVES AND C HOICE • continue testing against the facts E CONOMIC WAY OF THINKING • As favourable results accumulate, the hypothesis evolves into a theory • Scarcity and choice - Unlimited or model wants and limited resources • Economic principle: A widely • All choices have an opportunity cost accepted theory - Can't have it all o Makes it possible to predict o Consumers always buy at the probable effects of certain lowest cost actions o Firms try to maximize profits o Represented in models P URPOSEFUL B EHAVIOUR o Representations of "how the Economists believe that people behave economy works" purposefully DERIVING T HEORIES • Individuals maximize utility (pleasure) TERMINOLOGY • Desires and wants are unlimited and o Economic Principle insatiable GENERALIZATIONS M ARGINAL A NALYSIS: BENEFITS • Generalizations: statements of the AND C OSTS nature of the relation between two or • Our choices are made on weighing more sets of facts the marginal costs and marginal • What economic principles are benefits • ex: When the price of a product falls, THE SCIENTIFIC METHOD : the average consumer buys more of • Economics relies on the scientific that product method OTHER THINGS EQUAL ASSUMPTION • Observe the world • Assume that certain things are kept constant to better understand a • Formulate hypotheses particular issue • test by comparing actual outcomes to hypothesized predictions • What ought to be: "There should not be any poor people in Canada" - an assertion that cannot be tested ECONOMIC PROBLEM • Most people have unlimited wants G RAPHICAL E XPRESSION o Desire various goods and • Easier to understand graphs services that provide utility • We have limited amount (finite) of income M ICROECONOMICS • Individual units (household, firm orTHE BUDGET LINE industry) and their decision making process • Defn: A schedule or curve that shows various combinations of two products a consumer can purchase M ACROECONOMICS • The whole economy - national with a specific money income output of G and S (GDP) A BUDGET LINE WITH AN INCOME OF • The subdivisions or aggregates - 120 inflation, unemployment rate o Attainable and unattainable • Aggregate: A collection of specific options economic units treated as if they o Tradeoffs and opportunity were one unit costs - The more books you buy, the fewer the DVDs you can purchase P OSITIVE ECONOMICS o Make the best choice The analysis of facts to establish cause and effect relationships possible given your preference and income • We are interestied in describing - Change in income "What is" o Affects the budget line lower N ORMATIVE E CONOMICS or higher • Value judgements about what the economy should be like SCARCE R ESOURCES - Land - all natural resources - Capital - or capital goods -  Opportunity cost manufacturing aids to product G and increases with S amount produced H UMAN RESOURCES  Indicated in the downward slope of - labour- physical and mental talents of individuals used in producing G the curve and S o Outside the curve - Entrepreneurial Ability  Scarcity of resources o Takes initiative  Implies the area of o makes policy decisions unattainable combinations of output o innovates o bears risk  Area inside the curve P RODUCTION P OSSIBILITIES • Less total M ODEL output in the - Illustrates production choices economy • Inefficient use - Assumptions: of resources o Full employment and productive efficiency • Goods that are attainable o Fixes resources • Ex: A country o Fixed technology that is in a recession is o Two goods inside the curve  Pizzas symbolize consumer goods  Area along the curve  Industrial robots symbolize capital • Choice among goods outputs o The law of increasing • Variety of opportunity cost attainable combinations of goods  Downward slope of • More resources - increases in the curve factor supplies more land, labour capital and entrepreneurial activity • Opportunity cost • improved factor quality - o i.e - better trained and O PTIMAL ALLOCATION educate labour force • Decide on optimal allocation of resources by comparing marginal • Technological advances - getting cost of marginal benefit more output from a given amount of fact or input • Marginal benefit - the extra benefit associated with consuming one • The economy would achieve greater more unity output with greater production growth • Marginal cost - The extra • A country with full employment opportunity cost of that extra unit economy would achieve a greater • Economic activity should be output of both consumption goods expanded when MC exceeds MB and capital goods • Economic activity should be reduced • Economic Growth - The outward when MC exceeds MB shift of the productions possibilities curve • Optimal amount of activity occurs when MB=MC F UTURE POSSIBILITIES OF C URVE • If a society produces more current goods they are likely to have higher economic growth in the future U NEMPLOYMENT • An economy's present choice of • With unemployment, countries may produce less goods capital and consumer goods can predict the future circumstances of o Represented inside the the curve productions curve INTERNATIONAL T RADE • An individual nation is limited by the production possibilities curve • Not when there is international specialization and trade E CONOMIC G ROWTH • International Specialization: allows Correlation versus causation: Events may be related without a casual relationship a nation to sacrifice less to get more • of a desired good than they would producing without trade B IASES S CARCE R ESOURCES • Prefonceptions that are based on • Society has limited or scarce facts economic resources T HE LAST W ORD : PITFALLS TO • All natural resources that go into the S OUND E CONOMIC production of goods and services R EASONING R ESOURCE C ATEGORIES Loaded terminology Economists classify economic resources - Terms that contain the prejudice and into four general categories: value judgements of others LAND - Very difficult for a person to describe • Includes all natural resources economic behaviour without letting their opinions about that behaviour • Ex: - Deliberate attempt to sway opinion o Forests - Ex: Greedy owners o Mineral and oil deposits o Obscene profits o Water resources o Exploited workers o Wind power o Sunlight o Arable land LABOUR F ALLACY OF COMPOSITION • The physical actions and mental - What is true for one individual or part activitiesthat contributeto the of a whole is necessarily true for a production of goods and services group of individuals • Ex: C AUSATION FALLACIES o Work related activities: Post hoc Fallacy: When two events occur in time sequence, the first event is not  Logger necessarily the cause of the second event  Retail clerk  Machinist CAPITAL • Capital includes all manufactured aids in producing consumer goods and services • Capital does not refer to money as money produces nothing • Capital goods differ from consumer goods o Consumer goods satisfy wants directly o Capital goods satisfy indirectly • Economists refer to capital goods as investments ENTREPRENEURIAL ABILITY • The entrepreneur performs several functions: o Takes the initiativeof combining the resources of land, labour, and capital to produce a good or service • Entrepreneur bears risk o Innovation is risky as nearly all new products and ideas are o subject to the possibility of C H 2. THE M ARKET S YSTEM failure AND C IRCULAR F LOW Factors of production: Land, labour, E CONOMIC S YSTEMS capital,and entrepreneuriaabilityare combines to produce goods and services • Defn: A particular set of institutional arrangements and a coordinating mechanism for producing goods and services • Need economic system to produce SELF -INTEREST goods and services • Defn: That which each firm, property T HE C OMMAND S YSTEM owner, worker, and consumer believes is best for itself Also known as socialism or communism • Entrepreneurs try to maximize profits • Most property resources are or minimize loss privately owned by government • Property owners try to get the • Economic decisions are made by a highest price for the sale or rent of central government body other resources • Workers try to maximize their utility by finding jobs that offer the best T HE M ARKET S YSTEM combination of wages, hours, fringe • Property resources are privately benefits and working conditions owned • Maximizing utilityfrom various • Markets and prices are used to choices of cost direct and coordinate economic • Consumers try to obtain the activities products they want at the lowest • Prices are the signal for both possible price and apportion their expenditures to maximize their utility consumers and producers P RIVATE P ROPERTY C OMPETITION • People have the right to dispose a • Defn: Independently acting sellers certain good and buyers operating in a particular product or factor market • Encourage people to cooperate by helping to ensure that only mutually • Freedom of sellers and buyers to agreeable economic transactions enter or leave markets, on the basis of their economic self-interest take place • Enforces people to mutually • Buyers and sellers have the option agreeable economic transactions to enter or leave a market depending on what they like o Benefits you as well as them • The diffusion of economic power inherent in combination limits the potential abuse of that power F REEDOM OF ENTERPRISE AND • Competition is the basic regulatory CHOICE force in the market system o It is good for the economy • Ex: Saskatchewan specializing in wheat production M ARKETS AND PRICES U SE OF MONEY • Markets and prices are key components in the market system • Substitute for barter o The ability to coordinate daily • Resolves the double coincidence of economic decisions wants • Market system conveys the • Medium of exchange decisions made by buyers and • Money is used to facilitate sellers exchanges of goods and services • The market system is the organizing and coordinating mechanism • Whatever society defines as a medium for exchange is money • Ex: Craigslist is a market C HARACTERISTICS OF THE M ARKET • Society decides: S YSTEM o What the economy should • Active but limited government produce how production can be organized efficiently W HAT WILL BE PRODUCED ? o How the fruits of production • Consumer sovereignty: Crucial in are to be distributed determining the types and quantities of the goods produced T ECHNOLOGY AND C APITAL G OODS • The goods and services that can be • Extensive use of technologically produced at a profit advanced capital goods helps market economies achieve greater • Dollar Votes: The votes that efficiency in production consumers and entrepreneurs cast for the production of consumer and S PECIALIZATION capital goods • Specialization of work - division of o Determines which industries labour will continue to exist o There are ability differences H OW WILL THE GOODS AND o Learning by doing SERVICES BE PRODUCED ? o Saving time switching tasks • Seek the least costly labor • Markets encourages least cost G EOGRAPHIC SPECIALIZATION production because of profitability • Efficiency is dependent upon: • By responding to price and profit signals o The available technology • Responding to changes in factor o The prices of the needed prices resources o Economic efficiency requires H OW WILL THE SYSTEM PROMOTE obtaining a particular output PROGRESS with the least input of • Technological advance resources • Creative Destruction: The hypothesis that the creation of new products and production methods simultaneously destroys the market W HO WILL GET THE OUTPUT power of firms that use existing products • Consumers with the willingness to pay will get the product  Ex: MySpace and Facebook • Ability to pay depends on income T HE INVISIBLE HAND • The amount of income depends on: • Prices coordinate information o The quantities of the property • Brings private and public interest and human resources they supply closer together o The prices those resources Three special merits of the market command in the factor system: market • Market systems promote efficiency H OW WILL THE SYSTEM in the allocation of resources A CCOMMODATE C HANGE • Market systems provide incentives for people to be productive through • Guiding function of prices: The ability of prices to bring about work effort and acquiring skills changes in the quantities of products • Market sys
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