ECON 101 LECTURE Sept 11
Readings: Chapter 1 and 2
Economics: The study of the choice people make and the action they take in order to
make the best use of scare resources in meeting their wants and needs. Study of
people (social science). Choices made in the face of scarcity (does not necessarily
mean famine, prices are results of scarcity. Ex, wants 4.0 and social life, time is a
scarcity.) WHAT DO WE DO ABOUT SCARCITY?
Economic Choices: Consider some activity x. Then a simple rule of economics is
IF the benefits of activity x > (costs of activity x) THEN you do activity x
IF costs of activity x > benefits (of activity x) THEN do not do activity x
Consider the following the policy (activity x): Set the speed limit on the highway
from Edmonton to Calgary to 10km/hr.
Costs (-) Benefits
Fuel increases Safety (saves lifes)
Time increases d
Loss of work days w
More gas stations
Money spent on food and accommodations
Easier to calculate/put numbers to More difficult to put numbers to
Ex. Saving 100 grizzly bears. Easier to calculate the costs than the benefits, what is
the value of a grizzly bear? Ask people: How much would you pay to save a grizzly
bear? ($100). How much tax increase would you allow to save a grizzly bear? (IDK)
THEREFORE IT IS DIFFICULT TO CALCULATE BENEFITS
Two main branches of economics
Microeconomics: The study of the choices and actions of individuals, households,
firms, consumers, etc. (Business section of paper) AS AN INDIVIDUAL
Macroeconomics: The study of the behavior of the economy as a whole, including
issues like unemployment, inflation and changes in the level of national income.
(Front page of the paper) AS A WHOLE Ex.
Unemployment of teachers micro
Unemployment rate of all jobs macro
Judging Economic Allocation
Allocations of resources can be evaluate on the basis of:
i. Efficiency: Allocative efficiency is present when society’s resources are so
organized that it is impossible to make someone better off by any
reallocation without hurting someone else. This is Pareto efficiency.
(Scaffolding in tory lecture buildings when there was construction. Bank
robbers ran around tory and when caught had no money. It is believed
that there is money hidden in the scaffolding of the tory building. 400 000
given out to 400 students 1000 each. This is Pareto efficiency because
everyone is equal and no one gets more money. If 100 000 is kept aside in
the back and the people in the back can get more, it is not Pareto
efficiency. Does not allow trade offs because no one can be hurt in Pareto
efficiency. Pareto efficiency is not realistic for policies.
ii. Allocative efficiency is present when net benefits are maximized.
iii. Equity: Distributing goods and services in a manner considered by society
to be fair. Very difficult to be fair. Economists do not do equity, politicians
iv. Moral and Political Consequences: I have a policy that will eliminate
unemployment in Alberta forever, with firing squad. Shoot the
unemployed. This is not moral. I have a plan, first year we will cut income
taxes 20%, by the sixth year, no one will pay income taxes. Instead,
government get money from taxes from fossil fuels. This is a political
Positive vs Normative Economics
Positive Economics: Involves statements about what is and can be tested by
checking the statement against the observed facts. Ex. If the price of coffee rises,
people will buy less coffee. “If taxes are distributed from high income groups to low
incomes groups, more products would be bought.”
Normative Economics: Involves statements about what ought to be. Depends upon
values and beliefs and cannot be tested. “Taxes should be used to redistribute
income from high income groups to low income groups.”
Economics as a Science 3 people in a job interview. Engineer: 2+2=? (4), Are you sure?, Precisely 4.
Accountant (4), Are you sure? Give or take 10%. Economists, WHAT DO YOU WANT
IT TO BE?
Economics is a social science that seeks to explain how people act. Like any other
science, it uses models, theories, and assumptions to describe how people behave.
A model is a simplified description of the way things work. Models and theories are
meant to provide an understanding and explanation. They also should be useful in
Assumptions are made to the formulation of all models. Essentially, assumptions
simplify complexities. The true test of a model is not the realism of the assumptions
it uses but rather the ability of the model to explain and predict behavior.
The model used in this course is called the Neoclassical Paradigm (dominates
economic literary in microeconomics)
Economics is an empirical science because it can be observed.
i. Correlation Fallacy: An error in reasoning that correlation implies
causation. (because you see two variables moving together, one variable
must be causing the other) Ex. When ice cream sales increase, crime rates
increase. (this is not necessarily true)
ii. Post Hoc Fallacy: from the Latin phrase “post hoc ero propter hoc”
meaning: “after this therefore because of this”. An error of reasoning that
a first event causes a second event because the first occurred before the
second. FALLACY OF TIME. Shopping in Nov and Dec increases.
Christmas is in Dec. Shopping does not cause Christmas.
iii. Fallacy of Composition: An incorrect believe that what is good for the
individual is good for the group. Everyone drives to campus. Difficult to
find parking, so you come to school 1 hour early. If everyone were to do
that, it would not work.
Sept 13 Readings Chapter 3,4
Production Possibilities of Frontier: A graph that shows all of the possible
combinations of two goods that the society can produce, given its factors of
production and its level of technology. Factors of production Labour, resources.
Freedonia (Duck Soup) produces only two goods. i. bottled water. ii. Compact discs
Qof CD| |
|______________________________________ D BW
Points on the Production Possibly of Frontier are attainable and efficient, off the
trend is unattainable and inefficient.
Scarcity Choice Opportunity Costs
Scarcity leads to choice. Once you make a choice, it will cost you, an opportunity
costs (the benefits foregone by NOT using the resources in the next best alternative
way. What have you given up by choosing B over C. Consider the opportunity costs
of this lecture? What did you give up by choosing to be here? Sleep $7, work, $14
take another class $8, recreation $13, study $0.10. The opportunity cost of this class
is $16, which is the next best alternative. Consider the costs of a 4 year degree at the
UofA. Tuition = $7000/year. Supplies = $1500. Cost of education = $8500/year. 4
years = $34 000 = explicit costs. Does not factor in living and food because you live
and eat regardless of school. Opportunity costs instead of going to the UofA, a
person could work for $40 000. The opportunity costs of the 4 years is 4 x $40 000 =
$160 000. Total costs of school = $194 000.)
Possibility Quantity (b of w) Quantity (CD)
A 0 15
B 1 14
C 2 12
D 3 9
E 4 5
F 5 0
Quantity (b of w) Quantity CD) Opp Cost of b of W
0 15 ---
1 14 1
2 12 2
3 9 3
4 5 4
5 0 5 CD
Opportunity Cost = what is given up / what is gained
The shape of the production possibilities of frontier is shaped like a curve because
the opportunity costs are increasing.
If the shape of the ppf is a straight line, it means that the costs remain constant. For
whatever value of x, the y is in the same ratio. The Law of Increasing Costs: If we are on the production possibilities frontier, in
order to produce extra amounts of one good, society must give up or sacrifice ever
increasing amounts of the other good.
production possibilities of frontier to increase on the x axis, shifting ppf out?
i. increase in labour
ii. technological innovation
iii. discoveries of resources
What would costs the ppf to shift in?
i. damage to economy
ii. damage to labour
iii. damage to resources
Production possibilities of frontier do not show us which point on the trend we
should choose. It only shows the possibilities. To choose a point, we must look to the
market (supply and demand), politics (government). Mixed economy in Canada
market guided by the government.
The Market Economy
Market: A place where buyers and sellers interact.
Rationality Assumption: individuals do not intentionally make decisions that will
leave them worse off.
Players in the market
i. Households (consumers) consume goods and services, supply factors.
Objective: to maximize satisfaction/happiness
ii. Firms produce goods and services, consume factors. Objective: to
iii. Government referee, regulation, monopolization, remain a politician,
make life better for t he citizens, improve the standard of living, make
things fair. Objective: ? Supply and Demand (Ch.4)
Main Characteristics of a Market Economy
i. Self Interest (Adam Smith baker bakes for himself)
ii. Incentives (people respond to price change
iii. Market prices and quantities are determined in an open market iv. Institutions. All of the market activities are governed by a set of
institutions, many of which are created by governments. Regulations to
protect the consumer and producer. PRIVATE PROPERTY RIGHTS.
(Buying a pencil from someone vs. taking a pencil from someone)
Circular Flow Diagram
Households (being as happy as possible) Supply Factors Factors Market
Demand Factors Firms Supply Goods and Services Goods and Services
Households Payment for Goods and Services Goods and Services Revenue
Firm Costs Factors Market Payment for Factors
Supply and Demand: Quantity demanded of x is a function of the quantity
consumers are willing to buy. Relationships between how much people are willing
to buy and the price of the product.
The Law of Demand: As a product’s relative price (how the price x is relative to
other goods) increases, it’s quantity demanded decreases; as a product’s relative
price decreases, it’s quantity demanded increases; ceteris paribus (Latin for all other
things held equal) As relative price goes up, people are willing to by less. Law of
downward sloping demand curve as it describes the slope of the demand curve.
(Gasoline, stocks, coins, status goods/designer goods, water, cigarettes, and other
addictive goods, is exempt from the law of demand, they have downward sloping
Giffin Good: Upward slopping curve.
Changes to the commodities price correspond to movements along the demand
curve, which is referred to change in quantity demanded.
One and only one variable causes the change the change in quantity demanded, that
variable is the price of the product. The only thing that can cause the demand for
lettuce to change is the price.
Variables that Influence Demand (not quantity demanded)
The government is going to change the way they tax products by imposing a soup
tax. They want to know how consumers will respond. What are all the variables that
impact the consumer’s decision?
i. Price of soup., price of alternative soups
ii. Price of chili (alternatives)
iv. Nutrition/heath concerns v. The weather
vi. Price of crackers
i. Price of Substitute: Two goods are substitutes if for the consumers, these
goods satisfy the same needs and desires (butter and margarine) If the
price of a substitute increases, the demand for the original commodity
shifts out, which corresponds to an increase in demand (not in quantity
ii. Price of Compliments: Compliments are products that tend to be used
jointly. Examples, coffee and cream, butter and bread. If the price of a
compliment increases, the demand curve for the original commodity
shifts in, which corresponds to a decrease in demand.
iii. Number of Buyers: When the number of buyers increases, demand
iv. Preferences and Tastes: Cultural attitudes, health concerns, fashions and
fads. As preferences change, demand changes. Sometimes, the change is
gradual, and sometimes drastic.
v. Expectations: The consumer’s expectations of what will happen to the
price or availability of a good in the future may cause the demand curve
to shift. For example, if the price of a product is expected to increase in
the future, consumers may try to stock up on the commodity today.
(corporations will give you the perception of shortages to increase
vi. Income: As disposable income (income after taxes) increases, demand for
normal goods increases. (for most goods) Inferior goods as your
income increases, demand decreases (when you have more money, you
will buy less instant noodles because you can afford something else)
Income neutral does not change as your income changes, ex. Salt.
Quantity supply of a good = Price of the good (other factors)
Quantity supply of a good = quantity producers are willing to sell.
The Law of Supply: As the relative price of a commodity increases, the quantity
supplied increases, ceteris paribus (everything else held constant) As the relative
price of a commodity decreases, the quantity supplied decreases, ceteris paribus.
The supply curve should be upward sloping. a. labour supply (x =20hr/wk,
y=$4/hr) b. no more supply
increased to (x=50hr/wk, y=$16/hr)
increased to (x=? y=$320/hr)
star indicates reservation wage
don’t want to work much after
Changes in the price of commodity
x cause changes in quantity
supplied which correspond to movements along the curve.
One and only one variable causes the change in quantity supplied; it is the price of
Variables Affecting Supply
i. Cost of Inputs: wages, interest rates, opportunity costs, cost for energy,
etc. As the coast increase, the supply curve for the commodity shifts in,
which corresponds to a decrease in supply.
ii. Technology and Productivity: A better, cheaper production technology
allows the producer to supply more of a product at every pr