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ECON 101

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Gordon Lee

ECON 101 LECTURE Sept 11 Readings: Chapter 1 and 2 Definitions 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 Build hotels Change signs More gas stations Money spent on food and accommodations Civil discontent 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 do equity. 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 consequence. 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 predicting behavior. 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. Fallacies: 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. Technology  methods. Freedonia (Duck Soup) produces only two goods. i. bottled water. ii. Compact discs (CD) 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. What might cause the 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 maximize profits. 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 demand curves) 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) iii. Advertising 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 demand) 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 increases. 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 demand) 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. Supply 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 the commodity. 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
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