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ECON202 Study Guide - Winter 2019, Comprehensive Final Exam Notes - Gross Domestic Product, Graph Of A Function, Canada


Department
Economics
Course Code
ECON202
Professor
Harvey King
Study Guide
Final

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ECON202

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Module 1: What is Economics
Learning Objectives
At the end of this module, students should be able to do the following:
Define opportunity cost, and be able to explain/calculate the opportunity cost of various
decisions, both for simple decisions and for larger, more complex decisions.
In short, be able to use the concept of opportunity cost to analyze key decision-making both for
individuals and firms, but also for society.
Define the economic problem.
Explain the different methods societies use to solve the economic problem, and recognize these
different methods in action in decision-making in our society.
Explain what an economic model is, and give some insight into the strengths and limitations of
economic models.
Define and identify marginal benefits and marginal costs.
Explain and illustrate the role of incentives, rationality, and marginal costs/benefits in decision-
making in economic models.
1.1 Scarcity and Opportunity Cost
Economics can be thought of as studying how societies deal with what Robert Heilbroner calls
the economic problem: providing for the economic well-being of their citizens.
Each society has to decide on:
o What goods and services to produce, and how many.
o Which methods to use to produce those goods and services.
o Who gets the goods and services once they are produced.
1.1.1 Scarcity
We will begin by exploring the most basic economic problem scarcity.
What makes the economic problem interesting and difficult is that our available resources are
As a counter example, if you have ever watched the Star Trek TV shows or movies, you often
see the characters using the matter replicator to produce whatever good they wish in a sense, in
the world of Star Trek, there is no economic problem. (But see under time costs below)
This is not the case in the real world: resources are scarce there is not enough land, labour, raw
materials, etc. to produce everything.
Even in our rich country, there is scarcity.
People’s wants exceed their available resources.
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Even the richest person in the country has more wants than they can meet they may wish to
own another company, but cannot afford it; they may wish to attend their child’s concert and
the board meeting that is on at the same time, etc.
Economists focus on wants, the desire for goods and services, as opposed to needs, things you
may need to survive.
Everyone faces scarcity in terms of wants.
This is a different approach than that taken in other social sciences, such as sociology or
anthropology, where the focus is more on needs (or how some choices are really discussed
needs).
1.1.2 Choices
Because of scarcity, individuals and society have to make choices.
Sometimes these choices are relatively simple (which TV show should I watch, given my scarce
time).
Sometimes these choices are very complex should I take a Business degree or an Engineering
degree; should society provide more resources to help poor children, or poor seniors?
Economics studies these choices, to see how they are made, and what implications different
choices have.
Often when faced with such an unpleasant choice, people state “well, we should provide for
both poor children and poor seniors”.
This statement only hides a deeper choice, because given our resources are scarce, providing for
both means a) less of another type of government spending, for example on roads, or b) higher
taxes (less spending by taxpayers), or c) more borrowing (which leads to less investment, or
higher future taxes, or both, as we shall see below).
It is not possible to avoid tough choices, given that society has scarce resources.
1.1.3 Opportunity Cost
From choice flows the concept of opportunity cost.
Any time you make choice, you give up other choices.
This act of giving up the other choices carries a cost with it you have lost the value to you of
the other choices.
When you put in an hour working on this class, you gave up the chance to go to Tim Horton’s for
doughnuts and coffee with your friends, or you gave up the chance to lie around the apartment
watching soap operas, etc.
The opportunity cost of any choice is the value of the best alternative forgone the value of
what you gave up.
It is not the value of all the choices (you could not have had doughnuts at Tim Horton’s and
watched the soap operas simultaneously), just the value of the best alternative.
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