Chapters 1 - 3 Lecture & Textbook Notes Anything on a slide, everything in the textbook and study guide, and even personal explanations and examples.

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ECON 101
Corey Van De Waal

Economics 101: Chapter 1 Definition of Economics - All economic questions arise from scarcity - Choices depend on incentives – rewards that encourage actions and penalties that discourage action - Economics is the social science that studies the choices people make to cope with scarcity - Microeconomics studies choices of individuals and businesses - Macroeconomics studies national and global economies Two Big Economic Questions - 1) How do choices end up determining what, how, and for whom goods and services get produced? - 2) When do choices made in the pursuit of self-interest also promote the social interest? - 65 years ago, almost 20% of Canadians worked on farms: today that number is below 3% - Today, over 75% of Canadians provide services - There has been a decline in agriculture, mining, construction, and manufacturing, and an expansion of services - Factors of production are land (gifts of nature), labour (work, time and effort), capital (quality of labour is human capital/ tools, instruments, machines, etc. are just capital), entrepreneurship (the human resource that organizes land, labour and capital) - Who gets the goods and services depends on the incomes that people earn - Land earns rent, labour earns wages, capital earns interest, entrepreneurship earns profit - Every day, 6.7 billion people make economic choices that result in “what, how and for whom” goods and services get produced - Self-interest versus social interest The Economic Way of Thinking - Choices and trade-offs: every choice is a trade-off, an exchange, giving up one thing in order to get something else (beer versus studying) - What? Trade-offs arise when people choose how to spend their incomes, when governments choose how to spend their tax revenues, and when businesses choose what to produce - How? Trade-offs arise when businesses choose among alternative production technologies - For Whom? Trade-offs arise when choices change the distribution of buying power across individuals. Government redistribution of income from the rich to the poor creates the big trade- off – the trade-off between equality and efficiency - The rate at which our quality of life improves depends on choices that involve trade-offs - We face three trade-offs between enjoying current consumption and leisure time and increasing future production, consumption and leisure time - If we save more, we can buy more capital and increase our production - If we take less leisure time, we can educate and train ourselves to become more productive - If businesses produce less and devote resources to research and developing new technologies, they can produce more in the future - The choices we make in the face of these trade-offs determine the pace at which our economic condition improves - Opportunity cost: thinking about a choice as a trade-off emphasizes cost as an opportunity forgone. The highest-valued alternative that we give up to get something is the opportunity cost of the activity chosen. - Choosing at the Margin: people make choices at the margin, which means that they evaluate the consequences of making incremental changes in the use of their resources. The benefit from pursuing on incremental increase in an activity is its marginal benefit. The opportunity cost of pursuing an incremental increase in an activity is its marginal cost. - Responding to incentives: our choices are guided by incentives. For any activity, if marginal benefit exceeds marginal cost, people have an incentive to do more of that activity. If marginal cost exceeds marginal benefit, people have an incentive to do less of that activity. Incentives are also the key to reconciling self-interest and the social interest. - Economists take human nature as given and view people as acting in their self-interest - Self-interested actions are not necessarily selfish actions - But if human nature is given and people pursue self-interest how can the social interest be served? - Economists answer this question by emphasizing the role of institutions in creating incentives to behave in the social interest Economics: A Social Science - Economics is a social science - What IS = positive statements - What OUGHT TO BE = normative statements - A positive statement can be tested by checking it against facts - A normative statement cannot be tested (more opinion based) - Observation and measurement -> model building -> testing models - Observation and measurement: economists observe and measure economic activity. Keeping track of things like quantities of resources, wages and work hours, prices and quantities of goods and services produced, tax and government spending, quantities of goods and services bought from and sold to other countries - Model building: an economic model is a description of some aspect of the economic world that includes only those feature of the world that are needed for the purpose at hand - Many institutions and researchers use economic models to predict cause and effect - Testing models: an economic theory is a generalization that summarizes what we think we understand about the economic choices that people make and the performance of industries and entire economies - A theory is a bridge between a model and reality. It is a proposition about which model works. The success of a model is judged by its ability to predict - Obstacles and Pitfalls in Economics: economists cannot easily do experiments and most economic behaviour has many simultaneous causes, to isolate the effect of interest economists use the logical device called ceteris paribus (other things being equal), economists try to isolate cause and effect relationships by changing only one variable at a time holding all other relevant factors unchanged Policy Tool - Personal Economic Policy: We weigh the pros and cons of our economic decisions (like marginal benefit versus marginal costs) - Business Economic Policy: Business decisions are made by considering the impact on the “bottom line”. The economic tools we will learn guide these decisions - Government Economic Policy: Policies are made by considering the promotion of the social interest. Economic thought guides these decisions. Economics 101: Chapter 2 Production Possibilities and Opportunity Cost - The production possibility frontier (PPF) is the boundary between unattainable and attainable production possibilities and shows maximum combinations of outputs (goods and services) that can be produced with given resources and technology - Points on PPF represent production efficiency: outputs produced at the lowest possible cost - Points inside PPF are inefficient – attainable, but not maximum combinations of outputs; they represent unused or misallocated resources - Choosing among efficient points on PPF involves an opportunity cost (highest valued opportunity forgone) and a trade
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