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Econ Notes Chapters 1-5.docx

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University of British Columbia
ECON 101

Econ101StudyGuideChapter1EconomicIssuesandConcepts1The Complexity of the Modern Economy1The SELF ORGANIZING EconomyOr the Market EconomyAn economy is a system in which scarce resources are allocated among competing usesFree Market is SELF ORGANIZINGAdam Smith wrote about the invisible hand that organizes millions of independent decisionsoThese decisions are based on SELF INTEREST not benevolence2EfficiencySellers produce what buyers wantFree markets are relatively efficient and coordinate the buyers and sellers via the PRICEoPRICE is the buyers and sellers common groundBRAINWAVE Efficiency PrincipleEfficiency is better than inefficiencyBRAINWAVE Coordination PrincipleMarkets automatically coordinate3Main Characteristics of Market EconomyA Rational Self InterestoMaximize the EXPECTED benefitcost ratiooMake a change if the MARGINAL benefitsmarginal costsMaking a decision at the margin means thinking about the step after the decision is madeB IncentivesoEconomic players respond to incentivesC Prices and QuantitiesoBuyers and sellers negotiate the exchange of commodities in markets via PricesD Markets governed by RULES OF THE GAMEoRule of LawProperty rights freedom of contractoInstitutions oManners customs conventions4A Planned AlternativeCommand EconomyIn 1850 Karl Marx argued that markets are efficient for allocation of resources but create disproportionate distribution of incomeCommand EconomyCentral Planning CommunismoFailed because of failure to coordinate quality control misplaced incentivesBRAINWAVE Intervention PrincipleSometimes Government can improve on market outcomes2Scarce ResourcesEconomics is the study of the management of SCARCE RESOURCES to satisfy UNLIMITED human WANTS1ResourcesA ResourcesoResourcesfactors of productioninputsoGoods and ServicesoutputsB ProductionoTransforming inputs into outputsC ConsumptionoThe using up of production to satisfy human wantsoOutputsSatisfactionFive Factors of Production InputsoKCapitalPlant Equipment Inventory Residential Construction PEIRoLLandNatural resource Natural capitaloNLabourHuman resource Human capitaloTTechnologychange in the productive processoEEntrepreneurshipinnovation inventionGoods and Services OutputsoGoodTangible commodity ie a caroServiceIntangible commodity ie a haircut2ScarcityScarcity means that there is a finite amount of everythingoFactors of production are LIMITEDoHuman desires are UNLIMITEDEconomists work to manage these scarce factors to satisfy unlimited desiresPolitics decides among the unlimited desires or ENDSBRAINWAVE Scarcity PrincipleStuff is scarceScarce Goods have a limited supply at P0 QsQdFree Goods have an unlimited supply at P0 the quantity supplied is more than the quantity demanded3ChoiceScarcity implies CHOICE and choice implies COSTSBRAINWAVE Choice Principlepeople make decisions as tradeoffs
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