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ECO 1102 mdt 1 notes.pdf

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University of Ottawa

Chapter 1 Ten Principle of EconomicsEconomy Greek word one who manages a householdScarcitylimited nature of societys resourcesEconomics study of how society manages its scarce resources they study how people make decisions1 People Face Trade offsNo such thing as a free lunch give up one thing to get another that we want trade off one goal against anotherGuns or butter high income or clean environment efficiency or equityEfficiency property of society getting the most it can from its scarce resources size of the pieEquity property of distributing economic prosperity fairly among the members of society how the pie is dividedWhen the government tried to cut the pie into more equal slices the pie gets smallerMaking decisions requires trading off one goal against at least one other2 The Cost of Something is What You Give Up to Get ItMaking decisions requires comparing the cost and benefits of alternative courses of actionOpportunity Cost whatever must be given up to obtain some item3 Rational People Think at the MarginRational People people who systematically and purposefully do the best they can to achieve their objectivesMarginal Changes small incremental adjustments to a plan of actionRational people make decisions by comparing Marginal Benefits and Marginal Costs200 seat plane costs 100000 Avg costseat is 500One may conclude that the airline will never sell a ticket 500 However the airline can raise its profits by thinking at the marginSell for less marginal cost of selling ticket for cheaper is peanuts and sodaAs long as the passenger pays more than the marginal costRational people take action when Marginal BenefitMarginal CostPeople make decisions by comparing costs and benefits at the margin4 People Respond to IncentivesIncentive something that induces a person to actPublic policies change the costsbenefits that people face and alters behaviour tax on gasolineConsider not only the direct effects but indirect effects that work with incentives5 Fair Trade Can Make Everyone Better OffTrade between two countries can make each country better offTrade allows each person to specialize in the activities heshe does bestPeople can buy a greater variety of goods and services at a lower cost6 Markets Are Usually a Good Way to Organize Economic ActivityMarket Economy economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and servicesHouseholds and firms interacting act as if they are guided by an Invisible Hand leading them to desirable outcomesPricedetermines how much to buy and how much to supplyReflects both value and cost to societyHouseholds decide what to buy and who to work forFirms decide who to hire and what to produce7 Governments Can Sometimes Improve Market OutcomesProperty Rights ability of an individual to own and exercise control over scarce resourcesMarket Failure market is left o its own fails to allocate resources efficientlyCaused by an Externality impact of one persons actions on the wellbeing of a bystander pollutionCaused by a Market Power ability of a single economic actor small group of actors to have substantial influence on market prices ECO 1102 Page 1 Chapter 1 cont8 A Countrys Standard of Living Depends on Its Ability to Produce Goods and ServicesVariation in living standards is attributable to differences in countries ProductivityQuantity of goods and services produced from each hour of a workers timeMeasured by comparingPersonal Incomes and Total Market Value of Nations Production GDPTo boost living standards policy makers need to raise productivity by educating providing tools and access to best tech9 Prices Rise When the Government Prints Too Much MoneyInflation increase in overall level of prices in economyHigh inflation imposes various costs on society keeping inflation at a low level is goal of policy makersCause is growth in the quantity of moneythe value of money falls10 Society Faces a ShortRun Tradeoff between Inflation and UnemploymentIncreasing amount of money in economy stimulates overall level of spending and demand for goods and servicesHigher demand causes raise in prices but also increases quantity of gs produced and hire more workersMore hiring leads to lower unemploymentBusiness Cycle fluctuations in economic activity such as employment and productionChanges in govt spending taxes and amount of money it prints influences the combo of inflation and unemploymentThe Phillips Curve illustrates the tradeoff between inflation and unemploymentInflationUnemploymentIts a shortrun tradeoff ECO 1102 Page 2
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