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Introduction to Microeconomics - ECO 1104 - Part 1

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Serge Nadeau

ECO1104 Introduction to Microeconomics September 13 2011Lecture 2Chapter One Ten Principles of EconomicsDenitionsThe limited nature of societys resourcesScarcityThe study of how society manages and allocates its scarce resources Economicshow a society makes tradeoffs includingHow people decide how much to work save spend and what to buyHow rms decide on how much to produce and how many workers to hireHow a government decides how to divide its tax revenue between national defense social assistance protecting the environment and morePrinciple One People Face TradeoffsMaking decisions requires trading off one goal against anotherExamples leisure time vs work efciency vs equitySociety gets the most from its scarce resources enlarging the pieEfciencyThe benets of those resources are distributed fairly among the members of Equitysociety sharing the pieThis isone of the most difcult tradeoffs in public policyExample increasing welfare payments vs reducing taxesPrinciple Two The Cost of Something Is What You Give Up to Get ItDecisions require comparing costs and benets of alternativesopportunity cost of an item is what you give up to obtain that itemThe Example skiing vs going to work cost of skiingski ticket transportation and wage lossPrinciple Three Rational People Think at the MarginPeople make decisions by comparing benets and costs at the margin marginal benets and marginal coststextbook pg 8Marginal changessmall incremental adjustments to a plan of action ECO1104 Introduction to MicroeconomicsPrinciple Four People Respond to IncentivesPeople make decisions by comparing costs and benetsbehavior may change when the costs or benets changeExample textbook pg 19 8Increases incentive to workTakes money away from those who cannot work and are the poorestPrinciple Five Trade Can Make Everyone Better OffTrade allows people to specialize in what they do bestEveryone is better off with tradeExample textbook pg 19 9Example buying a shirt both the customer and salesperson are happySpecializationPrinciple Six Markets Are Usually a Good Way to Organize Economic Activity Chapter 7A market is a group of buyers and sellersOrganizing Economic Activity means determining goods to produceWhat to produce themHow much of each to produceHow gets themWhoAn Inquiry into the Nature and Causes of the Wealth of Adam Smith in his 1776 book NationsHouseholds and rms interacting in markets as if they are guided by an invisible hand that leads them to desirable market outcomesPrices are the instrument with which the invisible hand directs economic activityIn any market buyers look at the price when determining how much to demandSellers look at the price when deciding how much to supply in order to increase revenueAs a result of the decisions that buyers an sellers make market prices reect both the value of a good to society and the cost to society of making the goodFree market maximizes societys happiness in this instance Principle Seven The Government Can Sometime Improve Market Outcomes occurs when the market fails to allocate resources efcientlyMarket failureReasons for market failuresExternalities the impact of one persons action on a bystander eg pollutionMarket power ability of one person to unduly inuence on market prices eg LCBO and The Beer Store
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