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Economics Midterm 1 Review - Chapters 1-3.docx

Course Code
ECON 1021A/B
Michael Parkin
Study Guide

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Economics Midterm 1 Review
All economic questions arise because we want more than we can get.
Our inability to satisfy all our wants is called scarcity.
Because we face scarcity, we must make choices.
The choices we make depend on the incentives we face.
An incentive is a reward that encourages or a penalty that discourages an action.
Economics is the social science that studies the choices that individuals,
businesses, governments, and societies make as they cope with scarcity and the
incentives that influence and reconcile those choices.
The study of CHOICES that people and businesses make
The way these choices interact in markets
The influence of governments.
i.e why people are buying more of one product and not the another. How would tax on
e-commerce after eBay?
the study of the performance of the national economy and the global economy
i.e. why did inflation in Canada start to increase in 2008? Can the BOC keep inflation
rate under control by raising interest rates?
1. How do choices end up determining what, how and for whom goods and services
are produced?
oGoods and services: are the objects that people value and produce to
satisfy wants.
oWhat we produce changes over time.
oSixty years ago, almost 20 percent of Canadians worked on farms: Today
that number is 3 percent.
oToday, almost 80 percent of Canadians provide services.
oGoods and services are produced by using productive resources that
economists call factors of production.
Factors of production are grouped into four categories:
oLand: the “gifts of nature”
Economics Midterm 1 Review
oLabour: the work time and effort of people
oCapital: the tools, instruments, machines, buildings, and other
constructions that are used to produce goods and services
oHuman capital: the knowledge and skill that people obtain from
education, on-the-job training, and work experience
oEntrepreneurship: the human resource that organizes land, labour, and
oHow can choices made in the pursuit of self-interest also promote social
For Whom?
Who gets the goods and services depends on the incomes that people
o Land earns rent.
o Labour earns wages.
o Capital earns interest.
Entrepreneurship earns profit.
2. When is the Pursuit of Self-Interest in the Social Interest?
Every day, 6.9 billion people make economic choices that result in “What,” “How,”
and “For Whom” goods and services get produced.
oDo we produce the right things in the right quantities?
oDo we use our factors of production in the best way?
oDo the goods and services go those who benefit most from them?
You make choices that are in your self-interest—choices that you think are best for
Choices that are best for society as a whole are said to be in the social interest.
The Big Question: Is it possible that when each one of us makes choices that are in our
self-interest, it also turns out that these choices are also in the social interest?
Five questions in today’s world illustrate the tension between self-interest and the social
o Who benefits from and who bears the cost of globalization?
o Who are the winners and losers in the information age?
o Are we changing the climate and endangering our planet?
o Are we going to run out of forest and fish resources?
o Has greed caused the great recession of 2008-2009?
Five topics in today’s world that illustrate the tension between self-interest and social
oGlobalization: expansion of international trade, borrowing and lending and
oThe information-age technology: 1990s-2000s
Economics Midterm 1 Review
oGlobal warming: high political issue
oNatural resource depletion: tropical rainforest and ocean fish stocks are
oEconomic Instability: the past 20 yrs have been ones of remarkable
economic stability. Great Moderation
Choices and Tradeoffs
oThe economic way of thinking places scarcity and its implication, choice, at
centre stage.
oYou can think about every choice as a tradeoffan exchange—giving up one
thing to get something else.
oThe classic tradeoff is “guns versus butter.” “Guns” and “butter” stand for any two
objects of value.
oWhat, how, and for whom tradeoffs.
Cost and Benefit : To make a choice, we compare costs and benefits
Opportunity Cost:
oThinking about a choice as a tradeoff emphasizes cost as an opportunity
oThe opportunity cost of good or service is the highest-valued alternative that we
must give up to get it.
Benefit: The benefit of a good or service is the pleasure that we get from it.
oSubjective but with an objective measure.
oThe benefit of good or service is measured as the highest-valued alternative that
we are willing to give up to get it.
Two Types of Choices
oSome choices are “all-or-nothing”
oMost choices are “how much”
oPeople make “how much” choices at the margin, which means that they evaluate
the consequences of making incremental changes in the use of their resources.
Choosing at the Margin