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ECON 1000
Ardeshir Noordeh

9/12/2013 11:31:00 AM Economics is the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices.  Scarcity – no scarcity no economic problem ; production is limited ;  Incentives – rewards; gain; satisfaction; ^ ;  Choice – because we face scarcity we gotta make choices Microeconomics – represents the study of individual Macroeconomics – represents the whole economy Two big economic questions:  How do choices end up determining what, how, and for whom goods and services get produced? o What  agriculture accounts for 2 percent of total production,  manufactured goods for 20 percent,  and services (retail and wholesale trade, health care, and education are the biggest ones) for 78 percent. o How  what factors of production do we have  four major categories  land – minerals; resources  labour – if you use more labour – labour intensive  capital - machineries; tools; equipment; human capital (extra knowledge) – if you use more capital – capital intensive  entrepreneurship – someone has to produce in response to market needs o for whom  related to the distribution of income among people  income – consists of what is paid to the labour, land, capital, entrepreneur  land – rent sales – cost = profit  labour – wages  capital – interest  When do choices made in the pursuit of self-interest also promote the social interest? o Self-interest – no impact in society o social interest- little impact on you  efficiency – maximize the gain, minimize the cost  equity- who gets what ; CHAPTER 1 - notes Economics  Is the social science that studies the choices that individuals, businesses, governments and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices Scarcity – no scarcity no economic problem ; production is limited ; inability to get everything we want Incentives – rewards; gain; satisfaction; ^ ; reward that encourages an action or a penalty that discourages one Choice – because we face scarcity we got to make choices; choices must be consistent with the choices of others Microeconomics – is the study of choices that individuals and businesses make, the way these choices interact in markets, and the influence of government  Ex: Why are people downloading more movies? Macroeconomics – is the study of the performance of the national economy and the global economy  Ex: Why is the Canadian unemployment rate so high? TWO BIG ECONOMIC QUESTIONS  How do choices end up determining what, how and for whom goods and services are produced? o Goods and services – goods (physical objects) and services (tasks performed for people) o WHAT  agriculture accounts for 2 percent of total production,  manufactured goods for 20 percent,  and services (retail and wholesale trade, health care, and education are the biggest ones) for 78 percent. o HOW  Factors of production – productive resources that economists call to produce goods and services  Land – natural resources: land, minerals, oil, gas, coal, water, etc  Labour – the work time and effort that people devote to producing goods and services ; includes the physical and mental efforts of all people who work on farms, construction sites, etc. ; quality of labour depends on human capital – knowledge and skill that people obtain from education, training, etc.  Capital – tools, instruments, machines, buildings, and other constructions that businesses use to produce goods and services; money, stocks and bonds = financial capital = enabling businesses to borrow the funfd that they use to buy physical capital; not a productive resource  Entrepeneurship – human resource that organizes labour, land and capital; come up with new ideas about what and how to produce, make business decisions and the bear the risks that arise from these decisions o FOR WHOM – consumers depends on the incomes that people earn; people earn their incomes by selling the services of the factors of production they own  Land earns rent  Labour earns wages – most income 70 % of total income  Capital earns interest  Entrepreneurship earns profit  Can the choices that people make in the pursuit of their own self- interest also promote the broader social interest? o People make economic choices that determine in what, how and for who goods and services are provided o SELF-INTEREST – choice is the best one available for you o SOCIAL INTEREST – leads to an outcome that is the best for society as a whole  efficiency – achieved when the available resources are used to produce goodsand services at the lowest possible cost and in the quantities that give the greatest possible value or benefit  equity – variety views about what is fair use of our resources o Self- interest promote social interest?  Globalization  Definition : expansion of international trade, borrowing and leading and investment  Self interest : consumers who buy low-cost goods and services produced in other countries ; multinational firms that produce in low-cost regions and sell in high-price regions  Information-age economy  Self- interest: gave you a cellphone, laptop, apps, and the internet  Social interest? : Was the quality too low and the price too high?  Climate change  Self-interest : choices to use electricity, gasoline  Social interest : How can we encourage the use of wind and solar power to replace the burning of fossil fuels that brings climate change?  Economic stability  Banks’ choices to borrow and lend and the choices of people and businesses to lend to and borrow from banks are made in self interest  Does this lending and borrowing serve the social interest? THE ECONOMIC WAY OF THINKING 1. A choice is a tradeoff o We face scarcity that’s why we must make choices o Tradeoff- is an exchange – giving up one thing to get something else Ex : when you choose how to spend your Saturday night, you face a tradeoff between studying and hanging out with your friends 2. People make rational choices by comparing benefits and costs o Rational choice - is one that compares costs and benefits and achieves the greatest benefit over cost for the person making the choice o Only the wants of the person making a choice are relevant to determine its rationality 3. Benefit is what you gain from something o Benefit – is the gain or pleasure that it brings and is determined by preferences o Preferences – what a person likes and dislikes and the intensity of those feelings o Economists measure benefit as the most that a person is willing to give up to get something 4. Cost is what must give up to get something o Opportunity cost – highest valued alternative that must be given up to get it  The things you cant afford to buy  The things you cant do with your time 5. Most choices are ―how-much‖ choices made at the margin o To make the decision on how much time you’re going to spend in one activity, you must compare the benefit of a little bit more time in one thing with its cost – margin  Extra hour of studying : better mark o Marginal benefit – benefit that arises from an increase in an activity  Extra hour of studying = less time playing xbox o Marginal cost – opportunity cost of an increase in an activity 6. Choices respond to incentives o Central idea of economics is that we can predict the self interested choices that people make by looking at the incentives they face o Incentives – key to the reconciling self interest and social interest o Change in marginal cost and marginal benefit will influence our choices/decisions ECONOMICS AS SOCIAL SCIENCE AND POLICY TOOL Economist as a social scientist- Social scientist seek to discover how the economic world works o Positive statements – currently believed about the way the world operates; might be right or wrong but can be checked with facts o Normative statements – about what ought to be; depends on values and cannot be tested; agree or disagree; doesn’t assert a fact that can be checked o Unscrambling cause and effect – economic model is a description of some aspect of the economic world that includes only those features that are needed for the purpose at hand ; model is tested by comparing its predictions with the facts Economist as policy adviser – toolkit for advising governments and businesses and for making personal decisions; all the policy questions on which economists provide advice involve a blend of the positive and the normative CHAPTER 2 - notes Production possibilities frontier (PPF) – boundary between those combinations of foods and services that can be produced and those that cannot Production efficiency – produce goods and services at the lowest possible cost (dots)  Outside the ppf – unattainable  Inside the ppf – attainable but inefficient because we are giving up more than necessary of one good to produce a given quantity of the other good; resources are unused ( idle but could be working ) or misallocated (assigned tasks for which they are not the best match ) or both * Every choice along the PPF involves a trade off = opportunity cost opportunity cost  highest-valued alternative forgone  ratio – the decrease in the quantity produced of one good divided by the increase in the quantity produced of another good as we move along the PPF outward bowed shape – increase in opportunity costs resources are not all equally productive in all activities * When the rate of production increases, so does the opportunity cost of production allocative efficiency – when goods and services are produced at the lowest possible cost and in the quantities that provide the greatest possible benefit marginal cost – opportunity cost of producing one more unit of it (slope)  calculate using slope of the PPF  as the quantity increases, the PPF (slope) gets steeper and the marginal cost increases marginal benefit – benefit received from consuming one more unit of a good or a service; how much people are willing to pay to get one more unit of good and/or service; measured by what you are willing to pay for something, is the quantity of other goods and services that you are willing to forgo  depends on people’s preferences – people’s likes and dislikes and the intensity of those feelings stands in contrast to marginal cost and production possibilities * preferences describe what people like and want and the production possibilities describe the limits or constraints on what is feasible marginal benefit curve – device we use to illustrate preferences; curve that shows the relationship between the marginal benefit from a good and the quantity consumed of that good; UNRELATED TO THE PPF AND CANT BE DERIVED FROM IT principle of decreasing marginal benefit  more we have of any good or service, the smaller is its marginal benefit (the more we consume of any good or service, the more we tire of it and would prefer to switch something else) and less we are willing to pay for an additional unit of it any point on the PPF – cannot produce more of one good without giving up some other good best point on the PPF – cannot produce more of one good without giving up some other good that provides greater benefit ECONOMIC GROWTH  Increases our standard of living, but it doesn’t overcome scarcity and avoid opportunity cost  Comes from technological change and capital accumulation  The fewer resources we use to produce x and the more resources we use to produce y = thing you need to produce x, the greater is the expansion of our future production possibilities (FPP)  If a nation devotes all of its factors of production into producing consumption goods and services and none to advancing technology and accumulating capita, its production possibilities in the future will be the same as they are today  The decrease in today’s consumption is the opportunity cost of tomorrow’s increase in consumption Technological change – the development of new goods and of better ways of producing goods and services Capital accumulation – the growth of capital resources, including human capital GAINS FROM TRADE Specialization – producing only one good or a few goods Comparative advantage  Person can perform the activity at a lower opportunity cost than anyone else  Involves comparing opportunity cost Absolute advantage  A person who is more productive than others  Involves comparing productivities - production per hour Decentralized coordination works best but needs social institutions Firm  Aconomic unit that hires factors of production and organize those factors to produce and sell goods and services  Coordinate a huge amount of economic activity Markets  Any arrangement that enables buyers and sellers to get information and to do business with each other  Make deals by telephone,fax, and direct computer link Property rights  Social arrangements that govern the ownership use, and disposal of anything that people value o Real property – land, buildings, durable goods o Financial property – stocks and bonds and money in the bank o Intellectual property – intangible product of creative effort; books, music, computer programs, and invention  People can steal the production of others, resources are devoted not to production but to protecting possession Money  Commodity or token that is generally acceptable as a means of payment  Makes trading in markets such more efficient CHECK THE CHART ON OAGE 43 CHAPTER 3 -notes 9/12/2013 11:31:00 AM DEMAND AND SUPPLY Market  Any arrangement that enables buyers and sellers to get information and to do business with each other  Two sides : buyers and sellers Competitive market – a market that has many buyers and many sellers, so no single buyer or seller can influence the price How people respond to prices and the forces that determine the prices :  Price – number of dollars that must be given up in exchange for it  Opportunity cost – highest valued alternative forgone Relative price – ratio of one price to another ; also an opportunity cost; MONEY in economics DEMAND  Want it  Can afford it  Plan to buy it  Reflects a decision about which wants to satisfy Wants are unlimited desires o
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