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ECON 1000 STUDY PACKAGE (NOTES FROM 1-17) - Copy.docx

27 Pages
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Department
Economics
Course Code
ECON 1000
Professor
Qaiser Shadab

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Chapter1WhatisEconomicsDefinitionofEconomicsOur inability to satisfy all our wants is called scarcityThe choices that we make depend on the incentives that we face An incentive a reward that encourages or penalty that discourages an action Economics social science that studies the choices that individual businesses governments and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices two main parts Microeconomics and MacroeconomicsMicroeconomicsMicroeconomics study of choices that individualsbusinesses make the way choices interact in markets and influence of governments MacroeconomicsMacroeconomics study of performance of the national economy and the global economy TwoBigEconomicQuestionsoHow do choices end up determining what how and for whom goods and services get producedoWhen do choices made in the pursuit of selfinterest also promote the social interestWhat HowFor WhomGoodsServices the objects that people value and produce to satisfy human wants What determines the items that we produceHowfactors of production oLand is the natural resources oLabour is the work time and work efforthuman capital which is the knowledge and skill that people obtain oCapital is the tools instruments machines buildings that businesses use to produce goods and servicesoEntrepreneurship is the human resource that organizes labour land and capitalFor WhomLand earns rents Labour earns wages Capital earns interest and Entrepreneurship earns profit What How and For Whom TradeoffsWhat TradeoffsWhat goods and services get produced depends on choices made by each one of us by our government and by the business that produce the things we buyHow TradeoffsHow goods and services get produced depends on choices made by the businesses that produce the things we buy For Whom TradeoffsBig tradeoffthe tradeoff between quality and efficiency Opportunity CostThe highestvalued alternative that we give up to get something is the opportunity cost of the activity chosen Central idea of economics every choice involves a cost Choosing at a the MarginThe benefit that arises from an increase in an activity is called marginal benefitThe cost of an increase in an activity is called marginal costResponding to IncentivesA change in marginal cost or a change in benefit changes the incentives that we face and leads us to change our choice The central idea of economics is that we can predict how choices will change by looking at changes in incentivesLess of an activity is undertaken when its marginal cost rises or marginal benefit fallsHuman Nature Incentives and InstitutionsEconomists take human nature as given and view people as acting n their selfinterest EconomicsASocialScienceWhat is statements are called positive statements and they might be right or wrong We can test a positive statement by checking it against the factsWhat ought to be statement are called normative statements These statements depend on values and cannot be tested economic theory is a generalization that summarizes what we think we understand about the economic choices that people make and the performance of industries and entire economies Unscrambling Cause and EffectCeteris paribus is a Latin term that means other things being equal or if all other relevant things remain the sameEconomists try to avoid fallacieserrors of reason that lead to a wrong conclusionTwo main types Fallacy of Composition Post hoc fallacyFallacy of CompositionThe fallacy of composition is the false statement that what is true of the parts is true of the whole ore that what is true of the whole is true of the partsUnscrambling Cause and EffectThe post hoc fallacy is the error of reasoning that a first event causes a second event because the first occurred before the secondChapter2TheEconomicProblemProductionPossibilitiesandOpportunityCostPPF is the boundary between those combinations off goods and services that can be produced and those that cannot Production Possibilities FrontierThe PPF illustrates scarcity because we cannot attain the points outside the frontier We can produce at all points inside the PPF and on the PPF Production EfficiencyWe achieve production efficiency if we cannot produce more of one good without producing less of some other good When production is efficient we are at a point on the PPF If we are at a point inside the PPF production is inefficient Tradeoff Along the PPFEvery choice along the PPF involves a tradeoffwe must give up something to get something elseAll tradeoffs involve a costan opportunity costOpportunity CostThe opportunity cost of an action is the highestvalued alternative forgone The PPF helps us to make the concept of opportunity cost precise and enables us to calculate it Along the PPF there are only two goods so there is only one alternative forgone some quantity of the other goodOpportunity Cost is a ratioOpportunity cost is a ratioIt is 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 production possibilities frontier REFER TO PAGE 36 IN TEXTBOOKIncreasing Opportunity Cost2
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