INTL 1210 Study Guide - Winter 2019, Comprehensive Final Exam Notes - Microeconomics, Indirect Tax, Production–Possibility Frontier

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Published on 30 Nov 2019
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INTL 1210
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MIDTERM
Chapter 1: What is Economics?
Definition of Economics
Scarcity: inability to get everything wanted
Incentive: reward that encourages an action or a penalty that discourages one (e.g.
prices)
Economics: 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; split into…
1. Microeconomics: study of choices that individuals and businesses make, they
way these choices interact in markets and the influence of governments (e.g.
why are people downloading more movies?)
2. Macroeconomics: study of the performance of the national economy and the
global economy (e.g. why is the Canadian unemployment rate so high?)
Two Big Economic Questions
Two big questions that summarize economics:
1. How do choices end up determining what, how and for whom g/s are produced?
2. Can the choices that people make in the pursuit of their own self-interest also
promote the broader social interest?
Factors of production: productive resources used to produce g/s; 4 categories…
1. Land: natural resources
Earns rent
2. Labor quality of labor depends on human capital (knowledge and skill that
people obtain from education training and work experience)
Earns wages
3. Capital: tools, instruments, machines, buildings, etc. businesses use to produce
g/s financial capital is not used to produce g/s ≠ productive resource
Earns interest
4. Entrepreneurship: human resource that organizes labor, land and capital;
entrepreneurs come up with new ideas about what and how to produce, make
business decisions and bear the risks
Earns profit
Labor earns the most income
Wages and fringe benefits = 70% of total income land, capital and entrepreneurship =
30%
Income distribution among the factors production doesn’t explain how it is shared
amongst individuals income distribution amongst individuals is extremely unequal
On average, richest 20% earn more than 10X the incomes of the poorest 20%
Economics answers questions about what, how and for whom g/s are produced
Social interest: leading to an outcome that is the best for society; 2 dimensions…
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1. Efficiency achieved when the available resources are used to produce g/s at
the low possible cost and in the quantities that give the greatest possible
value/benefit
2. Equity
Globalization: expansion of international trade, borrowing, lending and investment in
the self-interest of consumers who buy low-cost g/s produced in other countries and in
the multinational firms producing in low-cost regions and sell in high-price regions
Globalization destroys many domestic jobs workers in manufacturing industries must
learn new skills, take service jobs (that are often lower paid) or retire earlier than
previously planned
The Economic Way of Thinking
6 key ideas that define the economic way of thinking:
1. A choice is a trade-off
2. People make rational choices by comparing benefits and costs achieves the
greatest benefit over cost
Only the wants of the person making a choice are relevant to determine
its rationality
Answers “What g/s will be produced and in what quantities?”
3. Benefits is what you gain from something
Benefit is determined by preferences
Economics measure benefit as the most that person is willing to give up
to get something
4. Cost is what you must give up to get something
Opportunity cost: highest valued alternative that must be given up to get
it
5. Most choices are how-much” choices made at the margin
Marginal benefit: benefit that arises from an increase in an activity
Marginal cost: opportunity cost of an increase in an activity
6. Choices respond to incentives
Central idea of economics = can predict the self-interested choices that
people make by looking at the incentives they face
Incentives = key to reconcile self-interests and social interests
Economics as Social Science and Policy Tool
Positive statement: can be test whether it is right or wrong
Normative statements: what ought to be (e.g. policy goals)
Economics provides a method of evaluating alternative solutions by comparing marginal
benefits and marginal costs and finding the solution that makes the best use of the
available resources
To explain the economic world, economists create and test economic models
Economics provides advice on government, business and personal economic decisions
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