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ECON 208 (113)
Chapter 1

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Department
Economics (Arts)
Course
ECON 208
Professor
Wendy Dickinson
Semester
Summer

Description
Chapter  1:  Economic  Issues  and  Concepts     1.1  The  Complexity  of  the  Modern  Economy   • Economy:  a  system  in  which  scares  resources  are  allocated  among  competing   uses.  Economies  tend  to  be  complex  systems  and  scares  resources  include   land,  labour  and  machines  (capital).     The  Self-­‐Organizing  Economy  (Invisible  Hand)   • “The  great  insight  of  economists  is  that  an  economy  based  on  free-­‐market   transactions  is  self-­organizing.”   • With  Market  Economies,  there  is  a  “spontaneous  economic  order”  because   they  are  based  on  the  self-­‐interests  of  consumers  who  make  decisions   independently  based  on  the  prices  in  open  markets.  With  this  –  the  collective   outcome  is  coordinated  based  on  the  independent  decisions  of  several   different  groups.   • “...Things  that  people  want  within  the  constraints  set  by  the  resources  that   are  available  to  the  nation.”   • Smith  recognizes  that  not  all  economic  interactions  are  motivated  by   benevolence  (kindness)  in  a  modern  economy.   Efficient  Organization   • Efficiency:  resources  available  are  organized  in  a  way  so  that  all  the  goods   and  services  that  people  require  are  fulfilled  while  being  produced  with  the   least  possible  amount  of  resources.   Main  Characteristics  of  Market  Economies   • Self-­‐Interest:    Individuals  pursue  their  own  self-­‐interests.   • Incentives:  Sellers  want  to  sell  more  when  prices  are  high,  buyers  want  to   buy  more  when  prices  are  low.   • Market  Prices  and  Quantities:  P  and  Q  are  determined  in  free  markets  where   potential  sellers  compete  to  sell  their  products  to  potential  buyers.   • Institutions:  Economic  activity  is  governed  and  monitored  by  institutions   that  tend  to  be  set  up  by  the  government.  Private  property,  freedom  of   contract  and  the  rule  of  law  are  the  most  important  institutions;  they  are   defined  by  contracts,  legislation  and  enforcement.     1.2  Scarcity,  Choice  and  Opportunity  Cost   • Because  we  live  in  a  world  of  scarcity,  where  not  everyone  can  have   everything  that  they  desire,  this  brings  choice,  the  decision  that  people  must   make  of  what  they  will  and  will  not  have.   • “Economics  is  the  study  of  the  use  of  scares  resources  to  satisfy  unlimited   human  wants.”   Resources   • Land  includes  natural  endowments  such  as  forests,  lakes,  minerals  and  oil.   • Labour  includes  all  mental  and  physical  human  resources.   • Capital  includes  all  manufactured  aids  to  production  such  as  tools,  machinery   and  buildings.   • Land,  labour  and  capital  make  up  the  Factors  of  Production.   • Goods  are  tangible  and  Services  are  intangible,  both  goods  and  services  are   produced  and  consumed  to  satisfy  the  wants  of  people.   Scarcity  and  Choice   • Scarcity  implies  that  choices  must  be  made,  and  making  choices  implies  the   existence  of  costs.   Opportunity  Cost   • Every  time  a  choice  is  made,  opportunity  costs  are  incurred.  When  you   choose  one  thing  over  another,  you  are  sacrificing  one  thing  for  another.   • Opportunity  cost  is  the  cost  of  using  resources  for  a  particular  purchase   measured  by  the  benefit  that  is  given  up  by  not  using  them  in  the  best   alternative  way.   • Cost  measured  in  terms  of  other  goods  and  services  that  could  have  been   obtained  instead.   Production  Possibilities  Boundary   • Its  shape  is  concave  because  it  demonstrates  how  the  opportunity  cost  of   either  good  increases  as  we  increase  the  amount  of  it  that  is  produced.     • Scarcity  is  indicated  on  the  boundary  by  the  unattainable  combinations  that   lie  outside  the  boundary.   • Choice  is  demonstrated  by  the  need  to  choose  among  the  alternative   attainable  points  along  the  boundary.   • The  negative  slope  of  the  boundary  demonstrates  Opportunity  Cost  because   it  shows  the  possible  combinations  that  can  be  achieved  when  using  all   resources  efficiently.     • When  more  of  one  good  is  produced,  the  opportunity  cost  of  producing  it   rises.     Four  Key  Economic  Problems   Microeconomics  is  the  study  of  the  causes  and  consequences  of  the  allocation  of   resources  as  it  is  affected  by  the  workings  of  the  price  system  and  government   policies  that  seek  to  influence.  Below  are  two  questions  that  fall  within   Microeconomics.     • What  is  produced  and  how?  I.e.  what  goods  are  produced  and  which  ones  are   not?   • What  is  consumed  and  by  whom?  I.e.  what  determines  the  distribution  of  a   nations  total  output  among  its  people?   Macroeconomics  is  the  study  of  the  determination  of  economic  aggregates,  such  as   total  output,  total  employment,  the  price  level,  and  the  rate  of  economic  growth.   • Why  are  resources  sometimes  idle?  I.e.  why  are  resources  not  being  used   when  they  are  available?  (Working  within  the  PPC)   • Is  productive  capacity  growing?  I.e.  what  are  the  determinants  of  growth  and   are  there  undesirable  effects  of  growth  in  productive  capacity?     1.3  Who  Makes  the  Choices  and  How?   The  Flow  of  Income  and  Expenditure   • Flows  of  income  and  spending  pass  through  markets   • Good  markets  are  where  goods  and  services  are  bought  and  sold   • Factor  markets  are  markets  where  those  that  own  various  factors  of   production,  sell  their  services   • Distribution  of
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