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Chapter 1

Econ 208 Chapter 1.docx

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McGill University
Economics (Arts)
ECON 208
Sebastien Forte

CHAPTER 1: Economic Issues and Concepts  Markets are self organizing  The market sets a price that ensures there is no excess supply or demand  It is the result of a large number of decentralized decisions  Without scarcity of resources there is no limit for consumers  Flow of income and expenditure is circular  All actual economies are mixed- elements of free markets, tradition, and government intervention.  Canada: has a lot of elements from a market economy, but things like health care, SAQs are based on centralized decision (government has a monopoly and sets prices)  The self organizing economy: The more people in an economy, the more interactions there are and the more difficult it is to centrally plan because there is so much information to organize that it becomes beyond the capacity of the central planner.  Consumers make a decision about what they are going to buy, producers make decision about what they are going to produce, and this together is the market  Adam Smith: Principle of self-organizing economy. Everyone acts in their best interest and in the market, things work out. He uses (in The Wealth of Nations) a butcher getting to feed the people in his village and questions why- he doesn’t do this to feed his village benevolently, he does it for his own best interest to make a living. *Self-interest, not benevolence, drives every single decision under production and consumption. If you don’t interfere with self-interest, you will have market order.  Efficiency: refers to organizing available resources to produce the goods and services that people most value, when they want them, and by using the fewest possible resources to do so. (Are we producing a level output that works, can we do better?) Not about social justice, redistribution, just the potential of the market to work as well as it could.  Main Characteristics of Market Economies: 1. Self interest guides individuals 2. Individuals respond to incentives (tied to self interest) 3. Prices and quantities are set in (relatively) free markets in which individuals trade voluntarily 4. Institutions, created by the state, protect private property (ex. Police force is the physical manifestation and enforce this), contractual obligations (judges, courts of law, civil code enforce this)  Economics is the study of the use of scarce resources to satisfy unlimited wants  Resources: land, labour and capital (software, intellectual property).  Resources are referred to as factors of production  Outputs are goods (tangibles) or services (intangible)  Goods: are things people would actually want to have- ex. Water is a good but pollution and garbage are not  Resources can produce only a fraction of the goods and services desired by people  Scarcity implies the need for choice, and every cho
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