ECON 208 Chapter Notes - Chapter 1: Resource Allocation, Externality, Transact

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Published on 16 Apr 2013
School
McGill University
Department
Economics (Arts)
Course
ECON 208
Chapter 1 Economic Issues and Concepts
1.1 The complexity of the Modern Economy
Raw materials, parts, tools, perishables, manufactured goods
Importing, producing, transporting, selling
Economy is a system in which scarce resources (labour, land, machines) are allocated among
competing uses
The Self-Organizing Economy
An economy based on free-market transaction is self-organizing, meaning when individual
consumers and producers act independently to pursue their own self-interests, responding to
prices determined in open markets, the collective outcome is coordinated (spontaneous
economic order)
Self-interest, not benevolence, is the foundation of economic order
Efficient Organization
Efficiency means that the resources available to the nation are organized so as to produce all the
goods and services that people want to purchase and to produce them with the least possible
amount of resources
Relatively efficient order that emerges spontaneously out of the many independent decisions
made by those who produce, sell, and buy goods and services. These decision makers all
respond to the same set of prices, which are determined in markets that respond to overall
conditions of national scarcity or plenty.
Main Characteristics of Market Economies
Self-interest: individuals buy and sell what seems best for them and their families
Incentives: sellers want to sell more when prices are high, buyers want to buy more when prices
are low
Market prices and quantities: determined in free-markets in which would-be sellers compete to
sell their products to would-be buyers
Institutions: all these activities governed by a set of institutions largely created by government
(private property, freedom of contract and the rule of law)
1.2 Scarcity, Choice, and Opportunity Cost
Scarcity leads to economic problem of choice
Economics is the study of the use of scarce resources to satisfy unlimited human wants.
Resources
Categories: Land (all natural endowments), labour (all mental and physical human resources),
capital (all manufactured aids to production)
All of these are Factors of production: resources used to produce goods (tangible commodities:
cars) and services (intangible commodities: education)
Production: act of making goods and services
Consumption: act of using goods and services to satisfy wants
Scarcity and Choice
A decision to have more of something requires a decision to have less of something else(cost)
Scarcity implies that choices must be made, and making choices implies the existence of costs
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Opportunity Cost
Limited resources force a choice among competing alternatives
Every time a choice is made, opportunity costs are incurred
Opportunity cost: the cost of using resources for a certain purpose, measured by the benefit
given up by not using them in their best alternative use; the cost measured in terms of other
goods and services that could have been obtained instead
Production Possibilities Boundary
A production possibilities boundary illustrates three concepts: scarcity, choice, and opportunity
cost. Scarcity is indicated by the unattainable combinations outside the boundary; choice, by the
need to choose among the alternative attainable points along the boundary; and opportunity
cost, by the negative slope (shows the combinations that are attainable when all resources are
efficiently used; when all resources are being used efficiently, producing more of one good
requires producing less of others) of the boundary
Production possibilities boundary: a curve showing which alternative combinations of
commodities can just be attained if all available resources are used efficiently; it is the boundary
between attainable and unattainable output combinations
Concave shape - Opportunity cost of either good increases as we increase the amount of it that
is produced; straight line opp cost of one good stays constant, no matter how much of it is
produced
Four Key Economic Problems
What is Produced and How?
Resource allocation: the allocation of an economy’s scarce resources of land, labour, and capital
among alternative uses; determines the quantities of various goods that are produced
Choosing to produce a particular combination of goods means choosing a particular allocation of
resources among the industries or regions producing the goods.
Resources scarce, so must use efficiently, look at available methods of production of each goods
What is Consumed and by whom?
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 it
Why are Resources Sometimes Idle?
Is Productive Capacity Growing?
Economic growth shifts the production possibilities boundary outward and makes it possible to
produce more of all products
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
1.3 Who Makes the Choices and How?
The Flow of Income and Expenditure
P.10 figure -important
Individuals own factors of production they sell the services of these factors to producers and
receive payments in return (incomes) producers use the factor services that they buy to make
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Document Summary

Raw materials, parts, tools, perishables, manufactured goods. Economy is a system in which scarce resources (labour, land, machines) are allocated among. An economy based on free-market transaction is self-organizing, meaning when individual consumers and producers act independently to pursue their own self-interests, responding to prices determined in open markets, the collective outcome is coordinated (spontaneous economic order) Self-interest, not benevolence, is the foundation of economic order. Efficiency means that the resources available to the nation are organized so as to produce all the goods and services that people want to purchase and to produce them with the least possible amount of resources. Relatively efficient order that emerges spontaneously out of the many independent decisions made by those who produce, sell, and buy goods and services. These decision makers all respond to the same set of prices, which are determined in markets that respond to overall conditions of national scarcity or plenty.

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