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Canada (161,555)
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Chapter 1

Microeconomics - Chapter 1.docx

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Rita Cossa

Microeconomics – Chapter 1 (Introduction) Economics – The study of how society uses its scarce resources to satisfy society’s wants Scarcity – Society has limited resources (Can’t produce everything we want) Microeconomics – Focuses on individual parts of the economy (Households and firms) Macroeconomics – Focuses on the economy as a whole (Inflation, Unemployment, Economics growth) Market economy – Relies on the decision of firms and households - Households decide on what to buy and who to work for - Firms decide who to hire and how much to produce Command/Centrally Planned Economy – Relies and is controlled by the government - Buys what the government instructs - Production/distribution is fully controlled by the government - USSR (Soviet Russia) is an example Traditional Economy – Relies on customs, beliefs, religion, and habits of people - Undeveloped countries that rely on agriculture for domestic consumption Mixed Economy – A mix between the market and Command Economy - Canada is an example (Mostly mixed, but we have government-controlled industries) Economic Rationality – Decisions that maximize the benefit of the decision-maker - We assume everybody who makes decisions act rationally - We also assume that people have perfect information (Everything to know) - We often have situations with asymmetric information (Ex. Seller info > Buyer info) - Ex. Ebay sellers know if the item is working but buyers don’t actually know Resources – Anything used to produce something else (Known as Factors of Production) - 3 largest resources are land, labour, physical capital (Entrepreneurship) Opportunity Cost – Everything you have to give up to get something else - Ex. To come to university, I give up my time, free food, free bills - Cost of the best forgone alternatives - Ex. University costs approx. $15000. I could have spent that on a car, however, I could have gotten a job and made $28000. The opportunity cost is the job (Job > Car) Marginal Changes – Small, incremental changes that are made to an existing plan of action - Ex. What would happen if a firm produces one more good? - Positive/Negative changes motivate people to respond - Decision to choose one alternative over another is when marginal benefits > marginal costs Adam Smith’s “invisible hand” – If all individuals and firms were allowed to choose what to sell/how to produce it, the market will settle to a product distribution and prices that are beneficial to everybody will be established - Greed will drive economic actors to beneficial behaviours - Ef
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