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Chapter 1

ECN 104 Chapter Notes - Chapter 1: Marginal Cost, Ceteris Paribus, Marginal Utility

Course Code
ECN 104
Xingfei Liu

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Isaiah Ferris Winter 2016
1:57 PM
ECN104 Chapter 1: Limits, Choices. And Alternatives
(Textbook Notes)
Society processes productive resources, such as labour and managerial talent, tools and
machinery, and land and mineral deposits
o These resources are employed in an economic system
Helps us produce goods to satisfy our economic wants, but these goods are finite,
meaning that they will run out some day
Meaning that hard choices will have to be made
This is the underlying definition of economics
o The social science concerned with how individuals, institutions, and society make optimal
(best) choices under conditions of society
10 concepts
o Divided into three categories
The individual
("Facing Tradeoffs"): Scarcity in relation to wants means you face tradeoffs;
therefore, you have to make choices
("Opportunity Costs"): The cost of the choice you make is what you give up for
it, or the opportunity cost
("Choosing a Little More for Less"): Choices are usually made at the margin; we
choose a "little" more or a "little" less of something
("The Influence of Incentives"): The choices you make are influenced by
Interaction among Individuals
("Specialization and Trade"): Specialization and trade will improve the well-
being of all participants
("The Effectiveness of Markets"): Markets usually do a good job of coordinating
trade among individuals, groups, nations
("The Role of Governments"): Governments can occasionally improve the
coordinating function of markets
The Economy as a Whole and the Standard of Living
("Production and the Standard of Living"): The standard of living of the average
person in a particular country is dependent on its production of goods and
services. A rise in the standard of living requires a rise in the output of goods
and services
("Money and Inflation"): If the monetary authorities of a country annually print
money in excess of growth of output of goods and services, this practice will
eventually lead to inflation
("Inflation-Unemployment Tradeoff"): In the short run, society faces a short-run
tradeoff between inflation and its level of unemployment
Whenever our wants are greater than the resources to meet these desires, we have an economic
o Economists then give their unique perspective, also called the economic perspective
A viewpoint that envisions individuals and institutions making rational decisions by
comparing the marginal benefits and marginal costs associated with their actions
Scarcity limits our options to satisfy our wants, which leads us to make choices
o We "can't have it all"
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Isaiah Ferris Winter 2016
We therefore, have to decide what we want in order to keep us satisfied in the long
Nothing is "free" in this world
o You may be treated to lunch from someone, but there is a cost associated to that someone -
ultimately, society
Scarce inputs of land, equipment, farmers' labour, cooks' and waiters' labour, and
managers' talents are required
Reason why they are scarce is because they could be used in other productive
activities, but instead, have been used to make lunch
Sacrifices are called opportunity costs
o The amount of other products that must be forgone or sacrificed to produce a unit of a
Ex. You have $100 to spend on either jeans or shoes
The opportunity cost of buying jeans is the shoes
Economies assumes that human behaviour reflects "rational self-interest"
o Humans pursue these opportunities to increase their utility
The satisfaction a person gets from consuming a good or service
Time, energy, and money is allocated to maximize their satisfaction
Decisions are purposeful
o Consumers are purposeful in deciding what goods or services to buy
o Business firms are purposeful in deciding what products to produce and how to produce
o Government entities are purposeful in deciding what public services to provide and how to
finance them
These purposeful decisions are all prone to mistakes, not everyone is the perfect
decision maker
o Purposeful behaviour means that people make decisions with some desired outcome in
Sometimes, people make personal sacrifices to others
o Contribute money to charities
o Pay money for kids’ education
These decisions all maximize the giver's satisfaction
Known as self-interested behaviour
Economists focus largely on marginal analysis
o The comparison of marginal (extra) benefits and marginal costs, usually for decision making
Most choices involve changes to the status quo
Should you add fries to your fast food order?
Should a business expand or reduce its output?
Each option will have marginal benefits and marginal costs
Economics relies on the scientific method
o The systematic pursuit of knowledge through observing a problem, collecting data, and
formulating and testing hypotheses to obtain theories, principles, and laws
o Consists of several methods
Observing real-world behaviour and outcomes
Formulating a possible explanation of cause and effect (hypothesis), based on those
Testing this explanation by comparing the outcomes of specific events to the outcome
predicted by the hypothesis
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Isaiah Ferris Winter 2016
Accepting, rejecting, or modifying the hypothesis based on those observations
Continuing to test the hypothesis against the facts
If it becomes a very well tested and widely accepted theory, it is referred to as
an economic law
A statement about economic behaviour or the economy that makes it
possible to predict the probable effects of certain actions
Economists develop theories of the behaviour of individuals and institutions engaged in the
production, exchange, and consumption of goods and services. Theories, principles, and models
are "purposeful simplifications"
o Highly useful in analyzing economic behaviour and understanding how the economy
Tools for ascertaining cause and effect within the economic system
What makes a theory good is that it does a good job in explaining and predicting
Supported by facts concerning how individuals and institutions actually
behave in producing, exchanging, and consuming goods and services
Other things to note about economic principles
o Generalizations
Statements of the nature of the relation between two or more sets of facts
Ex. Economists say that consumers buy more of a particular product when its
price falls
Some increase their purchases by a large amount, others by a small
amount, and a few not at all
o Other-Things-Equal Assumption
Also known as ceteris paribus, it is known as the assumption that factors other than
those being considered are held constant
Ex. The relationship between the price of Pepsi and the amount sold. Assume
that all of the factors that might influence the amount sold (price of Pepsi, price
of Coca-Cola, consumer incomes, preferences, etc.), only the price of Pepsi
varies. This is helpful because the economist can then focus on the relationship
between the price of Pepsi and the purchases of Pepsi in isolation without being
confused by changes in other variables
o Graphical Expression
Many economic models are expressed graphically
A simplified picture of economic reality
Microeconomics is the part of economics with such individual units as industries, firms, and
o We observe details of their behaviour at a microscopic level
Prices, employment, revenue, income, expenditures, government, etc.
Macroeconomics is the part of economics concerned with the economy as a whole
o Government, household, or business sectors
o Aggregate is collection of specific economic units treated as if they were one unit
Macroeconomics seeks to obtain an overview of the structure of the economy and the
relationships of its major aggregates
Total output, total employment, total income, etc.
Both micro and macroeconomics contain elements of positive and normative economics
o Positive economics is the analysis of facts to establish cause-and-effect relationships
Avoids value judgements and tries to establish scientific statements about economic
behaviour, and deals with what the economy is actually like
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