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Economics (923)
ECN 104 (387)
Amy Peng (1)


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ECN 104
Amy Peng

Scarcity means that we have to make choiceshaving more of one good thing usually means having less of anotherTradeoffs are widespread and importantEconomics the study of how people make choices under conditions of scarcity and of the results of those choices for society CostBenefit Principle An individual or a firm or a society will be better off taking an action if and only if the extra benefits from taking the action are greater than the extra costsThe result of the thing you didnt pickEconomists often use abstract models of how an idealized rational individual would choose among competing alternatives o Many economic models are examples of positive economics Positive economics has two dimensions It offers causeandeffect explanations of economic relationships It has an empirical dimension o Other economic models are examples of normative economicsSuch models overlap with positive economic modelsBut they incorporate valuation of different possible outcomes They lead to normative statements about what ought to be say what is best what is most socially efficient or what is optimalHence they have an element which cannot be tested with empirical evidenceTwo logical errors are to be avoided when modelling economic relationshipsThe fallacy of compositionoccurs if one argues that what is true for a part must also be true for the wholeThe post hoc fallacyoccurs if one argues that because event A precedes event B event a causes event BMicroeconomics studies subjects likeChoices of individualsChoices of FirmsThe determinants of prices and quantities in specific marketsMacroeconomics studies subjects likeThe performance of national economies o Long run growth and prosperity o Short run booms and bustsGovernment policies to change performanceSunk cost is a cost that is already irretrievably committed at the moment a decision must be madeshould NOT be counted for decisionmaking purposesMarginal costthe increase in total cost that result from carrying out one additional unit of an activity Marginal benefitthe increase in total benefit that results from carrying out one more unit of an activityPage 1 of 17Average costtotal cost of undertaking n units of an activity divided by n Average benefittotal benefit of undertaking n units of an activity divided by nOpportunity Cost The value of the nextbest alternative that must be forgone in order to undertake an activityRational decisions depend upon opportunity costsOpportunity cost is value of the next best alternativeOCnutsloss in sugar canesgain in nutsIn expanding the production of any good first employ those resources with the lowest opportunity cost and only afterward turn to resources with higher opportunity costsGreater production of one good results in rising opportunity cost of producing more of that goodAbsolute advantageOne person has an absolute advantage over another if he or she takes fewer hours to perform a task than the other person doesComparative advantageOne person has a comparative advantage over another if his or her opportunity cost of performing a task is lower than the other persons opportunity cost When each producer concentrates on the activities for which opportunity cost is lowest aggregate output is maximizedThis holds even when one has absolute advantage over others at everything Specialization where there is comparative advantage is still the best routeWhen we all focus where we are relatively more productive together we can produce vastly more than if we insisted on selfsufficiencySources for CA For individualsInborn talent plays a rolebut only to startAcquired skills Human Capitalare crucialSimilarly for countries comparative advantage stems from Accumulated Physical and Human Capital Difference in cultures and social institutions Noneconomic factors Production Possibilities CurveA graph that describes the maximum amount of one good than can be produced for every possible level of production of the other goodPage 2 of 17
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