Textbook Notes (363,339)
Canada (158,341)
Economics (923)
ECN 204 (281)

Textbook Notes - All Assigned Chapters

25 Pages
Unlock Document

Ryerson University
ECN 204
Christos Shiamptanis

Chapter 1- Ten Principals of Economics - Management of societys resources is important because resources are scarce Scarcity: the limited nature of societys resources Economics: the study of how society manages its scarce resources - Resources are allocated not by a single central planner but through the combined actions of millions of households and firms Principle #1: People Face Tradeoffs - One tradeoff that a society faces is between efficiency and equity Efficiency: the property of society getting the most it can from its scarce resources Equity: the property of distributing economic prosperity fairly among the members of society - Efficiency refers to the size of the economic pie, equity refers to how the pie is divided Principle #2: The Cost of Something Is What You Give Up to Get It Opportunity Cost: whatever must be given up to obtain some item Principle #3: Rational People Think at the Margin Rational People: people who systematically and purposefully do the best they can to achieve their objectives Marginal Changes: small incremental adjustments to a plan of action - Rational people often make decisions by comparing marginal benefits and marginal costs Principle #4: People respond to Incentives Incentive: something that induces a person to act - Public policymakers should never forget about incentives because many policies change the costs and benefits that people face and, therefore, alter behavior Principle #5: Trade Can Make Everyone Better Off - Trade allows countries to specialize in what they do best and to enjoy a greater variety of goods and services Principle #6: MarketsAre Usually a Good Way to Organize EconomicActivity Market Economy: an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services - Market economies are good at organizing economic activity in a way that promotes overall economic well-being, despite decentralized decision making and self-interested decision makers - Adam Smith: households and firms interacting in markets act as if they are guided by an invisible hand that leads them to desirable market outcomes - Prices are the instrument with which the invisible hand directs economic activity - When the government prevents prices from adjusting naturally to supply and demand, it impedes the invisible hands ability to coordinate households and firms (the economy) - Example: taxes distort prices and thus the decisions of households and firms - Adam Smith: - Individuals are usually best left to their own devices, without the heavy hand of government guiding their actions - Participants in the economy are motivated by self-interest - The invisible hand of the marketplace guides the self-interest into promoting general economic well-being Principle #7: Governments Can Sometimes Improve Market Outcomes - The invisible hand concept can work only if the government enforces the rules and maintains the institutions that are key to a market economy - Markets work only if property rights are enforced Property Rights: the ability of an individual to own and exercise control over scarce resources - Two reasons for a government to intervene in the economy and change the allocation of resources that people would choose on their own: - To promote efficiency - To promote equity - Most government policies aim either to enlarge the economic pie or to change how the pie is divided Market Failure: a situation in which a market left on its own fails to allocate resources efficiently - Two possible reasons for market failure: - Externalities - Market power Externality: the impact of one persons actions on the well-being of a bystander Market Power: the ability of a single economic actor (or small group of actors) to have a substantial influence on market prices - The invisible hand fails to ensure that economic prosperity is distributed evenly - It doesnt ensure that everyone has sufficient food, decent clothing, adequate health care, etc. Principle #8:ACountrys Standard of Living Depends on ItsAbility to Produce Goods and Services - Almost all variation in living standards is attributed to differences in countriesproductivity - In nations where workers can produce a large quantity of goods and services per unit of time, most people enjoy a high standard of living - Growth rate of a nations productivity determines the growth rate of its average income Productivity: the quantity of goods and services produced from each hour of a workers time - To raise living standards, policymakers need to raise productivity by ensuring that workers are well educated, have the tools needed to produce goods and services, and have access to the best available technology Principle #9: Prices Rise When the Government Prints Too Much Money Inflation: an increase in the overall level of prices in the economy - When a government creates large quantities of money, the value of the money falls Principle #10: Society Faces a Short-Run Tradeoff between Inflation and Unemployment - Short-run effects of monetary injections: - Increasing the amount of money in the economy stimulates the overall level of spending and thus the demand for goods and services - Higher demand may, over time, cause firms to raise their prices, but in the meantime, it also encourages them to increase the quantity of goods and services they produce and to hire more workers to produce those goods and service - More hiring means lower unemployment - This short-run tradeoff plays a key role in the analysis of the business cycle Business Cycle: fluctuations in economic activity such as employment and production - By changing the amount that the government spends, the amount it taxes, and the amount of money it prints, policymakers can influence the combination of inflation and unemployment that the economy experiences Chapter 2 - Thinking Like an Economist Circular-Flow Diagram: a visual model of the economy that shows how dollars flow through markets among households and firms Factors of Production: labour, land (natural resources), and capital (buildings and machines) Markets For Goods and Services: households are buyers and firms are sellers Markets For the Factors of Production: households are sellers and firms are buyers Production Possibilities Frontier: a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology - An outcome is said to be efficient if the economy is getting all it can from the scarce resources it has available Microeconomics: the study of how households and firms make decisions and how they interact in markets Macroeconomics: the study of economy-wide phenomena, including inflation, unemployment, and economic growth - When economists are trying to explain the world, they are scientists - When economists are trying to help improve it, they are policy advisers Positive Statements: claims that attempt to describe the world as it is - Positive statements can be confirmed or refuted by examining evidence - Economists use positive statement to explain how the economy works Normative Statements: claims that attempt to prescribe how the world should be - Evaluating normative statements involves values as well as facts - Involves our views on ethics, religion, and political philosophy - Economists use normative statements to explain how we can improve the economy Chapter 4 - The Market Forces of Supply and Demand Market: a group of buyers and sellers of a particular good or service - Buyers determine the demand for the product - Sellers determine the supply of the product Competitive Market: a market in which there are many buyers and many sellers so that each has a negligible impact on the market price - To be a perfectly competitive market, a market must have two characteristics: - The goods offered for sale are all exactly the same - The buyers and sellers are so numerous that no single buyer or seller has any influence over the market price Price Takers: buyers and sellers in a perfectly competitive market that must accept the price the market determines Monopoly: a market in which only one seller exists, thus only one seller sets the price Quantity Demanded: the amount of a good that buyers are willing and able to purchase - Is negative related to the price because it falls as the price rises, and rises as price falls Law of Demand: the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises Demand Schedule: a table that shows the relationship between the price of a good and the quantity demanded Demand Curve: a graph of the relationship between the price of a good and the quantity demanded Market Demand: the sum of all the individual demands for a particular good or service Increase in Demand: any change that increases the quantity demanded at every price, shifts the demand curve to the right Decrease in Demand: any change that reduces the quantity demanded at every price, shifts the demand curve to the left - Variables that shift the demand curve: - Income - Prices of related goods - Tastes - Expectations - Number of buyers Normal Good: a good for which, other things equal, an increase in income leads to an increase in demand Inferior Good: a good for which, other things equal, an increase in income leads to a decrease in demand Wealth Effect: the impact of changes in wealth on both the amount and composition of goods that individuals consume Substitutes: two goods for which an increase in the price of one leads to an incre
More Less

Related notes for ECN 204

Log In


Don't have an account?

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.