Textbook Notes (362,810)
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Economics (923)
ECN 204 (281)
Chapter 1

ECN204 Notes Chapter 1.doc

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Ryerson University
ECN 204
Christos Shiamptanis

ECN204 Notes – Chapter 1 • Scarcity – limited nature of society’s resources • Economics – study of how society manages its scarce resources • Principle #1: People Face Tradeoffs o To get one thing, we usually have to give up another. o Classic tradeoff is between “guns and butter.”  The more we spend on national defense, the less we can spend on consumer goods o Another tradeoff is efficiency vs. equity  The difference between getting the most out of resources vs. distributing economic prosperity fairly. • Principle #2: The Cost of Something Is What You Give Up to Get It o Comparing the costs and benefits of alternative courses of action o Opportunity Cost – whatever must be given up to obtain some item • Principle #3: Rational People Think at the Margin o Rational People – people who systematically and purposefully do the best they can to achieve their objectives o Marginal Changes – small incremental adjustments to a plan of action o Make decisions by comparing marginal benefits and marginal costs • Principle #4: People Respond to Incentives o Incentive – something that induces a person to act o Incentives are crucial to analyzing how markets work o Public policymakers should never forget about incentives  Many policies change the costs and benefits people face and that alters their behaviour. • Principle #5: Trade Can Make Everyone Better Off o Trade between two countries can make each country better off o Trade allows country to specialize in what they do best and to enjoy a greater variety of goods and services • Principle #6: Markets Are Usually a Good Way to Organize Economic Activity o Market Economy – an economy allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services o Most countries that once had centrally planned economies have abandoned this system and are trying to develop market conditions. • Principle #7: Governments Can Sometimes Improve Market Outcomes o Property Rights – the ability of an individual to own and exercise control over scarce resources o Market Failure – a situation in which a market left on its own fails to allocate resources efficiently (e.g., externalities can cause market failure) o Externality – the impact of one person’s actions on the well-being of a bystander (e.g., Pollution) o Market Power – the ability of a single economic actor (or a small group of actors) to have a substantial influence on market prices o Government can work its magic only if it enforces rules and maintains the institutions that a
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