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Chapter 1

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Simon Fraser University
ECON 105
Colin Stewart

Econ 105 Principles of Macroeconomics Chapter 1 Fall 2013 Reading: Chapter 1.1, 1.2, & 1.3 Macroeconomics/Ragan & Lipsey - 14 edition Chapter1: Economic Issues and Concepts Objectives: • To view the market economy as a self-organizing entity in which order emerges from a large number of decentralized decisions. • The importance of scarcity, choice, and opportunity cost, and how all three concepts are illustrated by the production possibilities boundary. • About the circular flow of income and expenditure. • Types of economies 1.The Complexity of the Modern Economy Economy is a system in which ___________________ resources are allocated among ___________________ uses. Q: What is considered as a sc arce resource in an economy? A: natural resources, and physical capitals. The Nature of Market Economies Q: What coordinates a complex set of dealings organized in an economy? A: Early economists noticed that the interaction of ___________________ people creates a spontaneous social order -- the economy is ___________________. Self-interest, not benevolence, is the ___________________ of economic order. 1 / 9 Econ 105 Principles of Macroeconomics Chapter 1 Fall 2013 Efficient Organization Loosely speaking, efficiency refers to organizing ___________________ resources to produce the goods and services that people most value, using the ___________ possible resources to do so. Main Characteristics of Market Economies 1.Self-interest & Incentives: Individuals respond to incentives. 2.Prices and quantities: are set in (relatively) free markets in which i 3.Institutions: Main four characteristics of market economies produce a spontaneous self-organization. 2.Scarcity, Choice, and Opportunity Cost Economics is the study of the use of ___________________ resources to satisfy ___________________ human wants. 2 / 9 Econ 105 Principles of Macroeconomics Chapter 1 Fall 2013 Economic Resources A society’s resources are usually divided into as follows; 1.Labour: 2.Land and Natural mineral: 3.Capital: Economists refer to resources as ________________ of production, and outputs are _____________ (tangibles) or ________________ (intangibles). Scarcity and Choice Resources can produce only a fraction of the goods and services desired by people. Scarcity implies the need for ___________________, associated with ___________________ cost. Opportunity cost is the costs of using resources for a certain purpose, measured by the benefit _________________ by not using them in their _____________ alternative use. 3 / 9 Econ 105 Principles of Macroeconomics Chapter 1 Fall 2013 Ex. Suppose your scarce resource is time given today. Your current activity Alternative activity Benefits Costs or Benefits given up Therefore, all times, we make a choice based on opportunity costs associated with two _________________ activities, with a given amount of resources. Q:What would be the opportunity cost to an individual completing a uni versity degree? A: Production Possibilities Boundary (PPB) A curve showing which alternative combinations of commodities can just be attained if all available resources are used efficiently.
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