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ECON 105 (113)
Junjie Liu (39)
Chapter 1-7

ECON 105 - Principles of Macroeconomics, 4th Canadian Edition - Chapters 1-7

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ECON 105
Junjie Liu

Chapter 1Ten Principles of Economics economicsstudy of how society manages scarce resources people land buildings machineryscarcitysociety has limited resourceseconomistsstudy how people make decisions how much they work what they buy how they saveinvest interactions between buyerssellers analyze forces and trends growth in average income unemployment rates rising prices rateseconomygroup of people interacting with one anotherHow People Make DecisionsIndividual Decision Making1 People Face Tradeoffsmaking decisions requires trading off one goal against another o ex student studying giving up one hour of play to study o ex family spending income saving or spendingtradeoffs in society o guns and butter national defence guns to protect our shores vs consumer goods butter to raise standards of living o clean environment vs high level of income reducing pollution raise cost of producing goodsservices improved health vs income o efficiency vs equityefficiencysociety getting most it can from resources economic pieequitydistribution of resources among society members how the pie is dividedoften conflicts with government policies ex welfare systememployment insurance individual income taxthese policies achieve greater equity but reduces efficiency when people receive less reward for working hard and therefore work less the more equal slices of pie is being cut the smaller the pierecognizing tradeoffs does not tell us what decisions to make only what the options are so that we can make good decisions2 The Cost of Something is What You Give Up to Get Itmaking decisions requires comparing the costs and benefits of alternative courses o ex decision whether to go to universitycollegebenefit intellectual enrichment and better job opportunitiescosts not including roomboard because even without school it is needed coststuitionbooks but most of all timeopportunity costwhat must be given up to obtain a certain item3 Rational People Think at the Marginrational peoplepeople who systematically and purposefully do the best they can to achieve their objectivesmarginal changessmall incremental adjustments to a plan of actionrational people make decisions by comparing marginal benefits and marginal costs o ex an airplane flight takes 100 000 to run the 200seat plane so each customer needs to pay 500 however there are 10 empty seats before takeoff when a customer says hell pay 300 for a ticket although average cost per customer is 500 the marginal cost is only the cost of peanuts and soda therefore selling the ticket is profitablerational decision maker takes action if and only if marginal benefit exceeds marginal cost o ex people pay more for diamonds than watereven though water is essential one extra cup has a small marginal benefit because it is so plentifuldiamonds have large marginal benefit because they are so rare4 People Respond to Incentivesincentivesomething that induces a person to act punishmentrewardcrucial to analyzing how markets work o ex when the price of apple risesbuyers people eat more pears instead of applessellers orchards hire more workers and harvest more applespublic policymakers have to always consider incentives because many policies alter behaviour in society o ex tax on gaspeople drive less or more fuelefficient cars o ex economist Peltzman proved that autosafety laws seat belt law resulted in altering drivers costbenefit calculation so that they drive faster and less carelessly higher benefit save time lower cost less likely to die in an accidentthis ultimately meant less driver deaths more accidents and more pedestrian deathsHow People Interact5 Trade Can Make Everyone Better Offalthough other countries are our competitors trade between countries make them better offtrade allows countries to specialize in what they do bestenables countries to have greater variety of goods and services at lower costs6 Markets Are Usually a Good Way to Organize Economic Activitymarket economyan economy in which the allocation of resources are based on decisions of many firms and households o firms decide who to hire and what to make o households decide who to work for and what to buyAdam Smithhouseholds and firms interacting in markets act as if guided by an invisible hand that leads them to desirable market outcomes
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