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Chapter 1

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Department
Economics
Course
ECON 1050
Professor
Eveline Adomait
Semester
Fall

Description
AW 9/12 – 9/15 ECON*1050 – Intro to Microeconomics Chapter 1 – What is Economics? Definition of Economics SCARCITY: our inability to satisfy all our wants INCENTIVE: a reward that encourages an action or a penalty that discourages one ECONOMICS: is the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices. Economics is divided into two parts: Microeconomics and Macroeconomics Microeconomics is the study of the choices that individuals and businesses make – the way these choices interact in markets, and the influence of governments. Macroeconomics is the study of the performance of the national and global economy. Summary - All economic questions arise from scarcity – from the fact that wants exceed the resources available to satisfy them - Economics is the social science that studies the choices that people make as they cope with scarcity - The subject divides into microeconomics and macroeconomics Two Big Economic Questions - How do choices end up determining what, how, and for whom goods and services are produced? - How can choices made in the pursuit of self-interest also promote the social interest? GOODS AND SERVICES: are the objects that people value and produce to satisfy human wants. Goods are physical objects (eg. BlackBerry’s, iPhone’s, iPod’s) Services are tasks performed for people (eg. Auto-repair services) What? - What we produce changes over time. (eg. 65 years ago, almost 20% of Canadians worked on farms. That number has shrunk to less than 3% today) - Over the same period of time, the number of people who produced goods in mining, construction and manufacturing has shrunk from 60% to less than 25%. This decrease is reflected in an increase in services. - Today, more than 75% of working Canadians have service jobs How? Goods and services are produced by using productive resources that economists call FACTORS OF PRODUCTION. These are grouped into four categories: - Land: “The gifts of nature” that we use to produce goods and services. - Labour: The work time and effort that people devote to producing goods and services. The quality of labour depends o human capital (which is the knowledge and skill that people obtain from education, on-the-job training, and work experience) - Capital: The tools, instruments, machines, buildings, and other constructions that businesses use to produce goods and services. - Entrepreneurship: The human resource that organizes labour, land, and capital. AW 9/12 – 9/15 For Whom? - Who consumes the goods and services that are produced depends on the incomes that people earn (eg. A large income enables a person to buy large quantities of goods and services. A small income leaves a person with few options and small quantities or goods and services). - People earn their incomes by selling services of the factors of production they own. (eg. Land earns rent; Labour earns wages; Capital earns interest; Entrepreneurship earns profit) - Wages are around 70% of total income. Land, capital and entrepreneurship share the rest. - Men (on the average) earn more than women; whites earn more than minorities; college graduates earn more than high-school graduates. We can get a good sense of who consumes the goods and services produced by looking at the percentages of total income earned by different groups of people. Self-Interest - A choice is in your SELF-INTEREST if you think that choice is the best one available for yo - You make the most of your choices in your self-interest - You use your time and other resources in the ways that make most sense to you, and you don’t think too much about how your choices affect other people. Social Interest - Self-interested choices promote the SOCIAL INTEREST if they lead to an outcome that is the best for society as a whole – an outcome that uses resources efficiently and distributes goods and services equitably (or fairly) among individuals. - Resources are used efficiently when goods and services are produced: 1. At the lowest possible cost 2. In the quantities that give the greatest possible benefit 5 Topics That Generate Discussion in Today’s World GLOBALIZATION: The expansion of international trade, borrowing and lending, and investment THE INFORMATION-AGE ECONOMY: The technological change of the 1990s and the 2000s has been called the Information Revolution. GLOBAL WARMING: Global warming and its effect on climate change is a huge political issue today. AW 9/12 – 9/15 Every serious political leader is aware of the problem and of the popularity of having proposals that might lower carbon emissions. NATURAL RESOURCE DEPLETION: Tropical rainforests and ocean fish stocks are disappearing quickly. No one owns these resources and everyone is free to take what they want. ECONOMIC INSTABILITY: The past 20 years have been ones of remarkable economic stability, so much so that they’ve been called the Great Moderation. Even after 9/11, it only brought small dip in the strong pace of Canadian and global economic expansion. However, in August 2007, a period of financial stress began. Summary - Two big questions summarize the scope of economics: 1. How do choices end up determining what, how, and for whom goods and services are produced? 2. When do choices made in the pursuit of self-interest also promote the social interest The Economic Way of Thinking TRADEOFF: An exchange – giving up one thing to get something else - The classic tradeoff is between guns and butter. “Guns” and “Butter” may stand for any pair of goods. The fact of the matter is: “If we want more of one thing, we must give up something else to get it” (eg. To get more “guns”, we must give up some “butter”) What Tradeoffs - What goods and services are produced depends on choices made by each one of us, by our government, and by the businesses that produce the things we buy – each of these choices involve a tradeoff (eg. The federal government faces a tradeoff when it chooses how to spend our tax dollars. It votes for more national defence but it cuts back on educational programs)
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