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Chapter 1&2

Microeconomics – Chapter 1 & 2.docx

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University of Guelph
ECON 1050
Eveline Adomait

Microeconomics – Chapter 1 & 2 Chapter 1 Definition of Economics Scarcity – inability to satisfy all our wants Incentive – reward that encourages an action or, penalty that discourages one  Prices act as incentives* Economics – social science that studies choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices Microeconomics – study of choices that individuals and businesses make, how they interact in markets and influence of governments (ex. businesses) Macroeconomics – study of performance of national economy & global economy (ex. banks) Two Big Economic Questions Summarizing the scope of economics: 1. How do choices end up determining what, how and for whom goods and services are produced? Goodsand Services– Objects people value and produce to satisfy wants (Goods = physical) (Services = task) Factors of Production – productive resources used to produce goods and services Land – natural resources Labour – work time and work effort (physical and mental). Quality is dependent on Human Capital Human Capital – knowledge & skill from education/experience Capital – tools/instruments/machines/buildings businesses use to produce G&S Financial Capital – stocks and bonds Entrepreneurship – human resource that organizes labour, land, capital Land = rent Labour = wages Capital = interest Entrepreneurship = profit Factor of production that earns the most income = Labour 2. Can the choices that people make in pursuit of their own self-interest also promote the broader social interest? Self Interest – choice is best available one for you Social Interest – choice is best for society as a whole Efficiency – resources are used to produce G&S at lowest cost and highest value/benefit Equity – fairness Can we organize our economic lives so when each of us makes choices in our self-interest, we promote social interest? Globalization – expansion of international trade, borrowing, lending, investment Information Age Economy – technological change of the past 40 years Climate Change Economic Instability The Economic Way of Thinking Six key ideas that define the Economic Way of Thinking : 1. A Choice is a tradeoff 2. People make rational choices by comparing benefits and costs 3. Benefit is what you gain from something 4. Cost is what you must give up to get something 5. Most choices are “how-much” choices made at the margin 6. Choices respond to incentives 1. A Choice Is a Tradeoff Economists: People facing scarcity -> make a choice -> select for available alternatives Tradeoff – an exchange; giving up one thing to get another 2. Making a Rational Choice Economists: Believe people make rational choices. Rational Choice – compares costs and benefits, achieving greatest benefit over cost 3. Benefit: What You Gain Economists: Measure benefit a most a person is willing to give up to get something. Benefit – gain or pleasure something brings determined by preferences Preferences – what a person like and dislikes and the intensity of those feelings 4. Cost: What You Must Give Up *Opportunity Cost – highest valued alternative that must be given up to get something 5. How Much? Choosing at the Margin Margin (edge or border of something) – choice is made by comparing a little more of something with its cost, choice is made at the margin Marginal Benefit – benefit that arises from an increase in an activity *Marginal Cost – opportunity cost of an increase in an activity 6. Choices Respond to Incentives Economists: Human nature as given/view people acting in their self-interest. Incentives are key to reconciling self-interest and social interest. Economics as Social Science and Policy Tool Economist as Social Sci
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