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Chapter 1

Chapter 1 - Economic Issues and Concepts.docx

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University of British Columbia
ECON 101
Robert Gateman

1.1 The Complexity of the Modern Economy09-29-2012 The Self-Organizing Economy  Economy – a system in which scarce resources are allocated among competing uses  The great insight of economists is that an economy based on free-market transactions is self-organizing.  Market economy – self-organizing, consumers and producers pursue their own self interests; collective and coordinated outcome due to o Actions motivated by self-interest o Foundation of economic order Efficient Organization  Efficiency – resources available to the nation are organized so as to produce all the goods and services that people want to purchase and to produce them with the least possible amount of resources  Invisible hand  Decision makers all respond to the same set of prices Main Characteristics of Market Economics  Self-interest  Incentives  Market prices and quantities  Institutions – created by government; examples: private property, freedom of contract, rule of law 1.2 Scarcity, Choice and Opportunity Cost 09-29-2012 Scarcity  Economics is the study of the use of scarce resources to satisfy unlimited human wants.  Resources/Factors of Production – used to produce goods and services o Land – ex. Natural endowments o Labour ex. Human resources o Capital – ex. Manufactured aids to production (tools, machinery, buildings)  Goods – tangible commodities like cars and shoes  Services – intangible commodities such as haircuts or medical care  Production – act of making goods  Consumption – using goods or services to satisfy wants  Because resources are scarce, all societies face the problem of deciding what to produce and how much each person will consume.  Scarcity implies the need for choice, so choice implies the existence of cost. Opportunity cost  Benefit given up by not using the in their best alternative use; next best option  Every time a choice is made, opportunity costs are incurred.  Productions Possibility Boundary – shows which alternative combinations of commodities can just be attained o If all available resources are used efficiently, then the output combination (a point) is on the boundary  A production possibilities boundary illustrated three concepts: scarcity, choice and opportunity cost. o Scarcity - shown by the unattainable combinations outside the boundary o Choice – choose among the alternative attainable points along the boundary o Opportunity cost – negative slope on the boundary o Concave shape – OC of either good increases as we increase the amount of it that is produced o Straight-line boundary – OC of one good stays constant no matter how much of it is produced  These shapes occur because each factor of production is not equally useful in producing all goods. o OC of producing one good rises as more of that good is produced. Four Key Economic Problems  What is produced and how? - micro o Resource allocation – allocation of scarce resources of land, labour and capital among alternative uses o It matters which of the available methods of production is used  What is consumed and by whom? - micro o Distribution of a nation’s total output among its people  Why are resources sometimes idle? - macro o Is there a reason to believe that such occasional idleness is necessary for a well- functioning economy?  Is productive capacity growing? - macro o Economic growth will shift the PPC outward  Questions relating to what is produced and how, and what is consumed and by whom, fall within the realm of microeconomics. Microeconomics is the study of the causes and consequences of the allocation of resources as it is affected by the workings of the price system and government policies that seek to influence it.  Questions relating to the idleness of resources and the growth of productive capacity fall within the realm of macroeconomics. Macroeconomics is the study of the determination of economic aggregates, such as total output, total employment, the price level, and the rate of economic growth. 1.3 Who makes the choices and How? 09-29-2012 The Flow of Income and Expenditure  Factor markets – Individuals sell the services of the factor that they own  Goods markets – where producers sell their outputs of goods and services  Distribution of income – how the nation’s total income is distributed among its citizens  Maximizing Decisions o Important Assumption – everyone tries to do as well as possible for himself or herself – maximize well-being or utility  Marginal Decisions o Weigh the costs and befits of their decision
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