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Chapter 1

ECON 101 Chapter Notes - Chapter 1: Opportunity Cost, Financial Capital, Human Capital

Course Code
ECON 101
Corey Van De Waal

of 3
Thursday, September 16, 2010
All economic questions arise because we want more than we can have
Change in technology, environment, and global economy. Positive: information age.
Negative: terrorism
Our inability to satisfy all our wants is called: scarcity p. 2
Because we face scarcity, we must make choices
The choices we make depend on the incentives we face.
An incentive is a reward that encourages an action or a penalty that discourages an action
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.
MICROECONOMICS: (choices individuals and businesses make, the way choices
interact with markets, and the influence of the government) p. 2
MACROECONOMICS: (performance of the national and global economy) p. 2
9 China, Indian, Brazil, and Russia playing a greater role in expanding global economy
9 Scarcity & incentives are a huge part in economics
Two Major Economic Questions:
1) How do choices end up determining what, how, and for whom good and services are
2) How can choices made in the pursuit of self-interest also promote the social interest?
What, How, and For Whom?
WHAT: Goods and services
-decrease in farming and manufacturing caused by the increase in services
HOW: Factors of production> production of goods and services with the usage of productive
9 Land – natural resources (minerals, oils, gas, water, air etc..)
9 Labour – work and time people devote to producing goods and services
*quality of labour depends on human capital – knowledge from education, work
experience, job-training people obtain
9 Capital – (investment) tools, instruments, machines, buildings that businesses use to
produce goods and services
*Physical capital – tools, machines, buildings etc.
*Financial capital – stocks, bonds
9 Entrepreneurship – human resources that organize labour, land and capital
Entrepreneurs come up with new ideas about what and how to produces, and make business
FOR WHOM: who consumes goods and services depends on the income those people earn.
Those with a larger income allow a person to buy large quantity of goods and services. A small
income gives a person few options and a smaller quantity of goods and services.
9 Land > rent
9 Labour > wages (earns the most income)
9 Capital > interest
9 Entrepreneurship > profit
How Can the Pursuit of Self-Interest Promote the Social Interest?
SELF-INTEREST: choice that is best for you
-acting on economic self-interest, you are connecting with the people who produce those goods
and services you buy.
SOCIAL INTEREST: self-interest promotes social interest if it leads to an outcome that is best
for society as a whole. *the outcome uses resources efficiently and distributes the goods and
services fairly.
Resources are used efficiently when goods and services are produced
1) At the lowest cost
2) In the quantities that give the greatest possible benefit
Choices and Tradeoffs
9 Tradeoff: exchange- giving up one thing for another. Example: spending a Saturday
night studying or hanging out with friends.
WHAT TRADEOFFS? (incentive?) What good and services are produced depends on choices
make by people, governments, and business that produce the things we buy. Each choice
involved a tradeoff.
Example: facing a tradeoff with our income >what to spend our money on. Go to the movies this
week, so you hold off buying coffee. Trade off coffee for a movie.
HOW TRADEOFFS? How business produce goods and services we buy depends on their
choices, which involved tradeoffs
Example: Air Canada replaces check-in agents for self check-in kiosks. *replacing labour for
FOR WHOM TRADEOFFS? For whom goods and services are produced depends on how much
consumers buy.
Buying power can be redistributed (transferred from one person to another) in 3 ways :
9 Voluntary payments
9 Theft
9 Through Taxes
Redistribution brings tradeoffs.
Example: you donate $50 to charity; therefore, you must cut your spending. You tradeoff your
own spending for economic equality
Opportunity Cost
9 Opportunity Cost of something is the highest valued alternative that we must give up
to get it.
9 Ex. Opportunity cost of being in school is higher =.
9 The opportunity cost of more goods and services in the future is less consumption
Choosing at the Margin
9 Decision to allocate your time to figure out the higher benefit.
9 Ex. Decision to study vs. decision to message your friends.
9 The benefits that arise from an increase in an activity is called marginal benefit.
9 Ex. You study more to get a higher GPA if you saw that with 4 hours of studying
you had a low one.
9 The cost of an increase in an activity is called Marginal cost.
Responding to Incentives
9 We respond to incentives, therefore, change in marginal cost and marginal benefit
leads us to change our choices.
9 Ex. Instructor A tells you all notes will be on test = study more. Instructor B tells you
no notes will be on the test = skip most.
9 Incentives are key to recording self-interest and social interest.
Human Nature, Incentives, and Institutions
9 People act in their self-interest.
9 Not necessarily selfish, but gets you most value.
Economics as a Social Science and Policy Tool
Social Science:
9 Seeks to discover how the world works; distinguish between positive and normative
9 Positive Statements are about what it is.(tested)
9 Normative Statements (opinion based) are about what it ought to be.
9 Unscrambling Cause and Effect: ex. Are computers cheaper or are people buying
them in larger quantities.
9 Natural Experiment: One factor of interest is different and others are equal.
9 Statistical Investigation: correlation.
9 Economic Investigation: Sees how one factor influences and how they respond.