Chapter 1- Introduction to microeconomics
- MORE, MORE, MORE
o Human wants are unlimited because people are GREEDY.
As so aptly demonstrated by many corporate executives
Canadians may be more ‘caring’ than the ‘money grubbing’ Americans, but,
FACE IT!… we are living in a material world.
- Human wants are PARTIALLY satisfied by producing and then consuming goods and services.
- We analyze the nature of :
o production activities - theory of the FIRM
o consumption activities - theory of the CONSUMER
o exchange activities - coordination between them - theory of MARKETS
- There are two primary types of ECONOMIC ACTORS (ACTRESSES).......
- ...who interact (exchange) within markets in a capitalist ECONOMY.
- An ECONOMY is an institution in which these actors produce, consume, and exchange.
- Any economy produces goods and services by combining RESOURCES...
- ...into a TECHNOLOGY OF PRODUCTION
- Economic Resources
o Land: natural resources or any derivative thereof
crops, minerals, land itself (on which buildings and structures LIE, not “lay”)
- Labour: human effort
- Capital: something that is used to make something else
o structures, vehicles, plant & equipment, machinery
o It is not altered or consumed in the production process, but it does depreciate.
- These resources available only in limited quantities, and therein lies the rub.
o unlimited wants
o limited means to produce them
- SCARCITY is this fundamental conflict.
o Every economy from the centrally planned, socialist economy to the purely capitalist,
- Because of scarcity, consumers and producers have to make CHOICES
o Principle #1: People Face Tradeoffs
• Page 4
Homonyms – get them straight - Principle: a concept or a point (noun)
- Principal: a head or leader (noun), primary or major (adjective)
- All choices involve incurring an OPPORTUNITY cost.
o defined as the value of the option that was NOT selected: the highest foregone
o no scarcity, no choices
o no choices, no opportunity cost
o Principle #2: the cost of something is what you give up to get it
It does not necessarily have a $ value
Page 5 in textbook
- Illustration of a choice and an opportunity cost - my career
- I faced the following choice in 1999-2000
o stay at my present position and earn a living salary
good working conditions
o join the ‘brain drain’ to the USA, and earn about 50% more than my present salary
do research for the government or a consulting firm
- I (obviously) chose to remain here, so the opportunity cost of that choice is the value of option
- Net loss of about 50% of my current salary
- I earn positive income from an accountant`s perspective, and I remained solvent.
- From the economist’s perspective, I lose money RELATIVE TO WHAT I COULD EARN
- Am I irrational? I lose out on PECUNIARY terms, but non-pecuniary terms entered my decision.
- Now I am too old to face such an attractive choice
PRIMARY FIRST LESSON – principle # 1 again
- if no opportunity cost, then it’s a FREE good, but.......
- There is NO such thing as a free good
o everything has a cost in terms of resources foregone.
o despite the denials of politicians, who promise higher living standards without giving up
anything in return
- Dalton McGuinty said in 2003 that his government would boost spending on education and
health care, not incur a budget deficit, and not raise taxes
- George Bush promised to fight and win the war on terrorism, cut taxes, fix social security, and
cut the deficit in half by 2009
o The lead author of this textbook was once his economic advisor
- Mitt Romney has promised to maintain defense spending, cut taxes, maintain middle-class
entitlement programs, and eliminate the deficit in 10 years
o The lead author of this textbook is one of his economic advisors - Quebec students demand “free” university educations
- Two corollaries of the principles
o Examine value of the preferred option or choice COMPARED TO THE ALTERNATIVES,
not just its $ value
- Principle #2
o Just because a certain option or choice confers benefits does not necessarily mean that
scarce resources should be allocated to it
- Principle #1
o Example: Ottawa’s would-be light rail transit system
- What is bad economic reasoning is often good politics (not emphasized in textbook)
-e.g. the ‘transitional jobs fund’ of