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ECO1102 (145)
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Chapter 1

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Department
Economics
Course
ECO1102
Professor
David Gray
Semester
Fall

Description
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)....... o Consumers o Producers - ...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... o LAND o LABOUR o CAPITAL - ...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 - SCARCITY is this fundamental conflict. o Every economy from the centrally planned, socialist economy to the purely capitalist, faces it. - 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 alternative 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 # 2 - 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 ELSEWHERE. - 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
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