Chapter 1 notes.doc

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Department
Economics for Management Studies
Course
MGEA02H3
Professor
Gordon Cleveland
Semester
Fall

Description
ECMA Notes – Chapter 1 • An economy is a system in which scarce recourses such as labour, land and machines are allocated among competing users. • Therefore decisions must be made about: what goods are produced, and which are not; who works where and at what wage; and who consumes which good at what times. • Efficiency means that the resources available to the nation are organized so as to produce the largest possible amount of the goods and services that people want to purchase and to produce them with the least amount of resources • Free market: those who produce, sell, and buy goods and services all respond to the same set of prices, which are determined in markets that respond to overall conditions of national scarcity or plenty. • Characteristics of market economies: o Self-interest: individuals pursue their own self-interest, buying and selling what seems best for themselves and their families. o Incentives: sellers usually want to sell more when prices are high, buyers usually want to buy more when prices are low. o Market prices and quantities: when would-be sellers compete to sell their products to would-be buyers o Institutions: governed by a set of institutions largely created by government. Such as property, freedom of contract, and the rule of law • Scarcity: compared to the known desires of individuals for such product as better food, clothing, housing, education, holidays, health care, and entertainment the existing supplies of resources are clearly inadequate. • If we cannot have everything we want, we must choose what we will and will not have. • Economics: is the study of the uses of scarce resources to satisfy unlimited human wants. • Economists call such resources factors of production because they are used to produce the things that people desire. • Goods: are tangible (e.g. cars and shoes) and services: are intangible (e.g. haircuts and education) • The act of making goods and services is called production. • Because resources are scarce, all societies face the problem of deciding what to produce and how much each person will consume. • Every time a choice is made, opportunity cost is incurred • The opportunity cost of resources for a certain purpose is defined to be the benefit given up by not using them in the best alternative way. It is the cost measured in terms of other goods and services that could have been obtained instead. Production Possibility Frontier • Because resources are scarce, some combination cannot be attained. The negative slope on a graph divides the combinations that can be attained to those that cannot. • Points above and to the right of the curve cannot be attained because there are not enough resources; points below and to the left of the curve can be attained without using all of the available resources; and points on the curve can just be attained if all the available resources are used efficiently. This is called the production possibility frontier • Production possibility frontier: a curve showing which alternative combinations of commodities can just be attained if all available resources are used efficiently; it is the boundary between attainable and unattainable output combinations. • it illustrates three concepts: scarcity, choice, and opportunity cost • scarcity: indicated by unattainable combinations outside the boundary, choice: by the need to choose a
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