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Chapter 1

ECO100Y1 Chapter 1 Notes
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Department
Economics
Course
ECO101H1
Professor
Robert Gazzale
Semester
Fall

Description
ECO100Y1 Textbook Notes Chapter 1 1.1 The Complexity of the Modern Economy  Economy: a system (typically very complex) where resources - such as land, labour and machines – are allocated among competing uses.  An economy based on free-market transactions is self-organizing.  Self-interest is the foundation of economic order as our actions are motivated primarily by it and not by benevolence.  Main characteristics of market economies: o Self-interest o Incentives o Market prices and quantities o Institutions 1.2 Scarcity, Choice, and Opportunity Cost  Economics: study of the use of scarce resources to satisfy unlimited human wants.  Society’s resources (factors of production): o Land: Natural resources o Labour: Human resources (management skills, entrepreneurial capacity etc.) o Capital: Capital resources (tools, machinery etc.)  What is produced is separated into two categories: o Goods (what is tangible) o Services (what is intangible)  We live in a world of scarcity.  Scarcity implies that choices must be made, and making choices implies the existence of costs.  Opportunity cost: what is given up in making a choice (i.e. choosing pizza over a hotdog; the hotdog is the opportunity cost).  Production possibilities boundary: a curve showing which alternative combinations of commodities can be attained if all available resources are used efficiently (boundary between attainable/unattainable)  PPB illustrates: o Scarcity (unattainable combinations) o Choice (need to choose among the alternative combinations) o Opportunity Cost (negative slope of the boundary)  Negative slope because making more of one item yields less that could be made of another(s).  Four key economic questions: o What is produced and how? Concerning the allocation of resources, which then determines the quantities of various goods that are produced. o What is consumed and how? Economists seek to understand what determines the distribution of a nation’s total output among its people. These two questions fall within the realm of Microeconomics (study of the decisions of individual households and firms in each market) o Why are resources sometimes idle? When the economy is operating inside its PPB. o Is productive capacity growing? The capacity to produce goods/services can grow and is represented by an outward shift of the PPB (making once unattainable combinations, now attainable). These two questions fall within the realm of Macroeconomics (study of the economy as a whole and not the outcome in any particular Market. 1.3 Who Makes the Choices and How?  Individuals sell the services of the factor they own in the factor markets and are paid by firms.  Firms sell their outputs of goods and services in goods markets and are paid by individuals.  Distribution of income: how a nation’s total income is divided amongst its citizens (largely determined by the price that each type of factor service receives in factor markets).  People are assumed to be maximizers.  Assumed individuals make choices designed to maximize their well-being or utility.  Assumed firms make choices designed to maximize profit.  Consumers and firms must weigh the marginal cost against the marginal benefit (benefit must exceed cost for both).  Consumers/firms who are maximizers make marginal decisions. (i.e. voting is a total decision as you must agree with everythi
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