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Economics: Canada in the Global Environment Textbook Notes - Micro Economics 1021

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Economics 1021A/B
Kul Bhatia

Chapter 1 What is Economics September2113741 PMEconomics 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 choicesMicroeconomics is the study of choices that individuals and businesses make the way those choices interact in markets and the influence of governmentsMacroeconomics is the study of the performance of the national and global economiesScarcity we have unlimited wants and limited recourses to satisfy themGoods vs Services physical vs tasks performed by people The Two Big Economic QuestionsHow do choices end up determining what how and for whom goods and services get 1producedWhen do choices made in the pursuit of selfinterest also promote the social interest2What How and for WhomWhat to produce Agriculture Manufacturing ServicesHow Factors of productionThe gifts of nature that we use to produce goods and services are landThe work time and work effort that people devote to producing goods and services is labourThe quality of labour depends on human capital which is the knowledge and skill that people obtain from education onthejob training and work experienceThe tools instruments machines buildings and other constructions that businesses use to produce goods and services are capitalThe human resource that organizes land labour and capital is entrepreneurshipFor Whom Depends on incomes and desiresPeople earn their incomes by selling the services of the factors of production they ownLand earns RentLabour earns WagesCapital earns InterestEntrepreneurship earns ProfitSelf Interest Vs Social InterestSelf InterestYou make choices that are in your selfinterestchoices that you think are best for youSocial InterestChoices that are best for society as a whole are said to be in the social interestSome people claim that the economy will be at its best when everyone thinks in their own self interest Adam Smith Invisible handEfficiency is achieved when available resources are used to produce goods and services at the lowest possible cost yielding the greatest possible benefitEquity does not have a crisp definition because everyone has a different viewThe Economic Way of ThinkingA choice is a tradeoffPeople make rational choicesby comparing benefits and costsBenefitis what you gain from something and is determined by preferencesCostis what you must give up to get somethingOpportunity Costis the best missed option for making a certain choiceMost choices are howmuch choices made at the marginThe benefit that arises from an increase in activity is called marginal benefitThe opportunity cost of an increase in an activity is called marginal costChoices respond to incentives MicroEcon 1021 Page 1 Choices respond to incentivesEconomics as a Social Science and Policy ToolPositive Statements is a statement that can be checked by facts whether correct or incorrectA Normative Statement is based on what something should be ie policy goals are normative statements MicroEcon 1021 Page 2 Chapter 2 The Economic Problem October23131122 PMProduction Possibilities Frontier PPF boundary between those combinations of goods and services that can be produced and those that cannotOccurs because we face a tradeoff when producing more of X we have to produce less of Y due to limited resources and technologyFor PPF we look at a model economy ie we examine the production of two goods and assume ceteris paribus All point on or in the PPF are attainable all points outside are notProduction Efficiency producing goods and services at the lowest possible costAll the points on the PPF are efficient all points inside are notoAt any point inside the frontier we can produce more of a resource without a tradeoff thus it is inefficientoFor these points in the PPF resources are either unused or misallocated or bothTradeoff along the PPFEvery choice along the PPF involves a tradeoff ie we have to produce less of X to produce more of YAll tradeoffs involve an opportunity costOpportunity Cost the highestvalued alternative forgone for making a certain choicePPF makes this idea precise and lets us calculate opportunity cost ie the opportunity cost of producing 1 more X is a certain amount of YOpportunity cost is a ratio it is the decrease in the quantity produced of one good divided by the increase in the quantity produced of another good as we move along the PPFIncreasing Opportunity Cost The opportunity cost of X increases as the quantity of X produced increasesoWhen we produce little of X the opportunity cost of increasing production of X is small When we produce a lot of X the opportunity cost of increasing production of X is greatoThis is because resources are not all equally productive in all activities ie people who specialize in producing Y may not be good at producing X and vice versaoThus when take people who are good at producing X and make them produce Y we only get a small increase in the production of Y for a large cost in the production of X oIncreasing opportunity cost is a universal phenomenon Using Resources EfficientlyEvery point on the PPF is efficient but which of those points is bestoThe answer is the point that provides the most benefitoAllocative Efficiency when goods and services are produced at the lowest possible cost and in the quantities that provide the greatest possible benefitThe PPF and Marginal CostMarginal Cost the opportunity cost of producing one more unit of a goodoCalculated by difference in the resource we produce less of divided by the difference in the resource we get more of ie marginal cost is calculated from the slope of the PPFPreferences and Marginal Benefit Marginal Benefit benefit received from consuming one more unit of a good or serviceoThis benefit is subjective and depends on each persons preferencesPreferences peoples likes and dislikes and the intensity of those feelings MicroEcon 1021 Page 3
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