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Chapter 1-5

Economics 1021A/B Chapter 1-5: ECON 1021A WITH KAHNERT TEXT NOTES


Department
Economics
Course Code
ECON 1021A/B
Professor
Michael Parkin
Chapter
1-5

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Chapter 1 – What is Economics?
Definition of Economics
All economic questions arise because we want more than we can get
Scarcity is our inability to satisfy all of our wants
Faced with scarcity we must make choices
Economics 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 choices
Economics divides into Microeconomics and Macroeconomics
Microeconomics is the study of the choices that individuals and businesses make, the
way these choices interact in markets, and the influence of governments
Macroeconomics is the study of the performance of the national economy and the global
economy
Two Big Economic Questions
The two big questions of economics are:
1. How do choices end up determining what, how, and for whom goods and services
are produced?
2. When do choices made in the pursuit of self-interest also promote the social
interest?
The objects that people value and produce to satisfy human wants are called goods and
services
Study figure 1.1 on page 3 of the textbook to determine if Canada is a service economy or
a goods economy SERVICES!
Factors of production are the resources that businesses use to produce goods and
services
Factors of production are grouped into four categories: land, labour, capital, and
entrepreneurship
oThe “gifts of nature” that we use to produce goods and services are called land
oThe work time and work effort that people devote to producing goods and
services is called labour. The quality of labour depends on human capital, which
is the knowledge and skill that people obtain from education, on-the-job training,
and work experience
oThe tools, instruments, machines, buildings, and other constructions that
businesses now use to produce goods and services are called capital
oThe human resource that organizes labour, land, and capital is called
entrepreneurship
To earn income, people sell the services of the factors of production they own
oLand earns rent
oLabour earns wages
oCapital earns interest
oEntrepreneurship earns profit
When we make choices about “what”, “how”, and “for whom” goods and services are
produced, we make the choices in the self-interest or the social interest

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Choices made in the self-interest are choices that are best for the person making them
Choices that are the best for society as a whole are said to be in the social interest
Economic Way of Thinking
Because we face scarcity, we must make choices every choice made is a tradeoff
A tradeoff is an exchange giving up one thing to get something else
People make rational choices by comparing benefits and costs
Benefit is what you gain from something
Cost is what you must give up to get something
Opportunity cost is the highest-valued alternative that we give up to get something
All tradeoffs involve an opportunity cost
When we make choices we make them at the margin compare the benefits of a little bit
more of something with its cost
The benefit that arises from an increase in an activity is called marginal benefit
The cost of an increase in an activity is called marginal cost
Our choices respond to incentives
oAn incentive is an inducement to take a particular action
oAn incentive can be a benefit of a cost
Economics: A Social Science
Economists distinguish between two types of statements: what is and what ought to be
Statements about what is are called positive statements and they might be right or
wrong. A positive statement can be tested by checking it against the facts
Statements about what ought to be are called normative statements. These statements
depend on values and cannot be tested
Chapter 1 Appendix – Graphics in Economics
Graphing Data
Making a graph
oThe horizontal line is the x-axis
oThe vertical line is the y-axis
oThe intersection of the x-axis and the y-axis is the origin
A scatter diagram plots the value of one variable against the value of another variable
Graphs Used in Economic Models
Variables that move in the same direction
oA relationship between two variables that move in the same direction is called a
positive relationship or direct relationship
oA relationship shown by a straight line is called a linear relationship
Variables that move in opposite directions
oA relationship between variables that move in opposite directions is called a
negative relationship or an inverse relationship

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Variables that have a maximum or a minimum
oA relationship that has a maximum slopes upward as it rises to its maximum
point, is flat at its maximum, and then slopes downward
oA relationship that has a minimum slopes downward as it falls to its minimum
point, is flat at its minimum, and then slopes upward
Variables that are unrelated
oVariables that are unrelated are shown on a graph as a horizontal or vertical line
The Slope of a Relationship
The slope of a relationship is the change in the value of the variable measured on the y-
axis divided by the change in the value of the variable measured on the x-axis
We use the Greek letter Δ (delta) to represent “change in”
The slope of the relationship is Δy/ Δx
Slope of a straight line is the same regardless of where on a straight line you calculate it
In the figure below (a), when x increases from 2 to 6, y increases from 3 to 6. Δx=4 and
Δy=3, so the slope of the line is ¾
In the figure below (b), when x increases from 2 to 6, y decreases from 6 to 3. Δx= 4 and
Δy=-3, so the slope of the line is -3/4
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