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Economics 1021A/B
Jeannie A Gillmore

Microeconomics Chapter 1: What is Economics? - What we can get is limited by time, income and prices o Everyone has some unsatisfied wants - We are limited by productive resources (nature, labour, tools, etc.) - Scarcity describes our inability to satisfy all of our wants o Rich and poor alike deal with scarcity o Child doesnt have enough money to buy 2 toys, business woman cannot play golf and attend a meeting - Since we cant have it all we must choose among available alternatives when faced with scarcity - Choices we make depend on incentive either a reward (encourages an action) or a penalty (discourages an action) - Two main areas of economics o Microeconomics: choices that individuals and businesses make, how these choices interact in markets, how they are influenced by governments o Macroeconomics is the performance of national and global economies - Two big questions in economics 1. What, how and for whom goods and services are produced (influenced by choices) 2. How do choices in pursuit of self interest promote Social Interest What How and For Whom Goods and Services: Objects that people value and that satisfy wants - Goods are physical objects (phone), services are tasks performed (cellphone service) - What we produce changes over time o 65 years ago: less service, more agriculture/mining/construction/ manufacturing - How Goods and services are produced by the Factors of Production o FOP are land, labour, capital and entrepreneurship - Land= gifts of nature, natural resources - Labour= work time and work effort put into producing goods and services o Quality of labour dependent on Human Capital (knowledge and skill gained from schooling, on the job training, experience expands over time, more people have higher education, etc.) - Capital= Tools, instruments, machines, buildings used to produce goods and services o This is distinct from idea of capital as money, stocks, bonds (financial capital) these do not produce goods and services - Entrepreneurship= Human resource that organizes labour, land and capital - For Whom Depends on incomes that people earn (larger income, can afford larger quantity of goods and services) - People can earn incomes through the services of the factors of production o Land earns rent, labour earns wages, capital earns interest, entrepreneurship earns profit o Labour earns highest percent of income (wages, fringe benefits make up about 70% of total income), pretty constant - Distribution of income is unequal (5% goes to poorest 20% of people, 50% goes to richest 20%--> make 10x more) Pursuit of Self And Social Interests Self Interest Choices in self-interest are the best ones available for you - Most decisions seem to be made in self interest, dont normally think of others - Choices bring you into contact with thousands of other people who produce or deliver goods and services you buy and people who buy what you sell all of these people have made their choices in their self interest Social Interest Self interested choices promote social interest when result is best for whole society - Efficient use of resources, fair distribution lowest possible cost, beneficial quantity Topics: Globalization, Information Age Economy, Global Warming, Natural Resource Depletion, Economic Stability (Relation to Self and Social Interest) Globalization is the expansion of international trade, borrowing and lending and investment - In the interest of?? o Multinational firms (can produce at low cost and sell at high cost) o Consumers (Lower Cost Goods) o Worker in Malaysia (Gets job) - Social Interest? Globalization produces work for Asians, destroys North American Jobs Information Age Economy: Technological Change (Information Revolution - Were scarce resources used well - Price and social interest, quality? - Self interest of Bill Gates and other major players Global Warming Lowering carbon emissions - We all leave a carbon footprint - Governments may change incentives so our self interested choices are also in social interest replacing fossil fuels Natural Resource Depletion Self interested Economic Choices - To buy products that destroy natural resources is damaging to social interest Economic Instability Past 20 years very stable Great Moderation - 2007 was economic stress due to banks choices to lend and people to borrow all in self interest - Credit Crunch: Low interest rates, US Banks lending spree to home buyers - Rising house prices made homeowners feel well off, would borrow and spend - Home loans sold and resold, in 2006 interest rates rise, home price increases slow down borrowers default on loans, flood, billion dollar losses Economic Way of Thinking - Scarcity means we must make choices (a choice is a tradeoff, give up something in order to get something else) - Guns vs. Butter to get more guns give up some butter or vice versa - What, How and For Whom Goods and services are produced involves tradeoffs - What is produced depends on us (tradeoffs on how to spend income, i.e. movie or coffee), the government (should tax dollars go to defense, education, other things) and businesses (what to produce, i.e. Nike deciding on golf balls or shoes) - How business produce Goods and Services could have a tradeoff between labour and capital or other factors of production (an example would be replacing workers with machines) - For Whom goods and services are produced depends on distribution of buying power - Buying power can be redistributed via: o Voluntary payments (Tradeoff between own spending and equality) o Theft (Tradeoff between increased security against theft and goods and services) o Taxes/Benefits, redistribution from rich to poor Big Tradeoff between equality and efficiency - Taxing productive activities discourages them, results in less production Choices Bring Change over Time - Quantity, range of goods and services available greater than in the past - This depends on choices and tradeoffs 1. How much income to save or spend o Saving more channels through the financial system, more financial capital available and more goods and services o Higher future consumption, economic growth 2. Education and training o More education and training means more production o When everyone is better education production increases, and there is a higher income per person 3. How much effort to devote to production methods o Research= greater productivity in the long run o Opportunity Cost: what we give up is cost of what we get (no such thing as a free lunch) o Opportunity Cost of something is the highest valued alternative that we must give up to get it o Opportunity cost of more goods and services in the future is less consumption today Choosing at the margin - Choice is usually not all or nothing - Have to decide how much to allocate to something (compare a little bit of something with its cost) - Benefit arising from an increase in an activity is the marginal benefit - Cost of an increase in activity is the marginal cost - Making decision you compare marginal benefit and marginal cost Responding to Incentives - Can predict how choices will change by looking at changes in incentives - Human nature in economics: view as acting in self interest Economics as Social Science and Policy Tool Positive Statement: - About what is, what is currently believed about how world operates (can be true or false) - Can be tested by checking the facts: economists test positive statements to weed out the wrong onese Normative Statement - Statement about what ought to be - Cannot be tested, depends on an individuals values - Can be agreed or disagreed with depending on opinion, not economics Cause and Effect - To answer questions of cause and effect, economists test economic models - Economic Model= description of some aspect of the economic world, only includes features needed for the purpose at hand (can include certain aspects while ignoring others) - Cab be tested by comparing predictions with facts - This can be difficult due to the simultaneous operation of many factors - Use: natural experiments, statistical investigations, and economic experiments Natural Experiments: Situation that arises in economic life in which the one factor of interest is different and other factors are equal or similar Statistical Investigation: Looks for correlation (the tendency of the values of 2 variables to move together, in same or opposite direction) in a predictable way; sometimes this shows causal influence (ie cigarette smoking causing lung cancer) Economic Experiment: Puts people in decision making situation and varies influence of one factor at a time, looks at responses Policy Tool: Tool for making decisions Personal, Business, Economics Policy all involve marginal cost an
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