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ECON1010_NOTES

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Department
Economics
Course
ECON 1010
Professor
Ardeshir Noordeh
Semester
Winter

Description
NScarcitymeans that society has limited resources and therefore cannot produce all the goods and services people wish to haveNEconomics is the study of how society manages its scarce resourcesChapter1 Ten Principles of Economics How People Make Decisions Principle 1 People Face Tradeoffs NMaking decisions requires trading off one goal against anotherNExamples of tradeoffsoguns for butterspending national money on defence or consumer goods oStudy time between subjectsoEfficiency vs equitySEfficiencythe propensity of society getting the most it can from its scarce resourcesSEquitythe property of distributing economic prosperity fairly among the members of society Swhen government tries to slice pie into equal slices the pie gets smalleroIt is important to acknowledge tradeoffs because people are likely to make good decisions only if they understand the options they have availablePrinciple 2 The Cost of Something Is What You Give Up to Get ItNOpportunity cost of an item is what you give up to obtain the item NEg the cost of going to university is often the time you could have put into a job and the wages you would have earnedPrinciple 3 Rational People Think at the MarginNRational people systematically and purposefully do the best they can to achieve their objectives given the opportunities they haveNMarginal changessmall incremental adjustments to a plan of action oMost rationalizations decisions occur at the smaller levelpeople often make decisions by comparing marginal benefits and marginal costs oExamplesSspending the extra hour reviewing or watching TVSIf airline company has empty seats and a passenger is willing to pay a lower price to board it is worth it for themthey are thinking at the margin NCost of flying the passenger may be 500 100 000 200 seats but the marginal cost is merely what the food costs for the passenger SPeople are willing to paymore for diamonds than water because the marginal benefit of one diamond is greater than the benefit of a cup of water which is more plentiful even though more vital to life1wwwnotesolutioncomNA rational decision maker takes an action if and only if the marginal benefit of the action exceeds the marginal cost Principle 4 People Respond to Incentives NIncentivesomething such as the prospect of punishment or a reward that induces a person to act NPeople respond to incentives because they often make decisions by comparing costs and benefits NExamplesoSupply and demand low priceincentive to buy an item high priceincentive to sell an item oSeatbelt lawsince people feared prosecution they wore seatbelts morebut accidents increased because they drove less carefully How People Interact Principle 5 Trade Can Make Everyone Better OffNAlthough countries families companies etc compete with each other they can all benefit from trade NTrade allows each person or country company etc to specialize in the activities they do best and by trading with others they get a greater variety of goods of a higher quality NEg American and Canadian Economy compete but trade with each other Principle 6 Markets Are Usually a Good Way to Organize Economic Activity NIn a market economy the decisions of a central planner are replaced by the decisions of millions of firms and householdsNFirms decide whom to hire and what to makeand households interact in the marketplace where prices and selfinterest guide their decisions NAs a result of decisions made by buyers and sellers market prices reflect both the value of a good to society and the cost to society of making the good NPrices adjust to guide buyers and sellers to reach outcomes that maximize welfare of society as a whole NGovernments impede on the invisible handoEg taxes effect price oWhy communism fellPrinciple 7 Governments Can Sometimes Improve Market Outcomes NMarket economies still require the influence of the government to enforce the rules and maintain the institutions that are key to a market economy NGovernments must enforce property rights the ability of an individual to own and exercise control over scarce resources NGovernments need to promote efficiency2wwwnotesolutioncomoMarket failuresituation in which a market left on its own fails to allocate resources efficiently SCausesSexternality the impact of one persons actions on the wellbeing of a bystanderNEg pollutionSMarket powerability of a single person or small group of peopleto unduly influence market prices ie monopolyNEg if there is only one well in a town NGovernmentneeds to promote equityoEg welfare systems healthcare etc How the Economy as a Whole Works Principle 8 A Countrys Standard of Living Depends on Its Ability to Produce Goods and Services NAlmost all variation in living standards between countries is attributable to differences in countries productivityNProductivitythe quantity of goods and services produced from each hour of a workers time NNations with more goods and services produced per unit of timehigh standard of living NGrowth rate of productivity growth rate of average income NExamples of implicationsoIncreasing min wagemore producedhigher standard of livingoMore competition from Japanless producedincome growth slows NPolicy makers need to find ways to boost productivity to indirectly improve standard of living education health etcPrinciple 9 Prices Rise When the Government Prints Too Much money NInflationan increase in the overall level of prices in the economy Nhigh inflation leads to increased costs for society so economic policy makers try to keep it at a low levelNinflation is often caused by the growth in the quantity of moneywhen a government creates largequantities of the nations money the value of the money falls Principle 10 Society Faces a ShortRun Tradeoff between Inflation and Unemployment Nreasons for why governments produce more money short term injections n the first placeomore money stimulates spendingmore demand for goods and servicesohigher demandencourages firms to increase quantity of goods and services they produce and hire more workers to produce the goods and servicesomore hiringlower unemployment NLeads to shortrun tradeoff between inflation and unemploymenteconomic policies push inflation and unemployment in opposite directions NBusiness cyclethe irregular and largely unpredictable fluctuations in economic acitivity as measured by the production of goods and services or the number of people employed3wwwnotesolutioncom
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