Economics 1010 - Chapters 1&2

Income inequality

The gap in income that exists between rich and poor. Is high in Canada. Increasing recently due to the high market returns on savings and investments. Debate exists on what government actions could be taken to reduce it, and whether the benefits of those actions would be greater than the associated costs.

Protectionism

When countries are less willing to open their domestic markets to other countries' products.

Economics

The study of the use of scarce resources to satisfy unlimited human wants.

What is inevitable and central to economies and economic problems?

Scarcity.

A society's resources are often divided into the three broad categories

1. Land: natural endowments (e.g., arable land, forests, lakes, oil, minerals).

2. Labour: mental and physical human resources, including the number of workers and their entrepreneurial capacity and management skills.

3. Capital: manufactured aids to production (e.g., tools, machinery, buildings).

   These resources are all inputs (or "factors") in the production process!

Factors of Production

Resources used to produce goods and services; frequently divided into the basic categories of land, labour, and capital.

Production

The act of making goods or services.

Goods

Tangible products.

Services

Intangible products.

Consumption

The act of using goods or services to satisfy wants.

Opportunity Cost

The value of the next best alternative that is forgone when one alternative is chosen. Every time a choice is made, the cost is incurred. The cost of choosing any one alternative is the value of the next best alternative that is given up. By using the next best alternative, the cost reflects what would have otherwise been chosen.

Production Possibilities Boundary

A curve showing which alternative combinations of output can be attained if all available resources are used efficiently; it is the boundary between attainable and unattainable output combinations.

People are self-interested

Sell products, including their own labour services, in an attempt to improve their own economic situation. Purchase products they want rather than those they dislike.

People respond to incentives

Buyers want to buy more when prices are low because they are better able to use their scarce resources to acquire the things they desire. Sellers usually want to sell more when prices are high because by doing so they will receive higher profits.

An economy based on free-market transactions is self-organizing

When individual consumers and producers act independently to pursue their own self-interests, the collective outcome is coordinated —there appears to be a "spon-taneous economic order."

The economic order is relatively efficient

Resources are organized to produce goods and services that people want, and to produce as much as possible with the least amount of resources.

Three types of decision makers operate in any economy

1. Consumers: purchase goods and services with their income; they usually earn income by selling their labour services to employers.

2. Producers: firms interested in profits or non-profit organizations; hire workers, purchase material inputs, then produce and sell products.

3. Government: usually provide goods and services at no direct cost; operations are financed by the taxes they collect from consumers and producers.

Maximizing

Consumers seek to maximize well-being and producers decide how much resources to use to maximize profits.

Marginal

Maximizing consumers and producers decide if they will be made better off by buying or selling a little bit more or less of a product.

How Individuals and firms interact in the factor market

• Individuals sell labour.

• Firms pay wages and salaries.

How Individuals and firms also interact in the goods market

• Firms sell goods and services.

• Individuals pay market prices.

Production process displays two characteristics

1. Specialization of labour.

2. Division of labour.

Specialization of labour

Specialization of individual workers in the production of particular goods and services.

Division of labour

Breaking up of a production process into a series of smaller specialized tasks.

Globalization

Refers to increased importance of international trade. It has challenges (e.g., human rights, environmental, product standards).

Two major causes of globalization

1. Rapid reduction in transportation costs.

2. Revolution in information technology.

   It has challenges (e.g., human rights, environmental, product standards).

There are three pure types of economic systems

1. Traditional.

2. Command.

3. Free-Market.

   In practice, every economy is mixed in the sense that it combines elements of all three systems in determining economic behaviour.

Traditional

Behaviour is based on tradition, resulting in an unchanging environment in goods produced and occupations over time (e.g., feudal system).

Command

Most economic decisions made by a central planning authority (e.g., USSR/Russia, Cuba, North Korea).

Free-Market

Decisions about resource allocation are the result of innumerable independent decisions by individual consumers and producers.

Key government-provided institutions in market economies are

• Private property.

• Freedom of contract.

Economists Give Two Broad Types of Advice

1. Positive statements

2. Normative statements

Distinguishing what is true from what we would like to be true requires distinguishing between positive and normative statements.

Positive Statements

A statement about what actually is, was, will be, or is likely to be. It is not based on a value judgment.

• About matters of fact.

• Disagreements are dealt with by an appeal to evidence.

Normative Statements

A statement about what ought to be; it is based on a value judgment.

• Tells others what they ought to do.

• Based to some extent on subjective values and beliefs.

• Cannot be evaluated solely by a recourse to facts.

A Theory

A rational form of abstract thinking intended to explain something. It is used to guide our analysis of a topic. Consists of the following:

1. Variable

2. Assumptions

3. Predictions

Variables

Any well-defined item, such as the price or quantity of a commodity, that can take on various specific values.

Assumptions

Motives (e.g., self-interest), directions of causation, and the conditions under which the theory is meant to apply.

Predictions

Propositions that can be deduced from a theory.

Positive Correlation

X, Y move together in same direction.

Negative Correlation

X, Y move together in opposite directions.

Index Numbers

A measure of some variable, conventionally expressed relative to a base period, which is assigned the value 100.

An economic variable (e.g., unemployment, national income, average house prices) can come in two basic forms.

1. Cross-sectional

2. Time-series

Cross-sectional

Observations of a variable at the same time across several different units (such as households, firms, or countries).

Time-series

Observations of a variable at successive periods of time.

What is Y?

A function of X if, for all values of X, there is only one possible value of Y.