ECON 203

Economics

The study of choices consumers, business managers, and government officials make to attain their goals, given scarce resources

Economics have ______ want and _____ resources

Unlimited and limited

Examples of Unlimited wants

Hospitals, Infrastructure, and food

Examples of limited resources

Capital, labor, land, and enterprise

Scarcity definition and what scarcity means in economics

A situation where unlimited wants exceed the limited resources available to fulfill those wants

What does microeconomics focus on

Studies the ‘One’, study of behavior and decisions of an individual, firm or market

Issues microeconomics addresses

how households and firms make choices, how they interact in markets, and how the government attempts to influence their choices

Macroeconomics is the study of?

the economy as a whole and the behaviour aggregate sectors, such as household sector and manufacturing sectors. It affects the whole economy

Issues Macroeconomics addresses

GDP, inflation, unemployment, the business cycle, differing growth rates, why countries experience recessions, etc

What are the 10 principles of how people make decisions

People face trade-offs, the cost of something is what you give up to get it, rational people think at the margin, people respond to incentives, and trade can make everyone better off, markets are usually a good way to organize economic activity, governments can sometimes improve market outcomes, a country’s standard of living depends on its ability to produce goods and services, prices rise when the government prints too much money, society faces a short-run tradeoff between inflation and unemplyment

What is the first principle on how people make decisions

People face trade-offs: choosing to get more of one thing requires giving up/sacrificing something else

Why do trade-offs happen

scarcity

Society faces an important trade-offs between _____ and _______

Efficiency and Equity

Define Efficiency in terms of economics

When society is getting the maximum benefits from its scarce resources

Define Equity in terms of economics

The benefits of resources are distributed fairly among societi’s members

Higher equity by raising taxes on high incomes results in?

Fewer goods and service produced, meaning lower efficiency

What is the second principle on people make decisions

The cost of something is what you give up to get it -→ Every time you use a resource in one activity, you give up the opportunity to use the same resource in another activity

Core concept that principle 2 introduces

Opportunity Cost —> The value of the next best alternative you give up when you make a decision

Example of Principle 2: Cost of something is what you give up to get it

Choosing to spend time playing video games means giving up the chance to study, sleep, or work

Opportunity cost is the relevant ___ for decision making —> The opportunity cost of using the resource in _________

Implicit cost, a different way

What is the third principle on how people make decisions

Rational people think at the margin: When making decisions, the marginal benefit should be compared to the marginal cost

Term marginal means?

Extra/additional

MC and MB is?

the additional cost or benefit associated with a small amount extra of some action

Calculation for Marginal Benefit

MB = (triangle symbol- meaning change) total revenue over by (triangle symbol) output

Calculation for Marginal Cost

MC= (Triangle symbol) total cost over (triangle) output

As long as the ______ is _______ to the marginal cost, the choice would be rational

marginal benefit, greater than or equal

What is the fourth principle on how people make decisions

People respond to incentives — something like a reward or punishment that induces a person to act

EX of the fourth principle on how people make decisions

When the price of gasoline goes up, drivers have an incentive to buy more fuel efficient cars or to take public transportation

What is the fifth principle of the interactions among people

Trade can make everyone better off - people can specialize in producing one good/service and exchange it for other goods/services. Trade allows countries to access more diverse and cheaper products

What is the sixth principle of the interactions among people

Markets are usually a good way to organize economic activity

—> markets coordinate the decisions of buyers and sellers through decentralized interactions. They organize the economic activity by using three fundamental questions

3 fundamental economic questions that must get solved

1) what goods and services will be produced —> determined by choices that consumers, firms, and governments make

2) How will the goods and services be produced —> A trade off between using more workers and using more machines

3) Who will receive the goods and services produced—> depends on how income is distributed

Different types of economic systems

Market, centrally planned and mixed economy

Market

group of buyers and sellers of a good/service and the rules that determine how buyers and sellers interact

Market Economy

Economy where decisions of households and firms interacting in markets allocate economic resources

Centrally Planned Economy

Government decides how economic resources will be allocated. Sometimes referred to as command economy or socialist economy

Mixed Economy

Economic decisions result from the interaction of buyers and sellers in markets, where the government plays a significant role, and relies on both the market and centeral planning

What economy system is Canada

Mixed economy

What do Market economies and competition promote

Voluntary exchange, Productivity efficiency, and allocative efficiency

What is the seventh principle of the interactions among people

Governments can sometimes improve market outcomes —>Promoting efficiency(corrective taxes, tradable permits, regulation) and promote equity (gov can alter market outcome and promote equity through taxes or welfare policies

Principle 8 of the economy as a whole

A country’s standard of living depends on its ability to produce goods and services. Looks at what determines the country’s standard of living or GDP per capita

How is Labor Productivity determined

physical capital, human capital, natural resources and technological change

Principle #9 on the economy as a whole

Prices rise when the government prints too much money: what causes inflation —> Demand pull (caused by increase in aggregate demand for gods/services), cost push (caused by increase in the cost of production, forcing firms to raise prices), central banks printing too much money

Principle 10 on the economy as a whole

Society faces a short-run tradeoff between inflation and unemployment —> During business cycle expansion production, employment and income are increasing their is low unemployment. During a business cycle recession production, employment, and income are decreasing, which means high unemployment

When demand for goods/services and spending decline, resulting in prices increase slowly/ decreasing it leads to?

Low inflation or deflation

Macroeconomics is the study of

The economy as a whole

Microeconomics is the study of

how households and firms make choices and how they interact in markets

The principles of decision making

All decisions involve trade-offs, the opportunity cost is the relevant implicit cost for decision making, rational people think at the margin, and rational people respond to incentives

The principle of the interactions among people

Trade can make everyone better off, markets are usually a good way to organize economic activity, and governments can sometimes improve market outcomes

The principles of the economy as a whole

A country’s standard of living depends on its labour productivity, prices rise when the government prints too much money, and society faces a short run tradeoff between inflation and unemployment

Macroeconomics is the study of

How households and firms make choices

Which of the following correctly describes the relationship between economic efficiency and economic equity

There is often a trade-off between the two

The decision about what goods and services will be produced made in a market economy is made by?

Consumers and firms choosing which goods and services to buy or produce

When policymakers make policies that change the costs and benefits that people face, what is the result for society

peoples behaviors are altered

What is an economic model

A simplified framework designed to illustrate a complex processes, it is built with assumptions

Important features of economic models

assumptions/simplifications, forming/testing hypothesis, and economic variables

Definition of Economic Variables (Economic models-Important features)

Something measurable that can have different values, such as wages, prices, quantities, etc. Economic variables have dependent variables and independent variables

Dependent variables

The one that is being explained

Independent Variable

Provide the explanation that causes the change

Calculating the slope of a line

change in value of the variable on vertical axis divided by change of value of the variable on horizontal axis

The slope of a straight line is ________. So you can use any two points to calculate the slope of the line

constant (same at any point)

The slope is ______ if the line is downward sloping

negative

The slope is ______ if the line is upward sloping

Positive

What is a non-linear curve

A graph that forms a curve or wave instead of a straight line

A non-linear curve has different slopes at different _______

Points

To measure the slope of a non-linear curve, you must?

measure the slope of tangent line to the curve at that point. A tangent line will touch the curve at only that point - then measure as any other straight line (change in variable of y and x, divided)

Households and Firms interact in two types of markets

Product markets → market for goods and services. Households demand the goods and services supplied by firms

Factor Markets → market for the factors of production. Factors of production are the inputs used to produce goods and services; labor, capital, natural resources and entrepreneurs

Circular Flow Diagram

A visual model of the economy that shows how dollar flow through markets among households and firms

In a circular flow diagram, households provide ____ of production to ____

factors of production, firms

In a circular flow diagram firms provide ___ and ___ to ___

goods and services, households

In a circular flow diagram firms pay money to ____ for the factors of ____

households, production

In a circular flow diagram households pay money to ___ for the ____ and ____

firms, goods and services

Like all economic models, the circular flow diagram is a simplified version of reality, there are no?

governments, financial systems, or foreign buyers and sellers of goods

What is the PPF

Production Possibilities Frontier

What does the PPF show

the relationship between scarcity, choice, opportunity, and economic growth

PPF graph shows the ____ attainable combinations of two products that the economy can possibly produce given the available factors of production available and the available production technology

maximum

Assumptions of the PPF

economy only produces two goods, all factors of production remain fixed, technology does not change, and every point along the PPF is the maximum that can be produced with a given level of resources → productivity efficient

Points along the PPF are both ____ and ______

feasible and productively efficient → all resource are being fully used to produce the maximum output and goods are produced at the lowest possible cost

Points inside the frontier are ____ but ____

feasible but inefficient —> maximum output is not being obtained from the available resources, some resources are not used

Points outside the frontier are not __ with current resources and technologies

feasible

Choosing the best point on the PPF is called

allocative efficiency

Allocative Efficiency occurs when

society is making the goods and services that are most valued by consumers

When choosing the best point on a PPF (Allocative efficiency), the marginal benefit of the production of a good or a service is ____?

equal to marginal cost of producing it

Moving along a PPF involves?

shifting resources from the production of one good to another

The slope of the PPF tells us?

the opportunity cost of one good in terms of the other

As an economy moves down the PPF, it experiences

increasing marginal opportunity costs

Why marginal opportunity costs increases

because some workers, machine, and other resources are better suited to some uses than others

Economic growth on the PPF

Increase in the available resources or the improvement in technology shifts the PPF outward and an economy can produce more of the two goods

Shifts in the PPF represent?

Economic growth

Economic growth

The ability of the economy to increase the production of goods and services

Technological change in One Industry (PPF)

Makes it possible to produce more goods with the same resources, also shifts the PPF outward, but technological change does not necessarily affect all sectors of the economy (think of the cars and hospital bed example D2L)

Positive Analysis

relies on facts or logic → Positive statements attempts to describe the world as is

Normative Analysis

relies on value judgements → normative statements attempt to prescribe how the world should be

Positive statements can be ___ or ____, normative statements cannot

confirmed or refuted

Is this statement positive or normative “Prices rise when the government increases the quantity of money”

Positive → describes a relationship, could have used data to confirm or refute

Is this statement positive or normative “ The government should print less money”

Normative → this is a value judgement and cannot be confirmed

Is this statement positive or normative “ A tax cut is needed to stimulate the economy”

Normative → its a value judgement that can’t be confirmed or refuted

Absolute Advantage

Ability of an individual, firm or country to produce more of a good or service than competitors, using the same or few amount or resources

Comparative Advantage

ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than competitors

The gains from specialization and trade are based on ___________

comparative advantage

When each person specializes in producing the good in for which he or she has a comparative advantage, total production in the economy ____?

rises