ECON 101 Ch. 1/2

Resources

are scares (limited - ‘not enough’), yet we have unlimited needs; these are (inputs) such as labor, capital, land, minerals

Needs

are goods (tangible - like a car, oranges) and services (intangible - like education, transportation)

Economic problem

is when resources are limited and we have unlimited needs; therefore, we cannot get all our needs (because resources are scarce) and must choose the most important needs; and when we get something, we must give up something else

Scarcity

causes choice which causes opportunity cost (what you will give up - sacrifice as a result of your choice)

Opportunity cost

what you give up (sacrifice) due to the economic problem (choice); this can be added to the cost of coming (eg. pay for parking + money that could have been made working if you came to lecture); common expenses are ignored (has to be directly related to the choice)

Economics

the science that studies how to manage the economic problem

Microeconomics

branch of economics which studies the behaviour of each each individual economic unit (consumer, producer, and markets)

Macroeconomics

branch of economics which studies behaviour of the whole country’s economy; such as inflation, unemployment, exports, etc.

Production possibility curve

(‘ppc’); often a concave line (where the sacrifice increases) shows different bundles that we can produce from two goods if we use all our resources; negatively sloped because more of one means less than the other; shows: scarcity, by points above it (not feasible because resources are scarce); choice, by points on the curve (where we have to choose one of them); and opportunity cost by negative slope (to get more from one of the goods, you must give up the other good)

Feasible

means can attain these from our resources - and efficient because we use all our resources (we don’t what left over resources which = unemployed resources) - points on the PPC

Points below PPC

attainable bundles but not efficient because we are not using all our resources (unemployed resources)

Points above PPC

not feasible because there are not enough resources

Constant opportunity cost

when the PPC is straight and the sacrifice is the same

Law of increasing opportunity cost

the amount we have to give up to from one good to get more of the other good is getting bigger because resources are not easily transferable from one use to another (“imperfect transferability of resources”) - that is why in reality the opportunity cost increases

PPC shifts outward

… if the quantity of resources increase, increase in productivity, and increase in technological advances (economic growth) - new bundles above previous line is now feasible

Economic growth

results when resources increase; but does not eliminate scarcity (because new bundles above PPC curve is not feasible - resources are scare)

Technology increase

results in an increase in available goods x and y; just x, or just y

Natural disasters

result in PPC shifting inwards due to the destruction of our resources; can decrease x and y, just x, or just y

Capital goods

goods used for production like machines; countries that produce lots of these will grow faster because they increase production possibility (“investment goods”)

Consumer goods

goods used for consumption like food; countries that produce more of this will grow slower

Specialization

concentrate on the production of one or few goods at a lower opportunity cost

Comparative advantage

to be able to produce a certain good at a lower opportunity cost

Trade

Since resources are scare, no country can produce everything, so each country should specialize in producing what she is more “clever in” - what she has a comparative advantage in - and other countries do the same thing and then they ____, which is beneficial to all involved (not reality)

Term of trade

… are always in favor of powerful countries (unfair)

3 economic questions

• What do we produce? How do we produce it? - Either labor intensive or capital intensive = the best method is the one which the country has the most of - Who will receive the goods?

Command economy

(Communist) government decides what is produced through central planning, how it is done, and who receives the goods

Free market economy

the consumers (consumer sovereignty) decide what is produced, how it is done, and who receives the goods

Mixed economy

private and public sectors each which produces goods and answers the 3 economic questions

Circular flow model

summarizes how the economy works (flow of inputs and outputs and their payments), with two markets (product and input) and firms and households; all peoples give some and receive some and interact through the markets; one market is for giving and one for spending

Income flow

the flow of income and expenditures in the economy (“outer flow”)

Goods and services flow

flow of output and inputs (“inner flow”)

Firms

sells goods and services in the product market and accepts revenues from consumer consumption spending at the product market

Consumers

sell inputs (labor and capital) at the labor/input market and are bought by the firms; they are paid for inputs (wage) at the labor market and receive income

Marginal thinking

(“rational”) keep doing the activity as long as the expected marginal benefit is greater than the expected marginal cost; when we make decisions we compare the EMB against the EMC

Marginal benefit/cost

the extra benefit/cost from and extra unit (the change in benefit for one extra Q); when equal, it is still worth it

Positive incentive

used to encourage an activity by increasing the benefit or decreasing its cost (like a subsidy for education)

Negative incentives

used to discourage an activity by increasing its cost or decreasing its benefits (like a tax on smoking)

Goods

items that we desire (food)

Bads

items that we don’t desire (eg. pollution)

Correlation

two events or variables tend to occur together but none of them cause the other; does not imply causation

Causation

one event or variable causes another to happen

Theory

an explanation for a phenomenon

Hypothesis

a claim that can be tested

Empirical analysis

examine the data to see if hypothesis is correct or not

Efficiency

get the most output out of our resources

Market failure

free market fails to achieve efficiency - them requires government intervention; examples are monopoly (single seller exploits consumers) or externalities (damage to others like pollution)

Ceterius Paribus

(Greek word); “other factors kept constant” or “other things being equal”; used to study the effect of one particular variable we have to isolate or remove the effect of any other factors and focus only on the variable of interest

Fallacy of composition

the mistake of generalization; if a certain behaviour is true at the individual level it may not be necessarily valid (“true”) at the group level; mistaking it for being true at the group level is the fallacy

Positive statements

statements that can be tested (eg. if something happens, this will happen), objective and value free, not reflecting opinions

Normative statements

not testable, subjective, and reflects opinion and wishes (eg. I don’t like this lecture)