Unit 1 - Intro to Economics

Scarcity

Supplies are not unlimited, so we must make choices on how we use them.

Choice

The way you choose to allocate your supply.

Economics

A social science that studies how individuals, institutions, and society make the best choices under scarcity.→ How society deals with scarcity

Economic Problem

We have unlimited wants but limited resources to satisfy them.

Microeconomics

The study of individual units such as people, firms, and industries.

• Individual, measurable factors in specific industries (S&D, Production Cost, Labour Markets)

Macroeconomics

The study of the economy as a whole.

• Economic growth, government spending, Inflation, unemployment, trade, etc

Positive Statements

Statements that are factual and objective.

• BC has a higher unemployment than Alberta

Normative Statements

Statements focused on value judgements.

• BC SHOULD increase revenue by increasing tax

Key Economic Principals (5)

1. Society has unlimited wants and limited resources

2. Due to scarcity, choices must be made - Every choice has a cost (trade-off)

3. Everyone’s goal is to make choices that maximizes satisfaction → Act in Self-Interest

4. Everyone makes decisions by comparing marginal costs and benefits of every choice 

• If the benefit exceeds cost people are more likely to do it

5. Real-life situations can be explained and analyzed through models and graphs

Self-Interest

Everyone's goal is to make choices that maximize their satisfaction.

Ceteris Paribus (Give Example)

• Ceteris Paribus: Focusing on only 2 factors but ignoring other interests

  • Latin for “other things being equal” or “other things remaining the same

  • There are so many variables and its too complicated so they change one variable at a time

  • If you change too many variables there can be a lot of errors

• EXAMPLE: Study ONLY the price and quantity purchased, while ignoring other factors like income, or like other global factors

Opportunity Cost & Give an Example

The value you could have gained by choosing the next-best alternative.

• It can be money, time, product, etc

Eg. How many cars do I give up if I choose to manufacture planes?

Explicit Cost

Traditional, direct costs associated with making a decision, typically "out of pocket" money.

Implicit Cost

The opportunity costs of making a decision, or the things you give up.

• Eg. Time lost if I go to movies instead of studying

Cost-Benefit Analysis

A method of economic thinking where decisions are made by comparing total benefits and total costs (both explicit and implicit).

Economic decisions are made by comparing total benefits and total costs (Explicit and Implicit)

Marginal Analysis (Marg. Benefit and Cost) - Provide an Example

Comparing the additional benefit of an activity with its additional cost.

• Should I spend another hour studying? What do I give up?

  • Marg. Benefit: Improved grades/ learning

  • Marg. Cost:Lost time on other activities

Optimal Quantity

The ideal amount of an activity or product that maximizes benefit and minimizes cost.

Resource

Anything used to produce something else, primarily goods or services

FACTOR OF PRODUCTION

Land

All natural resources used in the production process.

Labour

The physical and mental talent/effort of workers used in production.

Capital

Manufactured goods used to make other goods and services, such as tools and machinery. Capital does NOT refer to money.

Entrepreneurial Ability

The special human resource of organizing resources, taking risks, and innovating to create new products and processes.

3 Economic Questions

1. What goods and services should be produced?

2. How should they be produced?

3. For whom should they be produced?

Utility

Satisfaction or usefulness.

Marginal

Additional.

Allocate

The distribution of resources.

Price

The amount a buyer or consumer pays.

Cost

The amount a seller pays to produce goods.

Investments

Money spent by businesses to improve production.

Consumer Goods

Goods created for direct consumption.

Capital Goods

Goods created for indirect consumption, used to make consumer goods.

Net Benefits

•  (Total Benefit- Total Cost) are maximized at the optimal choice

What are the different categories if resources?

1. Land

2. Labour

3. Capital

4. Entrepreneurial Ability

Productivity

A measure of efficiency that shows the number of outputs per unit of input.

Higher productivity = Make more with less

Production Possibilities Curve (PPC)

A model that shows the alternative ways an economy can use its scarce resources. It demonstrates scarcity, trade-offs, opportunity costs, and efficiency.

Increasing Opportunity Cost

As you produce more of a good, the opportunity cost of producing an additional unit gets bigger.

Resources are not easily adaptable to produce both goods. (Cherry Example)

Total Opportunity Cost

The total amount of one good you must give up to produce a certain amount of another good.

Marginal Opportunity Cost

The cost of producing one additional unit of a good.

Productive Efficiency

The state of products being produced in the least costly way. Any point on the PPC curve represents productive efficiency.

Allocative Efficiency

The optimal point on the PPC where the products being produced are the most desirable for society.

Country with no electricity example

PPC Shift Outward

An increase in resource quality, quantity, or technology causes the PPC to grow bigger, representing economic growth and high productive potential.

PPC Shift Inward

A decrease in resource quality, quantity, or technology causes the PPC to shrink. (eg. a Drought)

What is the main concept of the PPC?

• MAIN CONCEPT: Producing more of one good means producing less of the other

  • You can not always produce all of everything → Scarcity

  • You must allocate resources efficiently to reach maximum means of production

What are the 4 main assumptions in the PPC?

• Only 2 goods can be produced

• Full employment of available resources (full utilization of resources)

• Fixed Resources and Technology

What are the 3 different types of PPC Opportunity Costs?

See Photo

What is Economics Used For?

Produce models to make generalizations and abstraction to develop theories

The theories are applied to solve problems and meet economic goals

What are 4 types of Resources?

1. Land

2. Labor

3. Capital

4. Entrepreneurial Ability

Constant Opportunity Cost

Opportunity cost stays the same, results in a straight line PPC

Resources are easily adaptable to produce both products (eg. Bread, Muffins)

What Causes the PPC to shift?

PPC is shifted by a change in quality, quantity of resources and technology

NOT SHIFTED BY DEMMAND

Economic System

The method a society uses to produce and distribute goods and services, which determines how the three economic questions are answered.

Command Economy

An economic system where the government controls the economy and central planners make all important decisions about production.

Market Economy

An economic system where private ownership and the use of markets determine economic decisions, which are made by business owners and consumers.

Mixed Economy

An economic system that combines aspects of both a command and market economy, where both the government and the private sector play a role in economic decision-making.

Invisible Hand

A theory by Adam Smith that states society's goals will be met as individuals pursue their own self-interest.

Absolute Advantage

The ability to produce more of a given product with a specific amount of resources.

• MOST OUTPUT FOR LEAST INPUT

Comparative Advantage

The ability to produce a good at a lower opportunity cost than another producer.

Terms of Trade

The agreed-upon conditions that would benefit both trading countries, which must fall between the two countries' opportunity costs.

BOTH COUNTRIES BENEFIT

Why do countries trade?

Countries trade so they can specialize in what they produce most efficiently then trade with other people and get goods for a lower opportunity cost

	TV	Salsa
Canda	4  (1TV = ⅓ S)	12 (1S = 3TV)
Japan	1 (1TV = ⅕ S)	5 (1S = 5TV)

For the given INPUT question, who has the comparative advantage? Identify Terms of Trade

Canada has advantage in salsa

Japan has the comparative advantage in TVs

1 Salsa for 4 TV

OUTPUT: Who has comparative advantage? Identify terms of trade

	Wheat	Sugar
USA	40 (1W = ½ S)	20 (1S = 2W)
Brazil	10 (1W = 2S)	20 (1S = ½ W)

USA had advantage in Wheat

Brazil has advantage in Sugar

1 Wheat for between 0.5 and 2 sugar

Law of Diminishing Marginal Utility

•  As you consume something, the additional utility/ satisfaction you receive will decrease

  • The more you eat, the less you feel satisfied the more you eat it

  • Helps understand why demand curve slopes downward

Marginal Utility

• Change in utility generated by consuming one-additional unit of a good or service

  • Like how much ADDITIONAL satisfaction you gain from eating one more

Utility Maximizing Rule

As you move down, buy the product with the highest marginal utility per dollar

Total Utility

SUM of all utility gained after calculating maximized utility

What are some guidelines for utility maximization?

• Know how much money you have and keep track

• Pick the choice with Highest MU/P until you use up all money - ONE AT A TIME

• If the MU/P is the same → Choose either one → Both lead to optimal combination

• Determine total utils from combination of two choices → ONLY DETERMINE TOTAL UTILS AT THE END