ECON1010 UNIT 1

Economic Interaction

how ones choices affect anothers choices and vice versa

How is economics the same in different countries?

circumstances and history affect what people need to know

How is economics different in different countries?

basic economic material is the same wherever you go

Individual choice

desicions by an individual about what to do and what not to do

Principle 1 (the principles of individual choice)

Choices are necessary because resources are scarce.

-limited income, limited time

resource

anything that can be used to produce something else .

-land, labour (time of workers), capital (machinery, buildings, other man-made productive assest)

scarce

a resource is scarce when there is not enough available to satisfy all the ways the society wants to use it

-natural resources (minerals, lumber, gas)
-human resources (labour, skill, intelligence)

what is the overall choice of an economy

the overall choice of an economy is the sum of the individual decisions

Principle 2 (the principles of individual choice)

the true cost of something is its opportunity cost

opportunity cost

the opportunity cost of an item is what you give up in order to get. Opportunity cost is its true cost
-in the end all costs are opportunity costs , every choic you make means forgetting some other alternative

Principle 3 (the principles of individual choice)

"how much" is a decsion at the margin

-how much decisions require making trade-offs at the margin: comparing the costs and benefits of doing a little bit more of an activity versus doing a little bit less
-ex) going to university versus just sleeping
-ex) going to sleep versus studying later

Trade-off

you make a trade off when you compare the costs with the benefits of doing something

marginal decisions

decisions about whether to do a bit more or less of an activity

marginal analysis

the study of marginal decision, like why you choose to put more effort into one thing or another; your reasoning behind it

Principle 4 (the principles of individual choice)

people usually respond to incentives, exploiting opportunities to make themselves better off

ex) jiffy lube car oil change example... park in oil change for $20 versus parking in parkade for $30 daily. but with this example, if everyone started doing this then it wouldnt be worth it (fully exhausted)

incentive

anything that offers rewards to people to change their behavior... individuals will continue to exploit opportunities until they have been fully exhausted

interaction of choices

my choices affect your choices, vice cersa. interaction of choices is a feature of most economic situations. the results of this interaction are often quite different from what the individuals intend

economy

A system for producing and distributing goods, and services to fulfill people's wants. an economy is a system for coordinating the productive activities of many people

market economy

an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services. in a market economy like we live in, coordination takes place without any coordination; each individual makes his or her own decision/choices

principle 5 (principles of interaction of individual choices)

there are gains from trade

trade

in a market economy individuals engage in trade: they provide goods and services to others and recieve goods and services in return.

gains from trade

people can get more of what they want through trade than they could if they tried to be self-sufficient

Specialization

each person specializes in the task that she or he is good at performing. the economy as a whole can produce more when each person specializes in a task and trades with others.

what is regarded as the beginning of economics as a discipline

Adam smith's 1776 book The Wealth of Nations. It talks about pin making and they make way more than they could've individually by specialization

Principle 6 (principles of interaction of individual choices)

markets move toward equilibrium. because people respond to incentives, markets move toward equilibrium. any time there is a change, the situation will move toward an equilibrium.

ex) grocery store line. one line is full and then a new till opens. people rush to that line until things settle down and both lines are the same length and its in equilibrium. invisible hand principle

Equilibrium

an economic situation is in equilibrium when no individual would be better off doing something different.

principle 7 (principles of interaction of individual choices)

resources should be used efficiently to achieve societies goals.

- "an economies resources are used efficiently when they are used in a way that has fully exploited all opportunities to make everyone better off".
-an economy is efficient if it takes all opportunities to make some people better off without making other people worse off.

an economy is effiecient if...

an economy is efficient if it takes all opportunities to make some people better off without making other people worse off. when an economy is efficient it is producing the max gains from trade possible given the resources available. when an economy is efficient, one person can be made better off by rearranging how resources are used only by making someone else worse off.

Equity

everyone gets his or her fair share

trade-off between equity and efficiency

there is typically a trade off between equity and efficiency: policies that promote equity often come at a cost of decreased efficiency in the economy. vice versa.
ex) having close parking spots for disabled people. desirable parking spots may be unused

principle 8 (principles of interaction of individual choices)

markets usually lead to efficiency.

-in a market economy, in which individuals are free to choose what to consume and what to produce, people normally take opportunities for mutual gain\-- that is, gains from trade.
-Because people usually exploit gains from trade, markets usually lead to efficiency.

exeptions to markets leading to efficiency

-market failure: individual pursuit of self-interest found in markets makes society worse off. market outcome\= inefficient

principle 9 (principles of interaction of individual choices)

when markets don't achieve efficiency, government intervention can improve society's welfare.

-when markets go wrong, an appropriately designed government policy can sometimes move society closer to an efficient outcome by changing how society's resources are used

Principle 10 (the principles of economy-wide interaction)

one person's spending is another person's income

-a chain reaction of changes in spending behavior tends to have repercussions that spread through the economy

principle 11 (the principles of economy-wide interaction)

overall spending sometimes gets out of line with the economy's productive capacity

-shortfalls in spending are responsible for most, though not all recessions

inflation

a rise in prices throughout the economy which occurs when overall spending is too high

principle 12 (the principles of economy-wide interaction)

government policies can change spending

-government itself spends a lot (military, healthcare) and can choose to do more or less
-taxes. the the amount of taxes determines how much is left for companies/individuals to spend
-control of quantity of money in circulation

what do microeconomists study

they study the attributes and behavior of the smallest possible economic actor. such as a person choosing what types of groceries to buy, or a firm choosing to hire another employee or to buy a new machine.

what do macroeconomists study

they study the attributes of many indivuduals interacting together. such as region and country. they study things like how a country can reduce unemployment or rate of inflation.

understanding individual parts (micro) is essential to understanding the bigger picture (macro). they are somewhat intertwined.

do people study better alone or in groups

studies show people who study in a group perform better than students on their own.

net marginal benefits principle

rational people will make an action only if the marginal benefits outweigh the marginal costs

model

a simplified representation of a real situation that is used to better understand real-life situations. models are important because they allow economists to focus on the effects of only one change at a time

other things equal assumption

"ceteris parabus" means that all other relevant factors remain unchanged. such as in the case of a model when an economist only wants to study one thing.

thought experiments

Simplified, hypothetical versions of real-life situations

3 types simple but important economic models and what they tell us

-production possibility frontier: helps economists think about trade-offs every economist faces
-comparative advantage: clarifies principle of gains from trade
-circular-flow diagram: schematic representation helping us to understand how flows of money goods and services are chanelled through the economy

production possibility frontier

illustrates the trade-offs faacing an economy that produces only two goods. It shows the max quantity of one good that can be produced for any given quantity produced of the other.

by simplifying reality, the ppf helps us understand some aspects of the real economy better than we could without a model; efficiency, opportunity and economic growth

If something is on its ppf then we say the economy is EFFICIENT IN PRODUCTION

every time you move from one point to another on a ppf, a trade-off must occur

point lies inside (below) ppf then it is considered....

feasable but inefficient

point lies outside (above) the ppf then it is considered...

not feasible

If an economy allocates its resources so that consumers are as well off as possible, it is said to be......

efficient in consumption

Efficiency notes

efficiency for the economy as a whole requires both efficiency in production and efficiency in production and efficiency in consumption: to be efficient, an economy must produce as much of each good as it can given the production of other goods and it must also produce the mix of goods that people want to consume.

when is a ppf a straight line

whenever we assume that the opportunity cost of an additional unit of a good doesn't change regardless of the output mix, the ppf is a straight line

the absolute value of the slope of a straight-line ppf is equal to the....

opportunity cost

when oppotunity costs are \______ rather than constant, the ppf is a (strictly concave) bowed-out curve rather than a straight line.

increasing

as more of a good is produced, its opportunity cost typically (falls/rises/stays the same) because well-suited inputs are already used up and less adaptable inputs must be used instead

rises

economic growth

the growing ability of the economy to produce goods and services. An expansion of the economy's production possibilities; that is... the economy can produce more of everything

factors of production

resources (labour, land, and capital) used to produce goods and services. if this increases an economy will grow.

human capital

refers to the educational achievements and skills of the labour force

Technology

the technical means for producing goods and services. the other source of economic growth

comparative advantage and gains from trade

if two places haves different opportunity costs for producing things they can benfit from trade, they can strike a deal that makes them both better off. one specializes in one thing and sells some to other and vice versa. usually you should specializes in the one with a lower opportunity cost

comparative advantage

a country has a comparative advantage in producing a good or service if its opportunity cost of producing the good or service is lower than that of other countries. likewise an individual has a comparative advantage in producing a good or service if his or her oppportunity cost of producing the good or service is lower than for other people. a country is willing to trade only if the 'price' of the good each country obtains in the trade is less than its own opportunity cost of producing the good domestically. everyone has comparative advantage in something and everyone has a comparative disadvantage in something

absolute advantage

a country has an absolute advantage in producing a good or service if the country can produce more output per worker than other countries. likewise, an individual has an absolute advantage in producing a good/service if he or she is better at producing it than other people. NOT THE SAME AS A COMPARATIVE ADVANTAGE

what is the basis for mutual gains from trade?

comparative advantage

comparative advantage and international trade, in reality

economists have a very positive view of international trade, since they view it in terms of comparative advantage. each country can consume more than if it didn't trade and remained self-sufficient

barter (transactions: the circular-flow diagram)

trade takes the form of barter when people directly exchange goods or services that they have for goods or services that they want. (not money)

circular-flow diagram

represents the transactions in an economy by flows around a circle

household

a person or a group of people that share their income

firm

an organization that produces goods and services for sale

markets for goods and services

firms sell goods and services that they produce to households in markets for goods and services

capital market

the market in which capital is bought and sold

factor markets

firms buy or rent the resources they need to produce goods and services in factor markets

income distribution

an economy's income distribution is the way in which total income is divided among the owners of various factors of production

what sort of real world complications does a circular flow diagram ignore

-is a small family business a household or a firm?
-firms often sell to companies and not households
-the government isn't in the diagram

positive economics

the branch of economic analysis that describes the way the economy actually works

normative economics

makes prescriptions about the way the economy should work

forecast

a simple prediction of the future

when and why do economists disagree?

for the most part they agree but the disagreeing times are often shown in the news making it seem like it occurs often. one important source of differences lies in values (individual belief). a second source of differences is models,,, 2 economists might disagree on which simplifications are appropriate, therefore arriving at different conclusions.

economic tradeoff airport example

waiting in a long airport line; giving up time and privacy for more security. economic tradeoff is sort of on a scale that you have to balance correctly to benefit

competitive market

a market in which there are many buyers and sellers of the same good or service, none of whom can influence the price at which the good or service is sold

supply and demand model

a model of how a competitive market behaves

in general, the amount of any good or service that people want to buy depends upon the \_____

price

demand schedule

a table showing how much of a good or service conusmers will want to buy at different prices

quantitiy demanded

the actual amount of a good or service consumers are willing to buy at some specific price

demand curve

a graphical representation of the demand schedule. It shows the relationship between quantity demanded and price. usually slopes downwards

Law of Demand

a higher price for a good or service, other things equal, leads people to demand a smaller quantity of that good or service

shift of the demand curve

a change in the quantity demanded at any given price, represented by the shift of the original demand curveto a new position, denoted by a new demand curve

"the demand for X increased" or "the demand for Y decreased"

movements along the demand curve

a change in the quantity demanded of a good arising from a change in the good's price

5 principle factors that shift the demand curve for a good or service:

-changes in the prices of related goods or services
-changes in income
-changes in taxes
-changes in expectations
-changes in the number of consumers

substitutes

two goods are substitutes if a rise in the price of one good leads to an increase in the demand for the other good

compliments

two goods are compliments if a rise in the price of one good leads to a decrease in the demand for the other good

normal good

the demand for them increases when income rises. When a rise in income increases the demand for a good\-- the normal case

inferior good

when a rise in income decreases the demand for a good. they are usually considered to be less desirable than more expensive alternatives. ex) bus vs taxi

individual demand curve

illustrates the relationship between quantity demanded and price for an individual consumer.

market demand curve

the horizontal sum of the individual demand curves of all consumers in that market

quantity supplied

the actual amount of good or service people are willing to sell at some specific price

supply schedule

shows how much of a good or service would be supplied at different prices

supply curve

shows the relationship between quantity suppied and price. usually slope upwards

shift of the supply curve

is a change in the quantity supplied of a good or service at any given price. it is represented by the change of the original supply curve to a new position, denoted by a new supply curve.

movement along the supply curve

a change in the quantity supplied of a good arising from a change in the good's price

economists believe that shifts of the supply curve for a good or service are mainly the results of 5 factors:

-changes in input prices
-changes in the prices of related goods/services
-changes in technology
-changes in expectations
-changes in the number of producers

input

a good or sevice that is used to produce another good or service