Economic Principles and Thinking Study Notes

Scarcity: Resources are limited and therefore society cannot produce all the goods and services people wish to have.
Economics: The study of how society, consumers, firms, and governments manage scarce resources. Economists analyze:
- How much to work and at what wages.
- What to buy and how.
- How much to save and where to invest.
- How buyers and sellers together determine market conditions (price and quantity).
Supply and Demand: Understanding the effects of any event or policy on the economy requires first considering its impact on supply and demand.

Efficiency: The property of society getting the most it can from its scarce resources.
Equity: The property of distributing economic prosperity fairly among members of society.
Tradeoff: Policies aimed at achieving a more equitable distribution of economic well-being may result in reduced efficiency. For example:
- Income Tax: Used to support government policy for those in need (e.g., disability insurance, employment insurance) increases equity but reduces incentives to work, thereby reducing efficiency.

Opportunity Cost: The cost of an item is whatever must be given up to obtain it. For instance:
- The cost of a university education includes tuition and the potential earnings lost during that time.
- For college-age athletes, choosing to play professionally can have a high opportunity cost; e.g., Victor Wembanyama earned $12.2 million in his rookie year with the San Antonio Spurs in 2023.

Rational People: Individuals who make decisions systematically and purposefully to achieve their objectives.
Marginal Changes: Small incremental adjustments to a plan of action. A person will take action if the marginal benefit exceeds the marginal cost. Examples:
- Airlines may sell tickets below average cost as long as prices exceed marginal cost.
- Water is valued less than diamonds, unless stranded in the desert.

Incentives: Factors that induce people to act. Example:
- Seat belt laws influence drivers’ cost-benefit calculations, making them more inclined to speed despite the safety increased by seat belts.

Trade allows countries to specialize in their strengths, thus enjoying a greater variety of goods and services. Interaction between Canada and the USA serves as an example:
- Canada provides affordable aluminum due to hydroelectric power; the USA supplies fruits due to a longer growing season.

Market Economy: Allocates resources through decentralized decisions of firms and households as they interact in markets for goods and services.
Invisible Hand: Coined by Adam Smith, describes how these interactions lead to desirable market outcomes. Example:
- Uber uses surge pricing to allocate rides based on demand and willingness to pay.

Market Failures: Situations such as pollution, where government intervention may promote efficiency or equity, i.e.:
- Enforcing Property Rights: Essential for individuals or firms to own and control scarce resources. Examples:
- A farmer won't plant crops if they expect theft.
- Film studios won't produce if customers can evade paying.

Productivity: The quantity of goods and services produced per hour of a worker's time. An increase in productivity leads to higher wages and lower prices.

Inflation: An increase in the overall price level in the economy. The primary cause of persistent inflation is often due to excessive growth in money supply:
- Historical context: During the 1970s, Canada witnessed an average inflation of 8% per year; prices more than doubled in a decade.
- In the 1990s, inflation averaged about 2% per year, where it would take 35 years for prices to double at that rate.

Business Cycle: Refers to irregular and unpredictable fluctuations in number of employed and output of goods and services.
Monetary Stimulus: Increasing money supply stimulates spending demand, leading to greater goods and services production and reduced unemployment.

Positive Statement: A claim describing the world as it is that can be confirmed or refuted with evidence. Example:
- "Prices rise when the government increases the quantity of money."
Normative Statement: A claim on how the world should be, often involving ethical or value judgments. Example:
- "The government should print less money."

Positive: An increase in the minimum wage will lead to higher unemployment among teenagers.
Normative: The government should increase minimum wage to reduce poverty.
Normative: It is unfair that some people earn significantly more than others.
Positive: The inflation rate in Canada was 75% last year. (False statement, but still a positive statement.)

Economists in various departments (e.g., Finance Canada, Competition Bureau) guide policies and analyze data to inform labor market and environmental regulations.
While economists offer policies, there are practical challenges and political considerations in implementing those policies.