Econ 1010- Midterm 1

Week 1

Scarcity-  Our inability to satisfy all our wants. 

Incentive- A reward that encourages an action or a penalty that discourages action. 

Economics-  Economics is the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices. 

Microeconomics- Microeconomics is the study of choices that individuals and businesses make, the way those choices interact in markets, and the influence on governments. 

Why are people buying more e-books and less hard copy books? an example of a microeconomics question. 

Macroeconomics- Macroeconomics is the study of the performance of the national and global economies.

Why does the unemployment rate in Canada Fluctuate? is an example of a macroeconomics question. 

Factors of Production-  These are what are used to produce goods and services and they are divided into 4 groups Land, Labour, Capital, Entrepreneurship.

Land- The gifts of nature we use to produce goods and services. 

Land earns Rent

Labour- The work time and effort people put into producing goods and services. 

Labour earns wages

The quality of Labour is based on the Human Capital. 

Human Capital- The knowledge and skill people obtain from education, on-the-job training, and work experience.

Capital- The tools, instruments, machines, buildings, and other constructions that businesses use to produce goods and services.

Capital earns interest

Entrepreneurship- The human resource that organizes land, labour, and capital.

Entrepreneurship earns profit

Self Interest- Choices that you think are best for you

Social Interest- Choices that are best for society as a whole.

Social Interest has 2 dimensions Efficiency & Equity 

Efficiency- When it is not possible to make someone better off without making someone else worse off, then the resource use is efficient.

Equity- Equity is fairness, which economists have a variety of definitions for

Benefit- Benefit is what you gain from something and this is determined by someones preferences. Benefit is also one of the 6 key ideas of economic thinking.

Choice- A choice is a tradeoff. it is also one of the 6 key ideas of economic thinking.

Rational Choice- A Rational Choice is one that compares the costs and benefits achieves the greatest benefit over cost. It is also one of the 6 key ideas to the economic way of thinking.

Only the wants of the person making a choice are relevant to determine its rationality 

Opportunity Cost- The opportunity cost of something is the next best alternative that must be given up to get it. Opportunity cost is one of the 6 key ideas of economic thinking

Example of Opportunity cost- What is the opportunity cost of going to a Griselda concert. The opportunity cost has 2 components. Firstly, the things i wont be able to afford if i buy the ticket and Secondly, the things i cant do with my time if i go to the concert.

Choosing at the Margin- This is just making the decision of how you allocate something by weighing the Marginal Cost & Marginal Benefit. Choosing at the margin is one of the 6 key ides in economic thinking

Marginal Cost- This is the opportunity cost from pursuing an incremental increase in an activity.

Marginal Benefit- This is the benefit from pursuing an small increase in an activity. We measure marginal benefit by the amount that as person is willing to pay for an additional unit of a good or service

If the marginal benefit  from a small increase in an activity exceeds the marginal cost, your rational choice is to do that activity.

Choices Respond to Incentives- A change is the marginal cost or marginal benefit changes the incentives we face and that can lead us to change our choices. This is also apart of one of the 6 key ideas that make up economic thinking.

The central idea of economics  is that we can predict how choices will change by looking at the change in incentives.

Positive Statement- A positive statement can be tested by checking it against fact.

Normative Statement- A normative statement expresses an opinion and cannot be tested

Production Possibility Frontiers (PPF)- PPF is the boundary between the combinations of goods and services that can be products and the ones that cannot

Point on the frontier are efficient.

Any point inside the frontier is inefficient

Every choice along the PPF involves a tradeoff

As we move down along the PPF we produce more of pizza but we produce less cola. The opportunity cost of a pizza is the cola

Because resources are not equally productive the PPF bows outward (is concave). The outward bow of the PPF means that as the quantity produces of each good increases, so does its opportunity cost.

Another way to look at it is from E to F the pizza quantity increases by 1 million and the quantity of coke decreases by 5 million cans. the opportunity cost of 1 million pizzas is 5 million cans of coke. One pizza cost 5 cans of cola


Product Efficiency- We achieve production efficiency if we cannot produce more of one good without producing less of some other good. 

Principle of Decreasing Marginal Benefit- The more we have of any good, the smaller is its marginal benefit and the less we are willing to pay for an additional unit of it.

Allocative Efficiency-  This is when we cannot produce more of a good without giving up some other good that we value more highly. This is the point on the PPF where marginal benefit equals marginal cost. The point is determine by where the marginal benefit curve crosses the marginal cost curver 

Economic Growth- The Expandsion of production possibilities and increase in the standard of living. The 2 key factors that influence economic growth are techonological change & capital accumulation.

The opportunity cost of economic growht is less current consumption

Technological Change- This is the development of new goods and of better ways of producing goods and services

Capital Accumulation- This is the growth of capital resources which includes human capital

Law of Demand- If other things say the same, the higher the price of a good, the smaller the quantity is demanded. In contrast, the lower the price, the larger the demand. The law of demand comes from the substitution effect & income effect.

Substituition Effect- When the relative price (opportunity cost) of a good or service rises, people seek substitutes for it, so the demand of the good/service decreases.

Income Effect- When the price of a good or service rises relative to income, people cannot afford all the things they used to buy, so the demand of the good/service decreases.

Demand- The term demand talks about the relationship between the price of the good and the quantity people want of th good. 

When demand increases, the demand curve shifts rightward. When demand decreases, the demand curve shifts leftward.

The 6 main factora of demand are 

  • The prices of related goods

  • Expected future prices

  • Income

  • Expected future income & credit

  • Population

  • Preferences

Substitute- A substitute is a good that can be used in place for another good.

Complement- A good that is used in conjunction with another good

When the price of the substitute for an energy bar rises or the price of a complement of an energy bar falls, the demand for an energy bar increases

 Demand Curve- The demand curve shows the relationship between the quantity demanded of a good and it’s price when all other influences on consumers’ planned purchases remain the same.

A demand curve has also been called a willingness-and-ability to pay curve. Willingness to pay measures Marginal Benefit

Change in Demand-  When some influence on buying plans other than the price of the good changes, there is a change in demand for that good.

Lecture 1

 

Define economics and distinguish between microeconomics and macroeconomics

Economics is the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices


Explain the 2 big questions of economics

How do choices end up determining What, How, and For Whom goods and services get produced?

What refers to what good or service is being produced and how those choices are made.

The answer to this question is we create goods that people rationally choose to buy.

How speaking about how goods and services are being produced, more specifically, the 4 factors of production.

For whom  refers to who gets the goods and services which itself depends on the incomes people earn.

Do choices made in the pursuit of self interest also promote the social interest?

To find this out we must know if it fits the 2 dimensions of social interest efficiency and Equity. 


Explain the key ideas that define the economic way of thinking

  1. A choice is a tradeoff

  2. People make rational choices by comparing benefits and costs

  3. Benefit is what you gain from something 

  4. Cost is what you have to give up to get something

  5. Most choices are “how-much” choices made a t the margin

  6. Choices respond to incentives

Explain how economists go about their work as social scientists and policy advisers

Economists distinguish between two types of statement 

  • What is— Positive statements

  • what ought to be— normative statements