Economics unit 1 study unit

1. Define: Economics, Scarcity, Opportunity Cost, Law of Diminishing Returns, Law of Increasing Returns to Scale

Economics - Economics is the social science that studies how people cope with the ever-present problem of scarcity. Economics is the study of scarcity and choice. Scarcity = central concept, the big problem we try to solve in economics, there’s not enough to go around

Scarcity - The fundamental economic problem of having limited resources but unlimited wants.

Opportunity Cost - (alternative cost) refers to the alternative that is sacrificed when a choice is made 

Law of Diminishing Returns 

• Law of Diminishing Returns (Like Too Many Cooks in the Kitchen 🍳)

Imagine you're baking cookies. At first, when you have just one person, they do everything. If you add a second person, things get faster—they can mix while you prepare the tray. A third person? Even better!

But if you keep adding more people, at some point, it gets too crowded. People start bumping into each other, arguing over tasks, and slowing things down. That’s the Law of Diminishing Returns—after a certain point, adding more workers (or resources) doesn’t help as much and might even make things worse.

Law of Increasing Returns to Scale 

• Law of Increasing Returns to Scale (Like a Bigger Factory 🏭)

Now imagine you own a lemonade stand. If you double your lemons, sugar, and cups, you can make twice as much lemonade. But if you also get a bigger stand, better machines, and more helpers, you might be able to make more than double the lemonade because everything works more efficiently.

That’s the Law of Increasing Returns to Scale—when you increase all your resources, you get even more output than expected because everything works together better! 🚀

2. Intangible vs. Tangible good

• Tangible Goods: Physical products (e.g., cars, food).

• Intangible Goods: Non-physical products (e.g., services, digital products).

3. 3 Basic Economic Questions.

1. What to produce? – Deciding which goods and services should be produced based on resources and societal needs.

2. How to produce? – Determining the methods and resources used in production (labor vs. capital-intensive, sustainable methods, etc.).

3. For whom to produce? – Deciding how goods and services are distributed among people in society.

4. Factors of Production or can be termed economic resources

• Land – Natural resources.

• Labour – Human effort.

• Capital – Machinery, tools, and buildings.

• Entrepreneurship – Innovation and risk-taking in business.

5. 6 Steps in the Economic Problem Solving Model

Steps in the Economic Problem Solving Model

1. Identify the problem carefully and accurately

2. Identify the goals/values (criteria)

3. List the alternatives

4. Evaluate each alternative (cost-benefit analysis)

5. Choose an alternative

6.  Verify your results

6. Four Hidden Fallacies

1⃣ Post Hoc Ergo Propter Hoc (False Cause Fallacy) – Assuming that because one event happened before another, the first caused the second.

• Example: "I wore my lucky socks, and my team won. My socks must have caused the win!"

2⃣ Fallacy of Composition – Assuming that what’s true for one part must be true for the whole.

• Example: "One student in the class is a genius, so the whole class must be full of geniuses."

3⃣ Fallacy of Single Causation – Blaming a complex event on just one cause when many factors are involved.

• Example: "The Great Depression happened because of the stock market crash." (It was actually caused by multiple factors.)

4⃣ Loaded Terms – Using emotionally charged words to manipulate opinion instead of presenting facts.

• Example: Calling a protester a "freedom fighter" vs. a "rioter" to sway opinions.

7. Positive vs. Normative Statements

Positive Statements (Fact-Based) 📊

These statements can be tested or proven with evidence.

1⃣ "An increase in the minimum wage leads to higher labor costs for businesses."

• This is based on economic principles and can be analyzed using data from businesses.

2⃣ "Canada's inflation rate was 3.5% last year."

• This is a measurable fact that can be verified using official economic reports.

3⃣ "A decrease in interest rates encourages more borrowing and spending."

• Historical trends and data show that when interest rates drop, people and businesses tend to borrow more.

Normative Statements (Opinion-Based) 💭

These statements reflect values or opinions and cannot be tested.

1⃣ "The government should increase the minimum wage to reduce poverty."

• This is a judgment about what should be done, based on a belief that higher wages help the poor.

2⃣ "Taxes on the wealthy ought to be higher to promote fairness."

• This is an opinion on how tax policy should be structured, which depends on personal views of fairness.

3⃣ "Healthcare should be free for everyone."

• This is a value-based statement about what ought to happen, rather than an objective fact.

Key Difference: Positive = Can be tested ✅ | Normative = Opinion-based ❌

8. Canadian Economic Goals

• Political stability

• Reduced public debt

• Economic growth

• Increased productivity

• Equitable distribution of income

• Price Stability

• Full employment

• Viable balance of payments and stable currency

• Economic Freedom

• Environmental stewardship

9. Illustrate points of underemployment, full employment and overemployment of the factors of production on the PPC curve.

• Underemployment: Inside the curve (resources not fully used).

• Full Employment: On the curve (efficient use of resources).

• Overemployment: Outside the curve (not sustainable).

10. What are the reasons the PPC can increase? Decrease?

Reasons PPC Increases (Shifts Right) 🚀

• More Resources – Discovery of new land, minerals, or oil.

• Better Technology – Innovations improve efficiency and output.

• Improved Education & Training – Skilled workers boost productivity.

• Higher Population – More workers available for production.

• More Capital Goods – More factories, tools, and infrastructure.

• Trade & Specialization – Increases efficiency and access to resources.

• Stable Government & Policies – Encourages investment and economic growth.

Reasons PPC Decreases (Shifts Left) 📉

• Resource Depletion – Loss of natural resources due to overuse or disasters.

• Technology Loss – Outdated methods or lack of innovation.

• Decline in Workforce – Aging population, emigration, or health crises.

• War & Political Instability – Disrupts production and investment.

• Economic Recession – Business closures, unemployment, and reduced investment.

• Natural Disasters – Earthquakes, floods, or droughts destroy resources.

• Bad Policies & Corruption – Discourages investment and reduces productivity.

11. Microeconomics vs. Macroeconomics

Microeconomics - (Price theory) Deals with the behaviour of individual economic units (Small) 

Macroeconomics - Examines the economy as a whole rather than the individual units (Whole country) 

12. Real flows vs. money flows

Money Flow - Flow of actual money; economists do not count on these flows; very volatile (e.g., wages, rent, interest, profits) 

Real Flow - Flow of actual goods/services; we economists prefer Real flows (e.g., labor, raw materials, finished products) 

Economists generally focus more on real flows because they represent the actual goods, services, and resources being produced and exchanged in an economy. Real flows directly reflect economic activity, production, and consumption. Money flows, while important for understanding the distribution of income and payments, are secondary in analysis, as they are just the medium facilitating the exchange of real goods and services.

13. Difference between 3 economic systems

Market Economy – Driven by supply and demand, minimal government intervention.

Command Economy – Government controls production and distribution.

Mixed Economy – Combines elements of market and command economies.

14. 4 Political Ideologies – know the spectrum

Here’s a breakdown of Communism, Socialism, Capitalism, and Fascism across 11 key categories:

15. What is economic value?

• Scarcity compared with demand -) the higher the market price, the more abundant the item compared with demand

•  Difficult to dictate economic value on such things as AIR and WATER

• Drinking water does have economic value (i.e. bottled water)

• Paradox of Value: a diamond is useless, yet has greater economic value

Economic value is the worth of a good or service based on people's willingness to pay for it. It depends on:

1⃣ Scarcity – If something is rare, it tends to be more valuable.

2⃣ Utility (Usefulness) – If something is useful, people are more likely to pay for it.

3⃣ Demand – If many people want something, its value increases.

16. What is consumer sovereignty?

• Consumers in the market economy decide on allocation of goods • Consumer sovereignty does not exist in command economic system • No countries economic system is ever static - NO pure economic system

1⃣ Consumers in a Market Economy Decide on Allocation of Goods

• In a market economy (capitalism), consumers have the power to decide what gets produced by choosing what to buy.

• If many people buy a product, businesses make more of it. If demand drops, production slows down.

• This is called consumer sovereignty—the idea that consumers control the market.

2⃣ Consumer Sovereignty Does Not Exist in a Command Economy

• In a command economy (communism), the government decides what goods are produced, how much, and at what price.

• Consumers do not have a choice in what gets made—production follows government plans, not demand.

• Example: In the Soviet Union, the government set production goals for industries instead of responding to consumer demand.

3⃣ No Country Has a Pure Economic System

• Economic systems are always changing and evolving.

• No country is fully capitalist or fully communist—most economies are mixed, combining elements of both.

• Example:

  • The U.S. is mostly capitalist but has government programs like Social Security.

  • China has a government-controlled economy but allows private businesses to operate.

📌 Key Takeaway: Consumer power exists in market economies but not in command economies. And in reality, every country has a mixed economy, not a pure system.

17. Paradox of Value

Why Does This Happen?

The paradox is explained by two key economic concepts:

1. Total Utility vs. Marginal Utility

   • Water is essential for survival, so its total utility is very high. However, because water is abundant, each additional unit provides low marginal utility, meaning people are willing to pay less for it.

   • Diamonds are not essential, but they are scarce. Since people have very few diamonds, the marginal utility of each additional diamond is high, making them more expensive.

2. Supply and Demand

   • Water has a high supply, keeping prices low.

   • Diamonds have a low supply, driving prices up.

Real-World Example

Imagine being stranded in a desert with no water. At that moment, you would likely trade a diamond for a bottle of water because the marginal utility of water is extremely high in that situation. However, in normal circumstances where water is abundant, you wouldn’t pay much for an extra glass.

Conclusion

Value isn’t just about necessity—it depends on scarcity and marginal utility, which is why diamonds cost more than water, despite water being more important for survival.

18. Government Intervention

Government intervention is when the government gets involved in the economy to influence markets, correct problems, or achieve economic goals.

Why Does the Government Intervene?

• To regulate businesses (prevent monopolies, ensure fair competition).

• To protect consumers (set safety standards, prevent fraud).

• To provide public goods (roads, schools, healthcare).

• To stabilize the economy (control inflation, reduce unemployment).

• To reduce income inequality (welfare programs, minimum wage laws).

Example of Government Intervention:

📌 Price Controls – The government sets a maximum or minimum price for a product.

• Example: Rent control laws limit how much landlords can charge for rent, making housing more affordable.

• Effect: Helps renters but may discourage landlords from building more housing.

19. Chapter 3 Economic Theorists – all notes

• Adam Smith 

• Thomas Robert Malthus 

• David Ricardo 

• Karl Marx 

• John Maynard Keynes 

• John Kenneth Galbraith 

• Milton Friedman