Intro to Microeconomics

Current Issues Facing the Canadian Economy

• COVID-19 Pandemic:

  • Resulted in temporary job losses and permanent business closures.
  • Led to massive government spending and increased government debt.

• Population Aging:

  • Decline in the growth of the labor force, leading to difficulties in finding workers and increasing wages.
  • Increased public health expenditure due to an aging population.
  • Changes in age pyramid, fertility rate, and life expectancy.

• Climate Change:

  • Challenge of reducing greenhouse gas emissions (GHGs) without hampering economic growth.

• Productivity Growth:

  • Slowing in Canada, affecting policies enacted by the government.

• Technological Change:

  • A crucial driver of long-term prosperity but also causes market disruptions.

• Rising Protectionism:

  • Trade-dependent countries facing challenges due to other nations being less willing to export.

• Growing Income Inequality:

  • Increasing income inequality within Canada.

• Government Debt and Priorities:

  • Concerns regarding plans to repay debt and the allocation of government priorities.

What is Economics?

• Defined as the study of how scarce resources are utilized to meet unlimited human wants.
• Resources Available:
  • Land: Natural resources used for production.
  • Labour: Human effort applied in the production process.
  • Capital: Tools, equipment, and buildings used to produce goods and services.
• Economists refer to these as Factors of Production.

Production and Consumption

• Production: Act of making goods and services.
• Consumption: Act of using goods and services.
• Goods: Tangible items that can be touched and used.
• Services: Intangible actions or activities provided to others.

Scarcity and Choice

• Resources are limited compared to human desires, leading to the necessity of making choices.
• Scarcity implies that not all wants can be met.

Opportunity Cost

• Choices made incur costs; the more of one thing pursued, the more of another thing that is forfeited.
• Opportunity Cost: Value of the next best alternative that is sacrificed when making a choice.
• It is represented as a ratio, considering the benefits given up when alternatives are chosen.

Production Possibility Boundary (PPB)

• PPB illustrates the concepts of scarcity, choice, and opportunity cost.

Four Key Economic Problems

1. What is produced and how?

   • Resource allocation influences the quantity and types of goods produced.
   • Questions arise about the best combinations of goods and government intervention.

2. What is consumed and by who?

   • Determines the distribution of total output among individuals in society.
   • Evaluates fairness and interventions required to alter consumption distribution.

3. Why are resources sometimes idle?

   • Presence of idle resources indicates the economy isn't operating at full capacity (inside the PPB).
   • Raises questions about the reasons for idleness and its implications for economic functioning.

4. Is productive capacity growing?

   • Economic growth shifts the PPB outward, indicating an ability to produce more varieties of goods.
   • Considers which goods were previously attainable and what changes occur post-growth.

Microeconomics vs Macroeconomics

• Questions 1 and 2 relate to Microeconomics:
  • Study of resource allocation consequences and the price system's effects.
• Questions 3 and 4 relate to Macroeconomics:
  • Study of aggregate economic measures like total output and employment.

Economics & Government Policy

• Government actions influence all four key economic questions:
  • Market Failures: Correct misallocated resources.
  • Distributional Fairness: Address consumption inequalities.
  • Idle Resources: Implement strategies to minimize resource idleness.
  • Promoting Growth: Encourage economic expansion.

Nature of Market Economies

• Self-Organizing Market Economy:

  • When individual actions of consumers and producers lead to coordinated outcomes through their self-interests.

• Efficiency in Market Economies:

  • Resources organized to produce goods and services that consumers desire, with minimal waste.

• Incentives and Self-Interest:

  • Individuals act in self-interest and respond to incentives (higher prices may increase supply).

Decision Makers in the Economy

• Consumers: Decisions on what to buy and how much.
• Producers: Decisions on what to produce and for whom.
• Government: Decisions on resource allocation to productive uses.

Decision-Making Processes

• Assumptions in economics:
  • Decisions made by consumers and producers aim to maximize benefits (maximizing behavior).
  • Assessing marginal costs and benefits is crucial in the decision-making process.

Circular Flow of Income & Expenditure

• Red Line: Represents the flow of goods and services.
• Blue Line: Represents monetary payments for those goods and services.

Production & Trade

• Producers must assess which goods to produce and their methods.
• Specialization: Different jobs assigned to various workers enhances efficiency.
• Division of Labour: Focuses specialization within the production process, aligning with necessary trade arrangements.

Types of Economic Systems

• Three Pure Economy Types:
  • Traditional, Command, and Free-Market Economies.
• Most real-world economies are classified as mixed economies, combining elements from the three.

The Great Debate

• Karl Marx argued against free-market systems for fair output distribution, advocating for centrally planned economies.
• Many countries influenced by Marx transitioned toward free-market systems due to better economic outcomes.

Role of Government in Mixed Economies

• Essential institutions such as private property and freedom of contract established by governments.
• Government intervenes to:
  • Correct market failures and provide public goods.
  • Address side effects (externalities) of economic activities.
  • Improve overall social welfare through policy interventions.