CAitlyn ramsay
CAITLYN RAMSAY 1
MICROECONMICS~ Chapter one and two CHAPTER ONE WHAT IS ECONMICS? • • •
•
A fundamental fact dominates our lives: We want more than we can get. o SCARCITY~ our inability to get everything we want. Scarcity confronts all living things What you can afford to buy is limited by your income and by the prices you must pay. Also your time is limited because there are only 24 hours in a day. Where you want to live and the type of environment you want to be surrounded by is based on the limits of the government, which is from the taxes they collect. This then lowers people incomes affecting the choices they make…. (ALL ONE BIG CYCLE). Your choices must somehow be made consistent with the choices of other you do one thing they have to do the other thing. o INCENTIVE~ is a reward that encourages an action or a penalty that discourages one. Prices act as incentives high price= more for sale, low price= less for sale
ECONOMICS~ is the social science that studies the choices that individuals, businesses, government, and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices. Two parts: • •
Microeconomics~ choices individuals and businesses make, the way these choices interact in markets and influence of governments Macroeconomics~ the performance of the national economy and the global economy.
WHAT, HOW AND FOR WHOM? GOODS AND SERVICES~ are the objects that people value and produce to satisfy human wants. • Goods~ are physical objects • Services~ are tasks performed for people WHAT? What we produce varies across countries and changes over time. HOW? Goods and services are produced by using productive resources that economist call factors of production, these are grouped into for categories. • Land~ the gifts of nature that we use to produce goods and services= natural resources
2 CAITLYN RAMSAY •
•
•
Labour~ the work time and work effort that people devote to producing goods and services. Includes all the physical and mental efforts of all people who work on farms and construction sites and factories, shops and offices. Capital~ the quality of labour depends on human capital knowledge and skill people gain from education, on job training and workexperience. Capital the tools, instruments, machines, buildings and other constructions that businesses use to produce goods and services. Financial capital stocks and bonds. Financial capital plays and important role in enabling businesses to borrow the funds that they use to buy physical capital. Doesn’t produce goods and services so it is not a productive resources Entrepreneurship~ the human resource that organizes labour, land and capital. Come up with new ideas for production, business decisions and the risks.
WHOM? Large incomes=more purchases, smaller income=less purchases, people earn their incomes by selling the services of the factors of production they own: • Land earns rents • Labour earns wages • Capital earns interest • Entrepreneurship earns profit LABOUR EARNS THE MOST INCOME!!
CAN THE PURSUIT OF SELF-INTEREST PROMOTE THE SOCIAL INTEREST? SELFINTERST A choice is in you selfinterest if you think that choice is the best one available for you. You don’t think much about your choice will affect others. SOCIAL INTEREST A choice is in the social interest if it leads to an outcome that is the best for society as a whole. Social interest has two dimensions: • Efficiency~ is achieved when the available resources are used to produce goods and services at the lowest possible cost and in the quantities that give the greatest possible value or benefit. • Equity~ Variety of views about what is fair. THE BIG QUESTION • Globalization o Expansion of international trade, borrowing and lending and investment. Selfinterest consumers who buy lowcost goods and services produced in other countries. Businesses who buy in low sell in high. • The informationage economy o Technological change, selfinterest produced your cell, laptop etc.
CAITLYN RAMSAY 3 • •
Climate change o Everyday when you make selfinterest choices to use electricity and gasoline you contribute Economic instability o 29932007, great stability called the GREAT MODERATION. In 2008 though one bank in France had financial difficulty and started the tumble of the economy, leading to the recession.
THE ECONOMIC WAY OF THINKING A CHOICE IS A TRADEOFF Tradeoff~ is an exchange, giving up one thing to get something else. MAKING A RATIONAL CHOICE Rational choice~ is one that compares costs and benefits and achieves the greatest benefit over cost or the person making the choice. Only wants of the person making the choice are relevant to determine its rationality. What is produced is based on what people rationally choose to buy BENEFIT: WHAT YOU GAIN Benefit~ something is the gain or pleasure that it brings and is determines by preferences (what a person likes and dislikes and the intensity of those feelings). Measure benefits as the most that a person is willing to give up to get something. COST: WHAT YOU MUST GIVE UP OPPROTUNITY COST~ something is the highest valued alternative that must be given up to get it. Most opportunity cast involve choosing how much of an activity to do. The more you do of one the less you do of the other. HOW MUCH? CHOOSING AT THE MARGIN Marginal benefit~ the benefit that arises from an increase in an activity. Marginal cost~ the opportunity cost of an increase in an activity. To make decisions you compare marginal benefits to marginal cost. If the marginal benefit exceeds the cost you choose to do the activity. CHOICES RESPOND TO INCENTIVES Economist take human nature as a given view people as acting in their self interest. Not always selfish!! But whatever act gets the most benefit for you and your view of that benefit. CENTRAL IDEA economics is that we can predict the selfinterested choices that people make by looking at the incentives they face. Institutions play a crucial role in influencing peoples incentives.
4 CAITLYN RAMSAY
ECONOMICS AS SOCIAL SCIENCE AND POLICY TOOL Positive statements About what is. What is currently believed about the way the world operates. May be right or wrong, check by putting it against the facts. Economists weed out those that are wrong. Normative Statements About what ought to be. Depends on values and cannot be tested. You may or may not agree but you can’t test it, doesn’t assert a fact. Unscrambling Cause and effect Economic model~ a description of some aspect of the economic world that includes only those features that are needed for the purpose at hand. A model is tested by comparing its predictions with the facts. But testing an economic model is difficult because we observe the outcomes of what the simultaneous change of many factors. Look for natural experiments situations in the ordinary course of the economic life in which the one factor of interest is different and other things are equal or similar. ECONOMIST AS POLICY ADVISER Toolkit for advising government and businesses for making personal decisions. All advice requires positive and normative, comparing marginal benefits and cost and finding the solution that makes the best use of the available resources.
GRAPHING DATA—please reference pages 1325 for a better understanding A graph represents a quantity as a distance on a line. Two scale lines perpendicular to each other are know as axes, the vertical axis is the yaxis and the horizontal axis is the xaxis. Where the two axes meet at zero is know as the origin. A coordinate is the distance from the axis to the point. Economists create graphs based on the principles to reveal, describe and visualize the relationships among variables. Scatter diagram~ is a graph that plots the value of one variable against the value of another variable for a number of different values of each variable. Reveals whether a relationship exists between two variables and describes that relationship. Breaks in the axis The breaks in the axes are shown by small gaps. The breaks indicate that there are jumps from the origin 0, to the first values recorded. This is to spread out the data if the first value is a very high number Misleading Graphs To put a break in the axis and to either stretch or compress the scale. To avoid being misled, always look closely at the values and the labels on the axes of a graph before you start to interpret it. Correlation and Causation
CAITLYN RAMSAY 5 A scatter diagram that shows a clear relationship between two variables, tell us that the two variables have a high correlation. When a high correlation is present, we can predict the value of one variable from the value of the other variable. Correlation does not simply imply causation!!!!
GRAPHS USED IN ECONOMIC MODELS Graphs in Economics are usually used to show the general relationships among the variable in an economic model. Economic model a strippeddown, simplified description of an economy or of a component of an economy such as a business or household. Variables that move in the same direction Positive relationship/ direct relationship~ a relationship between two variables that move in the same direction, line that slopes upward. Linear relationship~ a relationship shown by a straight line. Variables that move in opposite directions Negative relationship/ inverse relationship~ when variables move in opposite directions. Slopes downward!! Variables that have a maximum or a minimum Most economic cost relationships are like this. Variables that are unrelated No matter what happens to the value of one variable the other variable remains constant.
THE SLOPE OF A RELATIONSHIP Slope~ relationship is the change in the value of the variable measured on the y axis divided by the xaxis. (Rise over run). If a large change in the variable measured on the yaxis is associated with a small change in the variable measured on the xaxis, the slope is large and the curve is steep. If the small change in the variable measured on the yaxis is associated with a large change in the variable measured on the xaxis, the slope is small and the curve is flat. The slope of a straight line Slope of a straight line is always the same The slope of a curved line Slope of a curved line is not constant; slope depends on where we calculate it on the line. Two ways to calculate slope of a curved line: Slope at a point: Use a point to form a tangent and then calculate rise over run. Slope across an arc: draw a line between to points and then calculate the average slope between the two points.
6 CAITLYN RAMSAY
GRAPHING RELATIONSHIPS AMONG MORE THAN TWO VARIABLES Ceteris Paribus Ceteris Paribus~ means if all other relevant things remain the same. Everything constant except for the variable whose effect is being studied. When other things change Movement along and shifts of curves happen at many points in economics.
CHAPTER TWO PRODUCTION POSSIBILITIES AND OPPROTUNITY COST PRODUCTION POSSIBILITIES FRONTIER
CAITLYN RAMSAY 7 Production possibilities frontier (PPF)~ is the boundary between those combinations of goods and services that can be produced and those that cannot. WE look at a model economy in which everything remains the same except for the production of the two goods we are considering. The PPF illustrates the scarcity because we cannot attain the points outside the frontier. These points describe wants that can’t be satisfied. We can produce at any time points inside or on the PPF. PPF graphs also show other production possibilities, example producing all of one and none of the other. PRODUCTION EFFICIENCY Production efficiency~ if we produce goods and services at the lowest possible cost. Occurs at all points on the PPF. Points inside are inefficient because we are giving up more then necessary of on good to produce a given quantity of the other good. Production inside the PPF are inefficient because the resources are either unused or misallocated or both. Resources are unusedwhen they are idle but could be working Resources are misallocated when they are assigned to tasks for which they are not the best matches. TRADEOFF ALONG THE PPF Tradeoffs arise in every situation in which a choice is made. We are limited to hat we can produce, this limit defines a boundary between what we can attain and what we cannot attain. This b0oundary is the realworlds production possibilities frontier and it defines the tradeoffs that we must make. OPPROTUNITY COST The opportunity cost of an action is the highest valued alternatives. The PPF makes this idea precise and enables us to calculate opportunity cost. Opportunity cost is a ratio. It is the decrease in the quantity produced of one good divided by the increase in the quantity produced of another good as we move along the production possibilities frontier. The opportunity cost of a product increases as the quantity of the product increases
USING RESOURCES EFFICIENTLY Allocative efficiency~ When goods and services are produced at the lowest possible cost and in the quantities that provide the greatest possible benefit. THE PPF AND MARGINAL COST
8 CAITLYN RAMSAY Marginal cost~ the opportunity cost of producing one more unit of it. Calculate marginal cost from the slope of the PPF. AS the quantity of one product produced increases, the PPF gets steeper and the marginal cost of that product increases. PREFERENCES AND MARGINAL BENEFIT • Marginal Benefit~ from a good or service is the benefit received from consuming one more unit of it. Depends on people’s preferences. • Marginal benefits and preferences stand in sharp contrast to marginal cost and production possibilities. Preferences describe what people like and want and the production possibilities describe the limits or constraints on what is feasible. • Marginal benefit curve~ the device that we use to illustrate preferences. Relationship between the marginal benefit from a goods and the quantity consumed of that good. UNRELATED TO PPF. • Measure marginal benefit from a good or service by the most that people are willing to pay for an additional unit. More we have, smaller the marginal benefit and the less we are willing to paycalled PRINCIPLE OF DECREASING MARGINAL BENEFIT. Main reason for decrease is we like variety and are always looking for the new best thing. ALLOCATIVE EFFICIENCY At the best point on the PPF, we cannot produce more of one good without giving up some other good that provides greater benefit. ALLOCATIVE EFFICIENCY the point on the PPF that we prefer above all other points.
ECONOMIC GROWTH Economic growth~ the expansion of production possibilities. Increases our standard of living, the faster we make production grow, the greater is the opportunity cost of economic growth. THE COST OF ECONOMIC GROWTH Technological change~ is the development of new goods and of better ways of producing goods and services. Capital accumulation~ is the growth of capital resources including human capital. • If we use our resources to develop new technologies and produce capital, we must decrease our production of consumption goods and services. The amount by which our production possibilities expand depends on the resources we devote to technological change and capital accumulation. The fewer resources you use on one product the greater expansion you can make on the other product. A NATIONS ECONOMIC GROWTH To expand production possibilities in the future, a nation must devote fewer resources to producing current consumption goods and services and some resources to accumulating capital and developing new technologies. As production possibilities expand consumption in the future can increase.
CAITLYN RAMSAY 9
GAINS FROM TRADE
Producing only one good or a few goods is SPECALIZATION!!!
COMPARATIVE ADVANTAGE AND ABSOLUTE ADVANTAGE Comparative advantage~ a person gains this in an activity if that person can preform the activity at a lower opportunity cost than anyone else. Differences in opportunity costs arise from differences in individual abilities and from differences in the characteristics of other. Everything cannot be great at everything or it is VERY VERY rare!! Absolute advantage~ is a person who is more productive than others. Absolute advantage= comparing productivities (production per hour) VS comparative advantage= comparing opportunity cost. Absolute advantage does not mean comparative advantage in every activity, because resources vary, people have different opportunity cost of producing various goods. Source of comparative advantage.
ECONOMIC COORDINATION
Firms:
Two economic coordination systems: Central economic planning this system works badly because government planners don’t know people’s production possibilities and preferences. Resources get wasted, production ends up inside the PPF and the wrong things get produced. Decentralized coordination four complementary social institutions:
An economic unit that hires factors of production and organizes those factors to produce and sell goods and services eg. Tim Hortons, Canadian Tire. Firms coordinate a huge amount of economic activity. Markets: Any arrangement that enables buyers and sellers to get information and to do business with each other. Eg the worlds oil market. Without organized markets we would miss out on a substantial part of the potential gains from trade. Standing and ready to sell the items in which they specialize. ONLY WHEN PROPERTY RIGHTS EXIST! Property rights: The social arrangements that govern the ownership, use and disposal of anything that people value. Real property land and buildings and durable goods, such as plant and equipment’s. Financial property includes stocks and bonds and money in the bank. Intellectual property intangible product or creative effort, includes books, music, computer programs and inventions (protected by copyrights and patents) Money: Any commodity or token that is generally acceptable as a means of payment. CIRCULAR FLOWS THROUGH MARKETS
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COORDINATING DECISIONS Markets coordinate decisions through price adjustments. Higher the price more of the product, lower the price less of the product.
THINGS FROM MY ECON LAB QUIZ •
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Economics is the science which studies human behavior as a relationship between given ends and scarce means which have alternative uses ~Lionel Ribbons Dans Kapital was written by~ Karl Marx It is the business of economists, not to tell us what to do, but show why what we are doing anyway is in accord ~Joan Robinson Rational choice~ one that compares costs and benefits and achieves the greatest benefit over cost for the person making the choice
CAITLYN RAMSAY 11 • • • • •
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Economic growth does not overcome scarcity because economic growth requires capital accumulation and technological change Marginal benefit describes preferences When the quantity of capital in an economy increases, economic growth occurs, but it is not free When firms use new and better ways of producing all goods and services economic growth occurs, but it is not free The opportunity cost of an action is the highestvalued alternative forgone. Opportunity cost equals the decrease in the quantity produced of one good divided by the increase in the opportunity cost produced of another good as we move along the PPF To disentangle cause and effect, economists use economic models and use natural experiments, statistical investigations and economic experiments to test productivity. A market is any arrangement that enables buyers and sellers to get information and to do business with each other Allocative efficiency we are producing at a point on the PPF such that marginal benefit at the quantity produced equals marginal cost People specialize and trade for all of the following except (bolded) hey can buy goods for less than their opportunity cost of producing them, they can consume at a point outside their PPF, they can sell some goods for greater than their opportunity cost of producing them. BUT NOT so they can obtain an absolute advantage. An economy that uses new technology experiences economic growth but incurs an opportunity cost The opportunity cost of economic growth is fewer consumption goods today Householdschoose the quantities of labour, land, capital and the entrepreneurship to sell or rent Firms chooses the quantities of factors of production to hire. When the quantity of capital in an economy increases our standard of living increases, but we still face scarcity and opportunity cost
SAMPLE QUESTIONS 1. Questions facts In an hour, Abe can catch 4 kilograms of tune and 8 kilograms of peaches In an hour, David can catch 4 kilograms of tuna and pick 2o kilograms of peaches. THEREFORE: The opportunity cost of catching a kilogram of tuna is lower for Abe than for David, and the opportunity cost of picking a kilogram of peaches is higher for Abe than for David. So Abe has a comparative advantage in producing tuna
12 CAITLYN RAMSAY 2. Big lobsters sells lobsters and fish, and so too does H salt. If H salt’s opportunity cost of preparing lobster exceed Big Lobster’s opportunity cost of preparing lobster, who has comparative advantage?? Big Lobster has a comparative advantage in lobster If H Salt and Big Lobster decide to specialize and trade, then the source of the gains from the trade between H Salt and Big lobsters Divergent opportunity cost
MICROECONMICS~ Chapter one and two CHAPTER ONE WHAT IS ECONMICS? • • •
•
A fundamental fact dominates our lives: We want more than we can get. o SCARCITY~ our inability to get everything we want. Scarcity confronts all living things What you can afford to buy is limited by your income and by the prices you must pay. Also your time is limited because there are only 24 hours in a day. Where you want to live and the type of environment you want to be surrounded by is based on the limits of the government, which is from the taxes they collect. This then lowers people incomes affecting the choices they make…. (ALL ONE BIG CYCLE). Your choices must somehow be made consistent with the choices of other you do one thing they have to do the other thing. o INCENTIVE~ is a reward that encourages an action or a penalty that discourages one. Prices act as incentives high price= more for sale, low price= less for sale
ECONOMICS~ is the social science that studies the choices that individuals, businesses, government, and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices. Two parts: • •
Microeconomics~ choices individuals and businesses make, the way these choices interact in markets and influence of governments Macroeconomics~ the performance of the national economy and the global economy.
WHAT, HOW AND FOR WHOM? GOODS AND SERVICES~ are the objects that people value and produce to satisfy human wants. • Goods~ are physical objects • Services~ are tasks performed for people WHAT? What we produce varies across countries and changes over time. HOW? Goods and services are produced by using productive resources that economist call factors of production, these are grouped into for categories. • Land~ the gifts of nature that we use to produce goods and services= natural resources
2 CAITLYN RAMSAY •
•
•
Labour~ the work time and work effort that people devote to producing goods and services. Includes all the physical and mental efforts of all people who work on farms and construction sites and factories, shops and offices. Capital~ the quality of labour depends on human capital knowledge and skill people gain from education, on job training and workexperience. Capital the tools, instruments, machines, buildings and other constructions that businesses use to produce goods and services. Financial capital stocks and bonds. Financial capital plays and important role in enabling businesses to borrow the funds that they use to buy physical capital. Doesn’t produce goods and services so it is not a productive resources Entrepreneurship~ the human resource that organizes labour, land and capital. Come up with new ideas for production, business decisions and the risks.
WHOM? Large incomes=more purchases, smaller income=less purchases, people earn their incomes by selling the services of the factors of production they own: • Land earns rents • Labour earns wages • Capital earns interest • Entrepreneurship earns profit LABOUR EARNS THE MOST INCOME!!
CAN THE PURSUIT OF SELF-INTEREST PROMOTE THE SOCIAL INTEREST? SELFINTERST A choice is in you selfinterest if you think that choice is the best one available for you. You don’t think much about your choice will affect others. SOCIAL INTEREST A choice is in the social interest if it leads to an outcome that is the best for society as a whole. Social interest has two dimensions: • Efficiency~ is achieved when the available resources are used to produce goods and services at the lowest possible cost and in the quantities that give the greatest possible value or benefit. • Equity~ Variety of views about what is fair. THE BIG QUESTION • Globalization o Expansion of international trade, borrowing and lending and investment. Selfinterest consumers who buy lowcost goods and services produced in other countries. Businesses who buy in low sell in high. • The informationage economy o Technological change, selfinterest produced your cell, laptop etc.
CAITLYN RAMSAY 3 • •
Climate change o Everyday when you make selfinterest choices to use electricity and gasoline you contribute Economic instability o 29932007, great stability called the GREAT MODERATION. In 2008 though one bank in France had financial difficulty and started the tumble of the economy, leading to the recession.
THE ECONOMIC WAY OF THINKING A CHOICE IS A TRADEOFF Tradeoff~ is an exchange, giving up one thing to get something else. MAKING A RATIONAL CHOICE Rational choice~ is one that compares costs and benefits and achieves the greatest benefit over cost or the person making the choice. Only wants of the person making the choice are relevant to determine its rationality. What is produced is based on what people rationally choose to buy BENEFIT: WHAT YOU GAIN Benefit~ something is the gain or pleasure that it brings and is determines by preferences (what a person likes and dislikes and the intensity of those feelings). Measure benefits as the most that a person is willing to give up to get something. COST: WHAT YOU MUST GIVE UP OPPROTUNITY COST~ something is the highest valued alternative that must be given up to get it. Most opportunity cast involve choosing how much of an activity to do. The more you do of one the less you do of the other. HOW MUCH? CHOOSING AT THE MARGIN Marginal benefit~ the benefit that arises from an increase in an activity. Marginal cost~ the opportunity cost of an increase in an activity. To make decisions you compare marginal benefits to marginal cost. If the marginal benefit exceeds the cost you choose to do the activity. CHOICES RESPOND TO INCENTIVES Economist take human nature as a given view people as acting in their self interest. Not always selfish!! But whatever act gets the most benefit for you and your view of that benefit. CENTRAL IDEA economics is that we can predict the selfinterested choices that people make by looking at the incentives they face. Institutions play a crucial role in influencing peoples incentives.
4 CAITLYN RAMSAY
ECONOMICS AS SOCIAL SCIENCE AND POLICY TOOL Positive statements About what is. What is currently believed about the way the world operates. May be right or wrong, check by putting it against the facts. Economists weed out those that are wrong. Normative Statements About what ought to be. Depends on values and cannot be tested. You may or may not agree but you can’t test it, doesn’t assert a fact. Unscrambling Cause and effect Economic model~ a description of some aspect of the economic world that includes only those features that are needed for the purpose at hand. A model is tested by comparing its predictions with the facts. But testing an economic model is difficult because we observe the outcomes of what the simultaneous change of many factors. Look for natural experiments situations in the ordinary course of the economic life in which the one factor of interest is different and other things are equal or similar. ECONOMIST AS POLICY ADVISER Toolkit for advising government and businesses for making personal decisions. All advice requires positive and normative, comparing marginal benefits and cost and finding the solution that makes the best use of the available resources.
GRAPHING DATA—please reference pages 1325 for a better understanding A graph represents a quantity as a distance on a line. Two scale lines perpendicular to each other are know as axes, the vertical axis is the yaxis and the horizontal axis is the xaxis. Where the two axes meet at zero is know as the origin. A coordinate is the distance from the axis to the point. Economists create graphs based on the principles to reveal, describe and visualize the relationships among variables. Scatter diagram~ is a graph that plots the value of one variable against the value of another variable for a number of different values of each variable. Reveals whether a relationship exists between two variables and describes that relationship. Breaks in the axis The breaks in the axes are shown by small gaps. The breaks indicate that there are jumps from the origin 0, to the first values recorded. This is to spread out the data if the first value is a very high number Misleading Graphs To put a break in the axis and to either stretch or compress the scale. To avoid being misled, always look closely at the values and the labels on the axes of a graph before you start to interpret it. Correlation and Causation
CAITLYN RAMSAY 5 A scatter diagram that shows a clear relationship between two variables, tell us that the two variables have a high correlation. When a high correlation is present, we can predict the value of one variable from the value of the other variable. Correlation does not simply imply causation!!!!
GRAPHS USED IN ECONOMIC MODELS Graphs in Economics are usually used to show the general relationships among the variable in an economic model. Economic model a strippeddown, simplified description of an economy or of a component of an economy such as a business or household. Variables that move in the same direction Positive relationship/ direct relationship~ a relationship between two variables that move in the same direction, line that slopes upward. Linear relationship~ a relationship shown by a straight line. Variables that move in opposite directions Negative relationship/ inverse relationship~ when variables move in opposite directions. Slopes downward!! Variables that have a maximum or a minimum Most economic cost relationships are like this. Variables that are unrelated No matter what happens to the value of one variable the other variable remains constant.
THE SLOPE OF A RELATIONSHIP Slope~ relationship is the change in the value of the variable measured on the y axis divided by the xaxis. (Rise over run). If a large change in the variable measured on the yaxis is associated with a small change in the variable measured on the xaxis, the slope is large and the curve is steep. If the small change in the variable measured on the yaxis is associated with a large change in the variable measured on the xaxis, the slope is small and the curve is flat. The slope of a straight line Slope of a straight line is always the same The slope of a curved line Slope of a curved line is not constant; slope depends on where we calculate it on the line. Two ways to calculate slope of a curved line: Slope at a point: Use a point to form a tangent and then calculate rise over run. Slope across an arc: draw a line between to points and then calculate the average slope between the two points.
6 CAITLYN RAMSAY
GRAPHING RELATIONSHIPS AMONG MORE THAN TWO VARIABLES Ceteris Paribus Ceteris Paribus~ means if all other relevant things remain the same. Everything constant except for the variable whose effect is being studied. When other things change Movement along and shifts of curves happen at many points in economics.
CHAPTER TWO PRODUCTION POSSIBILITIES AND OPPROTUNITY COST PRODUCTION POSSIBILITIES FRONTIER
CAITLYN RAMSAY 7 Production possibilities frontier (PPF)~ is the boundary between those combinations of goods and services that can be produced and those that cannot. WE look at a model economy in which everything remains the same except for the production of the two goods we are considering. The PPF illustrates the scarcity because we cannot attain the points outside the frontier. These points describe wants that can’t be satisfied. We can produce at any time points inside or on the PPF. PPF graphs also show other production possibilities, example producing all of one and none of the other. PRODUCTION EFFICIENCY Production efficiency~ if we produce goods and services at the lowest possible cost. Occurs at all points on the PPF. Points inside are inefficient because we are giving up more then necessary of on good to produce a given quantity of the other good. Production inside the PPF are inefficient because the resources are either unused or misallocated or both. Resources are unusedwhen they are idle but could be working Resources are misallocated when they are assigned to tasks for which they are not the best matches. TRADEOFF ALONG THE PPF Tradeoffs arise in every situation in which a choice is made. We are limited to hat we can produce, this limit defines a boundary between what we can attain and what we cannot attain. This b0oundary is the realworlds production possibilities frontier and it defines the tradeoffs that we must make. OPPROTUNITY COST The opportunity cost of an action is the highest valued alternatives. The PPF makes this idea precise and enables us to calculate opportunity cost. Opportunity cost is a ratio. It is the decrease in the quantity produced of one good divided by the increase in the quantity produced of another good as we move along the production possibilities frontier. The opportunity cost of a product increases as the quantity of the product increases
USING RESOURCES EFFICIENTLY Allocative efficiency~ When goods and services are produced at the lowest possible cost and in the quantities that provide the greatest possible benefit. THE PPF AND MARGINAL COST
8 CAITLYN RAMSAY Marginal cost~ the opportunity cost of producing one more unit of it. Calculate marginal cost from the slope of the PPF. AS the quantity of one product produced increases, the PPF gets steeper and the marginal cost of that product increases. PREFERENCES AND MARGINAL BENEFIT • Marginal Benefit~ from a good or service is the benefit received from consuming one more unit of it. Depends on people’s preferences. • Marginal benefits and preferences stand in sharp contrast to marginal cost and production possibilities. Preferences describe what people like and want and the production possibilities describe the limits or constraints on what is feasible. • Marginal benefit curve~ the device that we use to illustrate preferences. Relationship between the marginal benefit from a goods and the quantity consumed of that good. UNRELATED TO PPF. • Measure marginal benefit from a good or service by the most that people are willing to pay for an additional unit. More we have, smaller the marginal benefit and the less we are willing to paycalled PRINCIPLE OF DECREASING MARGINAL BENEFIT. Main reason for decrease is we like variety and are always looking for the new best thing. ALLOCATIVE EFFICIENCY At the best point on the PPF, we cannot produce more of one good without giving up some other good that provides greater benefit. ALLOCATIVE EFFICIENCY the point on the PPF that we prefer above all other points.
ECONOMIC GROWTH Economic growth~ the expansion of production possibilities. Increases our standard of living, the faster we make production grow, the greater is the opportunity cost of economic growth. THE COST OF ECONOMIC GROWTH Technological change~ is the development of new goods and of better ways of producing goods and services. Capital accumulation~ is the growth of capital resources including human capital. • If we use our resources to develop new technologies and produce capital, we must decrease our production of consumption goods and services. The amount by which our production possibilities expand depends on the resources we devote to technological change and capital accumulation. The fewer resources you use on one product the greater expansion you can make on the other product. A NATIONS ECONOMIC GROWTH To expand production possibilities in the future, a nation must devote fewer resources to producing current consumption goods and services and some resources to accumulating capital and developing new technologies. As production possibilities expand consumption in the future can increase.
CAITLYN RAMSAY 9
GAINS FROM TRADE
Producing only one good or a few goods is SPECALIZATION!!!
COMPARATIVE ADVANTAGE AND ABSOLUTE ADVANTAGE Comparative advantage~ a person gains this in an activity if that person can preform the activity at a lower opportunity cost than anyone else. Differences in opportunity costs arise from differences in individual abilities and from differences in the characteristics of other. Everything cannot be great at everything or it is VERY VERY rare!! Absolute advantage~ is a person who is more productive than others. Absolute advantage= comparing productivities (production per hour) VS comparative advantage= comparing opportunity cost. Absolute advantage does not mean comparative advantage in every activity, because resources vary, people have different opportunity cost of producing various goods. Source of comparative advantage.
ECONOMIC COORDINATION
Firms:
Two economic coordination systems: Central economic planning this system works badly because government planners don’t know people’s production possibilities and preferences. Resources get wasted, production ends up inside the PPF and the wrong things get produced. Decentralized coordination four complementary social institutions:
An economic unit that hires factors of production and organizes those factors to produce and sell goods and services eg. Tim Hortons, Canadian Tire. Firms coordinate a huge amount of economic activity. Markets: Any arrangement that enables buyers and sellers to get information and to do business with each other. Eg the worlds oil market. Without organized markets we would miss out on a substantial part of the potential gains from trade. Standing and ready to sell the items in which they specialize. ONLY WHEN PROPERTY RIGHTS EXIST! Property rights: The social arrangements that govern the ownership, use and disposal of anything that people value. Real property land and buildings and durable goods, such as plant and equipment’s. Financial property includes stocks and bonds and money in the bank. Intellectual property intangible product or creative effort, includes books, music, computer programs and inventions (protected by copyrights and patents) Money: Any commodity or token that is generally acceptable as a means of payment. CIRCULAR FLOWS THROUGH MARKETS
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COORDINATING DECISIONS Markets coordinate decisions through price adjustments. Higher the price more of the product, lower the price less of the product.
THINGS FROM MY ECON LAB QUIZ •
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Economics is the science which studies human behavior as a relationship between given ends and scarce means which have alternative uses ~Lionel Ribbons Dans Kapital was written by~ Karl Marx It is the business of economists, not to tell us what to do, but show why what we are doing anyway is in accord ~Joan Robinson Rational choice~ one that compares costs and benefits and achieves the greatest benefit over cost for the person making the choice
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Economic growth does not overcome scarcity because economic growth requires capital accumulation and technological change Marginal benefit describes preferences When the quantity of capital in an economy increases, economic growth occurs, but it is not free When firms use new and better ways of producing all goods and services economic growth occurs, but it is not free The opportunity cost of an action is the highestvalued alternative forgone. Opportunity cost equals the decrease in the quantity produced of one good divided by the increase in the opportunity cost produced of another good as we move along the PPF To disentangle cause and effect, economists use economic models and use natural experiments, statistical investigations and economic experiments to test productivity. A market is any arrangement that enables buyers and sellers to get information and to do business with each other Allocative efficiency we are producing at a point on the PPF such that marginal benefit at the quantity produced equals marginal cost People specialize and trade for all of the following except (bolded) hey can buy goods for less than their opportunity cost of producing them, they can consume at a point outside their PPF, they can sell some goods for greater than their opportunity cost of producing them. BUT NOT so they can obtain an absolute advantage. An economy that uses new technology experiences economic growth but incurs an opportunity cost The opportunity cost of economic growth is fewer consumption goods today Householdschoose the quantities of labour, land, capital and the entrepreneurship to sell or rent Firms chooses the quantities of factors of production to hire. When the quantity of capital in an economy increases our standard of living increases, but we still face scarcity and opportunity cost
SAMPLE QUESTIONS 1. Questions facts In an hour, Abe can catch 4 kilograms of tune and 8 kilograms of peaches In an hour, David can catch 4 kilograms of tuna and pick 2o kilograms of peaches. THEREFORE: The opportunity cost of catching a kilogram of tuna is lower for Abe than for David, and the opportunity cost of picking a kilogram of peaches is higher for Abe than for David. So Abe has a comparative advantage in producing tuna
12 CAITLYN RAMSAY 2. Big lobsters sells lobsters and fish, and so too does H salt. If H salt’s opportunity cost of preparing lobster exceed Big Lobster’s opportunity cost of preparing lobster, who has comparative advantage?? Big Lobster has a comparative advantage in lobster If H Salt and Big Lobster decide to specialize and trade, then the source of the gains from the trade between H Salt and Big lobsters Divergent opportunity cost
