Economics 12Chapter 1 Notes

Economic PerspectiveIncludes

Scarcity & choicePurposeful behaviourMarginal analysis

Scarcity & choiceResources (time, money, water, oil, etc) are

LIMITED, therefore we must make CHOICES

Opportunity cost = the next best choice/optionWhat you would have done if your first choice was

no longer possible If options are ranked (1st, 2nd, 3rd) – opportunity

cost is the 2nd ranked option, if you choose the 1st

Opportunity cost is not the SUM of all choices

Purposeful behaviourHuman behaviour reflects “rational self-interest”

Ex. We seek opportunities to increase our UTILITY

Utility = pleasure, happiness, satisfaction obtained from consuming a good or service

Resources (time, energy, money, etc) are allocated in order to maximize satisfaction

Marginal Analysis: Benefits & Cost

All options have a marginal benefit and marginal cost

Marginal benefit = Extra/additional benefit

Marginal cost = Extra/additional cost

Marginal benefit/cost example

You have eaten 2 hotdogs already, and you are getting full. Hotdogs are $2. What is the marginal benefit & cost of eating a 3rd hot dog?

Benefit = slight additional satisfaction, but satisfaction is not as great as when you ate the first and 2nd hot dog, because you are getting VERY full

Cost = $2, plus potential discomfort from being TOO full.Forgoing a $2 cupcake later? (opportunity cost)

Marginal benefit vs Marginal cost

Compare the two, and always choose the option where the marginal benefit is highest (considering cost)

Scientific MethodEconomics relies on the scientific method

Observation of real-world behaviour & outcomes

Formulation of explanation of cause & effect (hypothesis)

Testing of hypothesis

Acceptance/rejection/modification of hypothesis

Hypothesis evolves into a theory after it has tested positively (seen to be correct)

Economic theoriesGeneralizations about how the economic world

works

When widely accepted, turns into economic principle or lawEnables predictions

Many economic models are expressed graphically

Example: supply & demandLow supply and high demand = high prices

MacroeconomicsExamines economy as a whole

Government, household, business sectorsUses aggregates (collections of specific units)

Seeks to obtain overview of structure of economy & relationships of major aggregates

Example: total output, total unemployment, total income

No detail given to specific units (1 individual, 1 company)

MicroeconomicsMicro (up close, microscopic, etc)

Examines individual unitsA householdA firmAn industry

Looks at very small segments of the economy

Positive & NormativePositive economics

Facts, cause & effect relationshipsTheory developmentConcerns what IS

NormativeValue judgements

What OUGHT TO BEPolicy development in order to achieve future

economic goals

The economic problemIndividual

Limited incomeUnlimited wantsBudget line

The economic problemSociety

Scarce resourcesResource categories/INPUTS

LandLabourCapitalEntrepreneurial ability (p.12)

Takes initiative in combining resources to produce good or service

Makes strategic business decisions Risk bearer – no guarantee of profit

Production possibilities model

Scarce resources are used to produce goods and services

AssumeFull employmentFixed resourcesFixed technology2 goods

Production possibilities table

Difference combinations of 2 products that can be made with the available resources, assuming full employment

Economy produces only pizzas and robots

Capital goods (robots) and consumer goods (pizzas)

Production Alternatives

Type of product

A B C D E

Pizzas 0 1 2 3 4

Robots 10 9 7 4 0

Production possibilities table

Consumer goods give MORE NOW, where capital goods promise MUCH MORE LATER

Scarcity prevents society from being able to have more of both goods

Some of 1 must be given up for more of another

Production Alternatives

Type of product

A B C D E

Pizzas 0 1 2 3 4

Robots 10 9 7 4 0

Production possibilities curve

0 1 2 3 4 5 6 7 8 9 100

2

4

6

8

10

12

Robots

Pizzas

Unattainable (outside of curve)

Attainable

Production possibilities curve

Shows different combinations of goods and services that society can produce in fully employed economy Assumes fixed availability of supplies, resources Assumes constant technology

Points ON the curve represents the maximum output of 2 products

Points under the curve, do not use full production Less total output

Points outside the curve are not attainable with current resources and technology

Law of increasing opportunity cost

More pizzas means less robots

From 0 pizzas to 1 pizza Opportunity cost = 1 robot

From 1 pizza to 2 pizzasOpportunity cost = ?

Production Alternatives

Type of product

A B C D E

Pizzas 0 1 2 3 4

Robots 10 9 7 4 0

Law of increasing opportunity cost

The opportunity cost of each additional pizza is GREATER than the previous

Illustrates the law of increasing opportunity costsAs production of a particular good increases, the

opportunity cost of producing an additional unit rises

Production Alternatives

Type of product

A B C D E

Pizzas 0 1 2 3 4

Robots 10 9 7 4 0

Shape of the curve

0 1 2 3 4 5 6 7 8 9 100

2

4

6

8

10

12

Robots

Pizzas

Unattainable (outside of curve)

Attainable

Increasing opportunity cost is reflected

Shows as move to more pizzas, giving larger and larger amounts of robots

Economic rationaleRationale for increasing opportunity costs

Resources are not completely adaptable to alternative uses

Many resources are better at producing one type of good than anotherSome land is good for growing resources needed to

make pizzaAs pizza production expands, land that is less suited

to this is used, producing less efficiently

Optimal allocationThe IDEAL or OPTIMAL allocation of resources

occurs when the marginal benefit = the marginal cost

MB = MC

Growth (p19)Maximum output is increased

Could be due to technology advanceMore resources are found

Production possibilities curve shifts outward

0 1 2 3 4 5 6 7 8 9 1002468

1012

Robots

Pizzas0 1 2 3 4 5 6 7 8 9 10

0

5

10

15

Present choices vs future possibilities

By choosing to use resources for goods to consume NOW, we give up the potential for greater growth in the future

Example, p 20.

International tradeAllows for specialization

One country may specialize in producing a type of good due to the presence of resources or more skilled labour

Enable a nation to get more of a specific good at less of a sacrifice than if it was produced at home

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