1. Economics 12
Chapter 1 Notes

2. Economic Perspective Includes Scarcity & choice Purposeful behaviour
Marginal analysis

3. Scarcity & choice
Resources (time, money, water, oil, etc) are LIMITED, therefore we must make CHOICES
Opportunity cost = the next best choice/option
What 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

4. Purposeful behaviour Human 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

5. Marginal Analysis: Benefits & Cost
All options have a marginal benefit and marginal cost
Marginal benefit = Extra/additional benefit
Marginal cost = Extra/additional cost

6. 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)

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

8. Scientific Method Economics 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)

9. Economic theories Generalizations about how the economic world works
When widely accepted, turns into economic principle or law
Enables predictions
Many economic models are expressed graphically
Example: supply & demand
Low supply and high demand = high prices

10. Macroeconomics Examines economy as a whole
Government, household, business sectors
Uses 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)

11. Microeconomics Micro (up close, microscopic, etc)
Examines individual units
A household
A firm
An industry
Looks at very small segments of the economy

12. Positive & Normative Positive economics Normative
Facts, cause & effect relationships
Theory development
Concerns what IS
Normative
Value judgements
What OUGHT TO BE
Policy development in order to achieve future economic goals

13. The economic problem Individual Limited income Unlimited wants
Budget line

14. The economic problem Society Scarce resources
Resource categories/INPUTS
Land
Labour
Capital
Entrepreneurial ability (p.12)
Takes initiative in combining resources to produce good or service
Makes strategic business decisions
Risk bearer – no guarantee of profit

15. Production possibilities model
Scarce resources are used to produce goods and services
Assume
Full employment
Fixed resources
Fixed technology
2 goods

16. 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 1 2 3 4
Robots 10 9 7

17. 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 1 2 3 4
Robots 10 9 7

18. Production possibilities curve
Unattainable (outside of curve)
Robots
Attainable
Pizzas

19. 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

20. 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 pizzas
Opportunity cost = ?
Production Alternatives
Type of product A B C D E
Pizzas 1 2 3 4
Robots 10 9 7

21. Law of increasing opportunity cost
The opportunity cost of each additional pizza is GREATER than the previous
Illustrates the law of increasing opportunity costs
As 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 1 2 3 4
Robots 10 9 7

22. Shape of the curve Increasing opportunity cost is reflected
Shows as move to more pizzas, giving larger and larger amounts of robots
Unattainable (outside of curve)
Robots
Attainable
Pizzas

23. Economic rationale Rationale for increasing opportunity costs
Resources are not completely adaptable to alternative uses
Many resources are better at producing one type of good than another
Some land is good for growing resources needed to make pizza
As pizza production expands, land that is less suited to this is used, producing less efficiently

24. Optimal allocation
The IDEAL or OPTIMAL allocation of resources occurs when the marginal benefit = the marginal cost
MB = MC

25. Growth (p19) Maximum output is increased
Could be due to technology advance
More resources are found
Production possibilities curve shifts outward
Robots
Pizzas

26. 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.

27. International trade Allows 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

28. Handout
Complete the handout
Fill in the blanks
True and false