# Economics 12 Chapter 1 Notes.

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Economics 12 Chapter 1 Notes

Economic Perspective Includes Scarcity & choice Purposeful behaviour
Marginal analysis

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

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

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 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)

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

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)

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

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

The economic problem Individual Limited income Unlimited wants
Budget line

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

Production possibilities model
Scarce resources are used to produce goods and services Assume Full employment Fixed resources Fixed technology 2 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 1 2 3 4 Robots 10 9 7

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

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

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

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

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

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

Optimal allocation The 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 advance More resources are found Production possibilities curve shifts outward Robots Pizzas

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.