Introduction

 Economics: study of scarcity; concerned with the efficient utilization of scarce productive resources
to attain the maximum satisfaction of unlimited human wants  scarce goods are economic goods
 Free goods: abundant goods
 Utility: economist’s term for the satisfaction, need fulfillment that people get from consumption
 Microeconomics: study of economic behavior of households and firms; how prices are determined
 Macroeconomics: study of economy as a whole, and economy-wide issues, like unemployment.
 Methodology: economists derive economic principles that are useful in the formulation of policies
designed to solve economic problems
 Positive statement: can be proven right or wrong by looking at facts
 Normative statement: matter of opinion and cannot be proven right or wrong  “should”
 If 10 economists are locked in a room, they’ll come out with 12 conclusions

Economic Goals
1. A high level of employment
 Unemployment: those over 15 (in Ontario) who are actively seeking work.
 A natural rate of unemployment will always exist  acceptable
2. Price stability
 Inflation hurts those living on fixed income
 Inflation can cause business mistakes
3. Efficiency
 Realizing the most effective use of scarce productive resources to yield the greatest benefits
 technological efficiency: production of maximum amount of goods and services with the
available resources
 allocative efficiency: production of the best combination of goods and services to meet
consumer needs
4. An equitable distribution of income
 equitable does not mean equality
5. Economic growth
 An increase in output that results from technological improvement
 In terms of real output and real productivity
 A high growth policy leads to higher future consumption with the sacrifice of lower current
consumption
 The government would adhere to these goals, except for lags
 Recognition lag
 Implementation lag
 Impact lag

Economic Systems
 A set of mechanisms (laws, institutions, and customs) by which a society accomplishes the tash of
producing goods and services to satisfy its wants
 Pure command economy: all resources are owned by the state
 Advantage: national objectives are easier to meet
 Disadvantage: individual freedom and mobility restricted
 Pure market economy: all resources owned by private citizens
  Advantage: production reflects consumer willingness
 Disadvantage: greed and misdirection in production
 Market: a network that keeps buyers and sellers in contact for the purpose of exchanging goods and
services and determining prices

Circular Flow Models

The Resource Market Realities
 Union pressures
 Land value fluctuation and speculation cause uncertainty
 Governments create additional demand

The Product Market Realities

 Some products are trends & have volatility
 Demand of some products is more price sensitive than others
 Current trade policies cause supply to be more responsive to price changes

Economist People
Adam Smith (1723 - 1790)
 Father of economics
 Wrote an important book: An Inquiry into the Nature and Causes of the Wealthy of Nations (1776)
 Book was written during the start of the industrial revolution in Great Britain
 Smith believed in the free market (no government interference) to gain maximum benefit (utility)
from the market system
 He believed that the “invisible hand” of competition would result in the most efficient outcome
 He didn’t believe in complete freedom
 He identified possible problems relating to firms’ collusions and exploiting consumers as well as
monopolies (firms dominating market)
 For the next 150 years, the theories that originated with him formed the bases of classical
economics. This overriding faith in the power of free markets to allocate resources efficiently was
the widely accepted view of the time.
Karl Marx (1818 - 1883)
 Revolutionary communist rather than an economist (philosopher)
 Saw capitalism (free market system) as being one of a series of methods of production
 Predicted there would be an inevitable breakdown of capitalism, and that communism would be the
natural end result
 Believed that society’s ability to produce would grow faster than its ability to consume 
unemployment
 There would thus be a need for the government to take over  communism
 Transitional economies: communist societies that are moving towards free market systems

Resources
 Since our world is characterized by scarcity, we’ll never have enough income to satisfy us
 The economizing dilemma (limited resources and unlimited wants) originates from the scarcity of
our natural resources
 Factors of Production vs. Factors of Payments
1. Land: given to us by nature  rent
 2. Labour: human work  wages and salaries
3. Capital: manufactured goods used in production by investment  interest and dividends
4. Entrepreneurship: inventor, manager (human capital)  profits

Opportunity Cost
 What’s being sacrificed for something else  caused by scarcity of resource inputs
 The opportunity cost of a product is the alternative which must be sacrificed to produce that
product Measured in terms of other commodities that could have been obtained instead
 Capital goods satisfy us indirectly by producing the things that satisfy us. The opportunity cost of a
capital good is the amount of consumer goods we could have produced
 Consumption goods satisfy us directly; opportunity cost is amount of capital investment sacrificed.
 Capital formation: involves a choice between consumptions now and more consumption in the
future

Production Possibility Curve/Frontier (PPC)

 Production possibility schedule: table showing various combinations of 2 goods that an economy
can produce if it uses all its resources
 Each point on PPC represents maximum combinations of resources to produce efficiently
 The most undesirable points are the ones on the y or x axis
 Y axis = all resources used for capital
 X axis: all resources used for consumer goods
 From the Y to X axis, more consumer goods and less capital goods are produced
 Assumptions being made when PPC is constructed:
 Two products only
 Fixed resources: amount of productive resources doesn’t change, but the available resources
CAN be shifted as desired to produce either good
 Full employment and efficiency
 Fixed technology  no new production methods available
 Limitations
 Shows only what’s possible, not necessary/desirable
 Cannot tell us where the consumer and producer are both happy.
 sometimes, failure to reach full efficiency restricts the economy’s ability to achieve maximum output
 points are within the boundaries
 by moving from a point inside the curve to a point ON the curve, we’re gaining more output at no
additional opportunity cost, since we’re just putting previously idle resources back to work
 any point outside the curve isn’t attainable unless one of the assumptions are removed (technology
improves, or resources increase)
 A concave PPC illustrates:
1. scarcity: by the unattainable combinations above the boundary
2. choice: by the need to choose among the alternative attainable points along the boundary
3. increasing opportunity cost: by the downward slope of the boundary
 Concave vs. Straight
 Concave: as you move to the points to the right, the opportunity cost rises
 Straight: opportunity cost is constant due to assumed perfect adaptability of resources