Intro Markets and Opportunity Cost Economic growth Ideas and Methods

Lecture 1: Introduction to Economics

Intro Markets and Opportunity Cost Economic growth Ideas and Methods

Learning Objectives

After reading chapters 1 and by the end of this lecture,

you should understand:
The nature and objectives of economics.
Opportunity cost, productivity advantage and
efficiency.
Specialization, exchange and markets.
The production possibility frontier.
Full employment, booms, recessions and economic
growth.
The role of theory, models, and data.
Intro Markets and Opportunity Cost Economic growth Ideas and Methods

What is Economics?
Intro Markets and Opportunity Cost Economic growth Ideas and Methods

Definition of Economics

Economics is the social science that studies

the choices that individuals, businesses,
governments, and entire societies make as
they cope with scarcity and the incentives
that influence and reconcile those choices.
Intro Markets and Opportunity Cost Economic growth Ideas and Methods

Branches of Economics

Economics is generally divided into two main

branches:
Microeconomics is the study of individual
behavior, a company, or a specific market in
the context of scarcity.

Macroeconomics studies the economy as a

system in which feedbacks among sectors
determine national output, employment and
prices.
Intro Markets and Opportunity Cost Economic growth Ideas and Methods

Economic Systems

In a mixed economy goods and services are supplied both by private suppliers
and government.
Intro Markets and Opportunity Cost Economic growth Ideas and Methods

Roles of the government

Government influences the economy

through monetary policy – the Bank of
Canada.

It influences the economy through its

taxation and expenditure policies – fiscal
policy.

It regulates the economy through the

imposition of standards and regulations.

It can alter the degree of inequality through

its taxation and transfer policies.
Intro Markets and Opportunity Cost Economic growth Ideas and Methods

Markets, Trading, and Opportunity Cost

Markets are central to our economic lives –

they permit us to trade, work efficiently and
improve our living standards.

Opportunity Cost: the value of best

alternative forgone.

Let’s take a numerical example that we can

develop into a model of production and
exchange.
Intro Markets and Opportunity Cost Economic growth Ideas and Methods

A model of exchange and specialization

Hours/ Hours/ Fish Vegetable
fish vegetable specialization specialization
Amanda 3 2 12 18
Zoe 2 4 18 9

Vegetable
Each producer has a time
allocation of 36 hours. 18

By splitting their time each Amanda’s PPF

person can also produce a
combination of the two.
9
Zoe’s opportunity cost is 1/2 (1
unit of V for 2 units of F).
Zoe’s PPF
Amanda’s opportunity cost is 3/2
(18 units of V for 12 units of F). Fish
12 18
Intro Markets and Opportunity Cost Economic growth Ideas and Methods

From production to consumption

Suppose before tade each person

produces for themselves: Trade is not a zero-sum game!
Amanda’s initial cons. = (6, 9)
Vegetable
Zoe’s initial cons. = (9, 4.5)
Total cons. = (15, 13.5) 18
Amanda’s PPF
With specialization and trade, they Consumption possibilities
consume along the line joining the for Amanda and Zoe

specialization points. A (8,10)

9
Z (10,8)
If Amanda trades 8V to Zoe in
return for 8F Amanda moves to the Zoe’s PPF
point (8, 10) and Zoe to (10, 8). Both
consume more after specialization, Fish
12 18
relative to pre-specialization.
Intro Markets and Opportunity Cost Economic growth Ideas and Methods

From individuals to the economy

Vegetable

18

Amanda’s PPF
Can we represent the production
possibilities of the whole
economy by ‘aggregating’ the 9
production capabilities of each
individual?
Zoe’s PPF

Fish
12 18
Intro Markets and Opportunity Cost Economic growth Ideas and Methods

From individuals to the economy

Vegetable
From point a, to produce Fish, it a
27
is more efficient to use Zoe
PPF for whole economy
because her opportunity cost is
less (segment ac). c (18,18)
18

When Zoe is completely Amanda’s PPF

specialized, Amanda is used

9
(section ce).

With complete specialization this Zoe’s PPF

e
economy can produce 27V or 30F. 30
Fish
12 18
Intro Markets and Opportunity Cost Economic growth Ideas and Methods

From individuals to the economy

Vegetable

a
b

The economy-wide PPF is the set

of products combinations that can c

be produced in the economy

when all available productive
d
resources are in use.

e
Fish
Intro Markets and Opportunity Cost Economic growth Ideas and Methods

PPF and Economic Growth

Services
A
S′max
PPF1
a
Economic growth or an increase Smax

in the available resources can be PPF0 X1

S1
envisioned as an outward shift in
S0
the PPF from PPF0 to PPF1 . X0

With PPF1 the economy can

produce more in both sectors than
with PPF0 .
b B
Goods
G0 G1 Gmax G′max
Intro Markets and Opportunity Cost Economic growth Ideas and Methods

Recessions and Booms

Services

a
Smax PPF
In an economic recession output W
falls below the economy’s
X
potential output. S0

Z
A boom is a period of high
growth that raises output above
normal capacity output.
b
Goods
G0 Gmax
Intro Markets and Opportunity Cost Economic growth Ideas and Methods

Ideas and Methods

Economics is scientific in its approach

Use of mathematics
Use of models
Use of data and statistical methods

Economics is the art of translating ideas into

formal models through mathematics, and
testing of the ideas/models through the use
of statistical models.
Intro Markets and Opportunity Cost Economic growth Ideas and Methods

Forms of data

Time series: oil prices over time

Cross-section: Unemployment rates in 2020 by

province

Longitudinal: following observations over time

such as survey of manufacturing industries.

Can you find a recent visualization for each of

these forms?!