Chapter 1 (Basic Principles) Flashcards
Scarcity
The problem that arises from our limited MONEY, TIME, & ENERGY
Economics
How individuals, businesses, & governments make the BEST POSSIBLE CHOICE to get what they want & how those choices interact in markets
Opportunity Cost
The cost of the BEST ALTERNATIVE given up.
What you give>what you give up
Equation: Give up/ get
Opportunity costs is the key to mutual benefits of TRADE.
Incentives
REWARDS & PENALTIES for choice
People respond to economic incentives by taking advantage of opportunities to make themselves better off.
Ex: women have a LARGER incentive than men when it comes to post-secondary studies
Voluntary Exchange
When one trades a product for money
Production Possibilities Frontier (PPF)
Shows the MAXIMUM combos for products or services that can be produced with existing inputs.
Demand: maximum price people are WILLING & ABLE to pay
Absolute Advantage
The ability to produce a product or service at a lower absolute cost then another producer… if 1 person is better in EVERYTHING
Comparative Advantage
The ability to produce a product or service at a lower OPPORTUNITY COST than another producer
Specialization
According to comparative advantage and trade… allows each trader to consumer outside ones PPF and allows for lower opportunity cost
Input Markets
Households are Sellers (HS)
Businesses are Buyers (BB)
Output Markets
Households are Buyers (HB)
Businesses are Sellers (BS)
3 sets of players in the Circular Flow Model (C.F.M)
Governments
Houses
Businesses
Positive Statements
Claims about how the world IS
FACTS
Can be tested and is verifiable
Normative Statements
Claims about how the world SHOULD/OUGHT/GOOD IDEA/BAD IDEA to be
OPINIONS
Microeconomics
Analyzes choices that individuals in households, businesses and government make and h these choices interact in markets
SMALLER LENSE
Macroeconomics
Analyzes performance of the whole Canadian and GLOBAL economy, the combined outcomes of all individual micro choices
LARGER LENSE
Marginal Benefits (DEMAND)
- ADDITIONAL benefits from the next best choice
- Flat fees DO NOT equal additional costs… and should NOT influence how much food you eat at a buffet
Price depends on the MB not TB
Ex (diamond/water paradox):
Diamonds= high MB and low TB
Water= low MB and high TB
Marginal Opportunity Costs (SUPPLY)
- Additional O.C from the next best choice
- the marginal costs a business pays for an input is an O.C
- spending more time in any activity INCREASES marginal O.C
Ex: sunk costs DO NOT equal O.C and have 0 influence on making a smart choice
Implicit costs
- HIDDEN opportunity costs of what business owners could earn elsewhere with time and money invested
- NON-MONETARY: not related to money
Ex: wages and salaries paid to workers, loss of interest income,
Explicit costs
- costs a business pays DIRECTLY. Accounts count all obvious business costs and include depreciation
- MONETARY: spending actual money $$$$$$
Ex: mortgage, rent, utilities, advertisements, raw materials… etc
Negative Externalities
- imposes a COST on innocent ppl
- the PRIVATE cost is endured by the producer of the good (supply curve)
- the SOCIAL costs if the full costs, including private and external cost
Marginal social cost curve (MSC): includes all private and external costs in a transaction
Positive Externality
- creates a BENEFIT for innocent ppl
- the PRIVATE benefit is received by the consumer of the good (demand curve)
- the SOCIAL benefit includes the private and external benefit
Marginal social benefit curve (MSB): includes all private and external benefits in a transaction.
Efficiency
- Positive efficiency: maximizing output at the LOWEST possible cost (attainable vs unattainable)
- Allocative efficiency: production represents consumer preferences
Equality (equity)
The fair distribution of economic benefits
