Chapter 5 | Are Your Smart Choices Smart for All? Flashcards
scarcity
the problem that arises from our limited money, time, and energy
economics
how individuals, businesses, and governments make the best possible choices to get what they want, and how those choices interact in markets
opportunity cost
cost of best alternative given up
incentives
rewards and penalties for choices
production possibilities frontier
maximum combinations of products or services that can be produced with existing inputs
absolute advantage
the ability to produce a product or service at a lower absolute cost than another producer
comparative advantage
the ability to produce a product or service
opportunity cost formula
give up / get
Circular Flow of Economic Life
Individual Households -> Input Markets -> Businesses
Businesses -> Output Markets -> Households
Government
model
a simplified representation of the real world, focusing attention on what’s important for understanding
inputs
the productive resources – labour, natural resources, capital equipment, and entrepreneurial ability – used to produce products and services
positive statements
about what is; can be evaluated as true or false by checking the facts
normative statements
about what you believe should be; involve value judgements
microeconomics
analyzes choices that individuals in households, individual businesses, and governments make, and how those choices interact in markets
macroeconomics
analyzes performance of the whole Canadian economy and global economy; the combined outcomes of all individual microeconomic choices
key 1
opportunity costs rule
key 2
Look Forward Only to Additional Benefits and Opportunity Costs
key 3
Implicit Costs and Externalities Count, Too
marginal benefits
the additional benefit from a choice, changing with circumstance
marginal opportunity costs
additional opportunity costs from the next choice
implicit costs
hidden opportunity costs of what business owner could earn elsewhere with time and money invested
negative externalities (external costs)
costs to society from your private choice that affect others, but that you do not pay
positive externalities (external benefits)
benefits to society from your private choice that affect others, but that others do not pay you for
economic disasters
The Global Financial Crisis
(2008–2009)
involved housing bubbles that
burst, falling asset prices, and failures of banks and financial institutions
Great Depression
(1929–1933)
involved financial bubbles that burst, high unemployment, falling living standards, bankruptcies, and government policy mistakes
Fallacy of Composition
what is true for one is not true for all; the whole is greater than the sum of the individual parts
Paradox of thrift
attempts to increase saving cause total savings to decrease because of falling employment and incomes
Say’s Law
supply creates its own demand
Market Failure
market outcomes are inefficient or inequitable and fail to serve the public interest
Government Failure
government policy fails to serve the public interest
Yes – Left Alone, Market Self-Adjust – Hands Off camp believes
- Macroeconomic and microeconomic outcomes are the same
- External events or government policy cause business cycles
- Government failure is more likely than a market failure
- Government should be hands-off
Politicians on the political right tend to be in Yes – Left Alone, Market Self-Adjust camp, so government hands-off
No – Left Alone, Market Fail Often – Hands on camp believes
Fallacy of composition - macroeconomic and microeconomic outcomes are different
Markets cause business cycles through connection failures between input and output markets, roles of money, banking and expectations
Market failure is more likely than government failure
Government should be hands-on
Politicians on the political left tend to be in No – Left Alone, Market Fail Often camp, so government hands-on
agreements between camps
Some role for government
Markets eventually adjust, but how long do they take?
Outcomes
Good Outcomes:
Higher gross domestic product (GDP)
Lower unemployment
Low and predictable inflation
Players
Consumer choices
- Spend income or save
- Buy Canadian products and services, or imports
Business choices
- Investment spending - business purchases of new factories and equipment
- Hiring workers or not
- Buying inputs domestically or importing
- Selling outputs domestically or exporting
Government choices
- Buying products and services
- Fiscal Policy - government purchases, taxes/transfers to achieve the macroeconomic outcomes
Bank of Canada and banking system choices
- Monetary Policy - Bank of Canada changes interest rates and supply of money to achieve the macroeconomic outcomes
Your personal economic success is affected by:
GDP - higher GDP per person allows higher living standards
Unemployment - affects odds of finding a job
Inflation - reduces living standards if income does not rise as fast as the prices of what you buy
Interest rates, exchange rates, and government taxes and transfer payments
Monetary Policy
Bank of Canada changes interest rates and supply of money to achieve the macroeconomic outcomes
Fiscal Policy
government purchases, taxes/transfers to achieve the macroeconomic outcomes
Investment spending
business purchases of new factories and equipment
Hiring workers or not
