Lec 2: Structure and Organization of Economies

Question 1

What is an economy?

Answer 1

• A system that allows people to meet their needs & wants
  
  • It is scale independent: can be global Canadian, regional, local, our household economies

Question 2

What is the economic problem?

Answer 2

The ‘economic problem’
* How to best use scarce resources, when wants and needs are infinite?
* Scarcity –> trade-offs –> choices

Question 3

What is a production possibilities frontier? What does it depend on?

Answer 3

Def: a curve which illustrates the possible quantities of 2 products that can be produced if they both depend on the same finite resources
* Depends on:
○ Trade-offs
○ Valuation
○ Preferences
○ Opportunity costs
○ Economic growth

There is an opportunity cost; what you produce of one product you cannot produce of the other

Question 4

what results in economic growth?

Answer 4

New resources and consequently an expanded frontier

Question 5

Define:
economic agents
economic institutions
factors of production
goods and services
scarcity (2 types)

Answer 5

• Economic agents
  
  • Function within economic institutions
• Economic institutions
  
  • Set of rules that govern economic conduct/activity. Incentives that guide and shape behaviour
  • e.g. property rights, law of contract, lecture hall
• Factors of production (L,L,K)
  
  • Land: Natural resources
  • Labour: All physical + mental work
  • Capital: Human made wealth
• Goods and services
  
  • Private goods: excludable and rivalrous
  • Public goods: non-excludable and non-rivalrous
• Scarcity
  
  • 2 types:
    ○ Natural
    § e.g. diamonds are naturally scarce
    ○ Socially constructed
    § social structures limit availability
    § e.g. land is naturally abundant but socially scarce
    Some resources can experience both natural and socially constructed scarcity

Question 6

What is a market, and what are the 3 types of markets?

Answer 6

• An economic institution that facilitates an exchange of goods and services
• 3 types:
  ○ Factor markets: where factors of production are bought and sold
  ○ Commodity markets: where raw materials or primary products are traded
  ○ Labour markets: supply and demand for labour

Question 7

What are the 2 types of efficiency?

Answer 7

• Efficiency
  
  • Productive: being able to produce something efficiently
  • Allocative: resources are efficiently allocated

Question 8

What is the primary role of markets?

Answer 8

• “allocate scarce resources efficiently”
  
  • e.g. allocating oil
    ○ Create a market and allow people to bid on oil. Those willing to pay more will make the most productive use of it, therefore oil is distributed in an efficient way.

Question 9

Describe the structure of a market economy

Answer 9

• Circular economy is made up of two markets:
  
  • The resource (or factor) market
    ○ Households sell resources to companies
  • The product (or commodity) market
    ○ Companies sell products to households

Question 10

What are the 4 types of economic systems?

Answer 10

• Traditional economy
  
  • Subsistence focused, limited government role, traditions guide exchange, agriculture is primary market
  • e.g. food sharing among the Inuit
• Market economy
  
  • Exchanges are mediated by institutions
• Command economy
  
  • A strong centralized economy
  • Government says what will be produced and who gets what
• Mixed economy
  
  • mix of a command economy and a market economy
  • Government stabilizes

Question 11

What is political economy?

Answer 11

• Study of different types of economy
• Ways of thinking of nature of economies, and how it affects people