Econ 203

• Economics


  The study of how we respond to scarcity
• Scarcity


  The idea that it is not possible to fulfil all wants and desires. Implications: individuals must make choices or decisions, society chooses institutions, and the choice of institution determines what, how much, how, and who produces things
• Trade-offs between efficiency and equity

  Should promote equity while minimizing the effect on efficiency
• Pros of markets


  • Decentralized mechanism
  • Prices signal value
  • Gains from trade can be recognized
  • Natural selection allows people to be rewarded for their innovation
• Cons of markets


  • Markets can fail
• Rational economic agents


  Make decisions at the margin
• Incentives


  If you change the marginal benefit or cost, it will impact people's decisions and behaviour
• Key economic principles


  • Trade has the potential to make everyone better off
  • Markets are usually a good way to organize economic activity
  • Governments can sometimes improve market outcomes
• Standard of living


  The wealth of a nation is a function of the value of goods and services it produces
• Theory of the invisible hand


  The idea that when the market is left alone, it will result in the best outcome
• Efficiency


  Voluntary trade leads to the Pareto efficiency – the idea that you can't make someone better off without making someone else worse off. An efficient outcome maximizes the value of production
• Prices


  Prices are created in markets to signal value, they effectively allocate resources in market economies by determining what, how, and who produces goods
• Governments


  Can intervene in the market by using coercive force (private property rights, rule of law, and contracts) to prevent market failure. In theory, a perfect government can improve the allocation of resources when there are externalities. However, in practice, government intervention is not perfect because of asymmetric information and incentives
• Opportunity cost


  The cost of the next best alternative, what you give up to get something
• Opportunity cost example


  • Option a = trip ($800 value), option b=bike ($700 value), option c=pass to watch sports ($1500), option d=dinner ($1000). If you choose option c, your opportunity cost is $1000 because it is the next best alternative
• Economists


  Play two roles: as scientists who try and explain the world by using the scientific method and as policy advisors who try and improve it
• Circular flow diagram

  A visual model of the economy that demonstrates how dollars flow through the markets among households and firms (the two economic agents). It shows the market for goods and services and for the factors of production
• Factors of production


  • Land
  • Labour
  • Capital-building and machines used in production
• Firms


  Buy/hire factors of production to produce goods and services and sell the goods and services
• Households


  Own the factors of production and sell/rent to firms for income, buy goods and services
• Production Possibilities frontier


  A graph that shows the combinations of two goods that an economy can produce given the available resources and technology. Demonstrates that when you get more of one good, you must give up the production of another. The slope of a PPF tells you the opportunity cost of one good in terms of another
• Points on the PPF

  • Possible and efficient
  • Possible and not efficient
  • Not possible or efficient
• Shape of the PPF

  Straight line means that the opportunity cost is constant. If it is bowed out, the opportunity cost is increasing
• Positive statements


  Describe the world as it is. Can be confirmed or refuted
• Normative statements


  Attempt to prescribe how the world should be. Can't be confirmed or refuted
• Absolute advantage


  The one who requires the fewest inputs to produce a good
• Comparative advantage


  The producer who gives up less of one good to produce the other
• People specialize in what they have the comparative advantage in. The price must lie between the two opportunity costs to be efficient and fair for each person. If the price fell below or above this range, both people would have more demand
• Trade among nations should be encouraged. The country with the lowest opportunity cost should produce more of a good than they consume. The excess should be sold as exports
• GDP


  The market value of all final goods and services produced within a country in a given period. Includes all the items produced and sold legally in an economy. Doesn't include the goods that are used in the production of the final good (intermediate goods). Measures the total income of everyone in the economy/the total expenditure on the economy's output of goods and services. Income=expenditures. Doesn't include things produced in the past like used cars
• 1. Consumption


  Spending by households on goods (goods like vehicles, appliances, food, and clothing) and services (haircuts, dentist, lawyer)
• 1. Investment


  The purchase of goods that will be used in the future to produce more goods and services. Things like inventories, housing, etc.
• 1. Government purchases


  Spending on goods and services by the government. Includes government salaries transfer payments, pension plans
• NX-Net exports


  The purchase of domestically produced goods by foreign buyers – the domestic purchases of foreign goods
• Real GDP


  Measures the market value of goods and services sold in an economy around prices in a given year – the base year. The production of goods and services valued at constant prices. Helps us capture economic growth that is not affected by the changes in prices. Therefore, it is a measure of the economy's production
• Nominal GDP


  The production of goods and services at current prices
• CPI


  A measure of the overall cost of the goods and services bought by a typical consumer. Gathers price of goods by creating a basket. Measured by the Bank of Canada
• Contents of CPI basket

  • Food
  • Shelter
  • Transportation
  • Household expenses
  • Furniture and appliances
  • Apparel
  • Medical and personal care
  • Sports
  • Travel
  • Education
  • Leisure
  • Alcohol
  • Tobacco
  • Recreational cannabis
• Core inflation


  Measures the underlying trend of inflation. Removes the volatile components (fruits, vegetables, gas, natural gas, tobacco) of CPI to find it
• GDP deflator vs CPI

  GDP deflator measured the price of all goods and services produced domestically whereas CPI measures the prices of goods and services bought by consumers