Week 1 Notes:

Chapter 1:

What is Economics?

1. Economics is about money

2. Economics about individuals, business and government (Micro)
3. Economics is about why some countries are rich and others are poor (Macro)
4. Its core is the study of choices and their consequences

Scarcity
- Resources are limited and wants are unlimited
- Results in the need to make choices
- The choices we make depend on the incentives we face
o Incentives is a reward that encourages an action or a penalty that discourages an
action

Economics is the social science that studies the choices that individuals, businesses, governments and
entire societies (rational agents) make when they cope with scarcity and incentives that influence and
reconcile those choices

Rational means acting in ones own self-interest (Eg: Firms want to maximize profits or minimize
costs, society wants to maximize welfare)

Factors of production:

Resources are the inputs or factors of production used to produce commodities and services that
people want

1. Land physical land together with minerals, oil, gas, coal, water, air, forest and fish
a. Earns rent
2. Labour work time and work effort that people devote to producing goods and services
a. Earns wages
3. Capital tools, instruments, machines, buildings and other constructions that businesses use
to produce goods and services
a. Earns interest because the concept of opportunity cost
4. Entrepreneurship human resource that organizes labor, land and capital
a. Earns profit

Positive vs Normative Statements

Positive Statements
- the study of how the economy works
- Answer the question What is?
- Testable statement
Normative Statements
- Practice of recommending policies to solve economic problems
- Answer the question What ought to be?
- Judgements or beliefs (not testable) as it is an opinion

Opportunity Cost
- What is given up when taking an action or making a choice
- To determine the opportunity cost, ask the question What is given up?
- Highest valued alternative forgone
Chapter 2:
Production possibilities frontier

- PPF shows the possible combinations of products that an economy can produce, given that its
productive resources are fully employed and efficiently used
- Boundary of goods and services that is attainable and unattainable
- Can produce at any point on and within the PPF graph
- Inside the graph means inefficiency misallocation of resources
- All points on PPF are productive efficient
o Moving along the PPF boundary is a trade-off but operating at full efficiency
- Outward shape shows the increasing opportunity cost
o Opp cost is a ratio decrease in the quantity produced of one good / increase in
quantity produced in another good
o Opp cost of pizzas increases as the quantity of pizzas produces increases

Productive Efficiency: Producing goods and services at lowest possible cost.

- Occurs when producing on the PPF

Allocative Efficiency: MC = MB

Tradeoff Along the PPF: moving along the PPF

Marginal Cost: opportunity cost of producing one more unit of good

- calculated from the slope of the PPF, steeper PPF = higher MC

Marginal Benefit: benefit received from consuming one more unit of it

- unrelated to the PPF and cannot be derived from it

Opportunity Cost: loss in highest valued alternative / gain in current action

- slopes of the PPF are the negative of the OC

Specialization: results in gains from trade.

- Export goods that they produce and import goods produced by others
- Enables individuals to gain consumption relative to the case where they try to be self-
sufficient

Absolute Advantage: If that person is more productive than others in all activities

Comparative Advantage: If that person can perform the activity at a lower opportunity cost than
anyone else

It is possible for somebody to have an absolute advantage in something but not have a comparative
advantage
Tom has an absolute advantage in both production of rice and meat

To calculate the OC: Eg: Mary for Rice Loss in production of meat (0.05) / Gain in Rice (0.1) = 0.5

Gains from trade: Gains both parties can consume more of both goods than under self-sufficiency

- If Tom wants to consume 5kg of rice, he can only get max 4kg from Mary and then he needs
to start producing his own so the graph will be back to the original (parallel)

For trade to be beneficial to both parties, relative prices must lie between the opportunity costs
otherwise there is no incentive to trade

Economic Growth: the expansion of production possibilities (outward shift of PPF)

- increases our standard living
- does not overcome scarcity and doesnt avoid opportunity cost