Macro CH 1-2

Scarcity refers to
the limited nature of society’s resources.
Economics is the study of
how society manages its scarce resources.
Principle #1:
Principle #2:
Principle #3:
Principle #4:
Principle #1: People Face Tradeoffs
Principle #2: The Cost of Something Is What You Give Up to Get It
Principle #3: Rational People Think at the Margin
Principle #4: People Respond to Incentives
Principle #5:
Principle #6:
Principle #7:
Principle #5: Trade Can Make Everyone Better Off
Principle #6: Markets Are Usually A Good Way to Organize Economic Activity
Principle #7: Governments Can Sometimes Improve Market Outcomes
Scientists:
try to explain the world
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What do economists do? Where can you find economists?
Universities; research agencies; financial institutions
Government; Bank of Canada; (Policy) Institutions
Economists as scientists employ the…
scientific method: Build models with assumptions; Collecting evidence to verify models.
As scientists, economists make
positive statements, which attempt to describe the world as it is.
economists as policy advisors:
try to improve the world
As policy advisors, economists make
normative statements, which attempt to prescribe how the world should be.
The scientific method involves
The scientific method involves observation, theory, and more observation.
Economists use theory and observation like other scientists, but they do face an obstacle that makes their task especially challenging:
Experiments are often difficult in economics.
Economic models omit many details to
allow us to see what is truly important. All the models are built with assumptions.

Assumptions can simplify the complex world and make it easier to understand.
-The art in scientific thinking is deciding which assumptions to make.

Production Possibility Frontier:
a graph that shows the combinations of output that the economy can possibly produce given the available factors of production and the available production technology.
We can use PPF to
illustrate our production and the potential trade-offs.
The slope of the PPF illustrates
the opportunity cost.
the expansion of the PPF:
Both the increase in resources and the advancement of technology can lead to economic growth, which can be illustrated as the expansion of the PPF.
Bow shape PP:
because resources are different, the opportunity cost of producing one good increases when more of this good is produced (increasing opportunity cost).
Circular-Flow Diagram:
a visual model of the economy that shows how dollars flow through markets among households and firms.
downward sloping PPF
trade off and opp cost
income=expenditure applies ONLY to
aggregate economy
normative
good/bad
judgement
positive
what happens
no judgement
Microeconomics is the study of
how households and firms make decisions and how they interact in markets.
Macroeconomics is the study of
economy-wide phenomena, including inflation, unemployment, and economic growth.
Both households and societies face many decisions because
resources are scarce
A good is considered scarce in a society when
everyone in that society cannot have all they want of the good
When government policies such as the welfare system try to help the most needy members of society, it
increases equity and reduces efficiency
College-age athletes who drop out of college to play professional sports
are well aware that their opportunity cost of attending college is very high
Paul receives $300 as a birthday gift. In deciding how to spend the money, he narrows his options down to four choices, Option A, Option B, Option C and Option D. Each option costs $200. Finally he decides on Option B. The opportunity cost of Option B is
the value to him of the Option he would have chosen if Option B were not available.
The average cost per seat on a bus trip from Montreal to Toronto is $140. If no refreshments are served and 3 seats are empty, the bus company could increase its profit only if it
a. charged any ticket price above $0 for the remaining seats Correct
true in a market economy (3)
a. Firms decide whom to hire and what to produce

b. Profit and self-interest guide the decisions of firms and households.

c. Households decide which firms to work for and what to buy with their incomes.

One advantage market economies have over central planning is that market economies
are more efficient
Market failure can be caused by
externalities and market power.
Because it is difficult for economists to use experiments to generate data, what must they generally do?
use whatever data the world gives them
Where do the most common data for testing economic theories come from?
historical episodes of economic change
What can good assumptions do?
simplify the complex world and make it easier to understand
Which is the best statement about the roles of economists?
In trying to explain the world, economists are scientists; in trying to improve the world, they are policymaker
Two economists, Adam and Joan, are discussing the possibility of substantially reforming the current federal tax system. Adam thinks the current system is fine but Joan is in favour of reform. Which of the following is the LEAST likely explanation for the disagreement?
a. Adam is a positive economist and Joan is a normative economist.
b. Adam and Joan have different positive views about the effect of changing the tax system.
c. Adam and Joan have different values, and so have different normative views about policy.
d. Adam is better off under the current system and Joan would be better off if the reforms were implemented.
a. Adam is a positive economist and Joan is a normative economist.
What do good economic models do?
They omit many details to allow us to see what is truly important.
What does a point on a country’s production possibilities frontier represent?
a combination of two goods that an economy can produce using all available resources and technology
When a production possibilities frontier is linear, what does it show?
that resources are perfectly shiftable from the production of one good to another
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