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Class notes Introduction To Microeconomics (ECO1104)
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- University Of Ottawa (U Of O )
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Chapter 1:Economics: study of how people manage resources
Resources: tangible and intangible things: cash, land, time, ideas, technology, experience,
relationships
Microeconomics: study of how individuals/firms manage resources
Macroeconomics: study of the economy on a regional, national, international scale
Classical theory: focuses on an equilibrium condition where supply and demand interact
● Suggests if demand and supply are not equal, the market will adjust so equilibrium
prevails
● Great Depression contradicted Classical theory that demand will always equal supply
General Theory of Employment, Interest, and Money: markets may not need to be in equilibrium
for the economy to operate
Economic problem solving:
1. What are the wants and constraints of those involved? (scarcity)
2. What are the trade-offs? (performance and decision making)
3. How will others respond? (incentives)
4. Why isn’t everyone already doing it? (efficiency)
Scarcity: wanting more than we can get with available resources
Performance and decision making: economic measurements are our performance indicators’ tell
us where we are; help us set goes
● Gross Domestic Product (GDP): measurement of national income (dollar value of all the
final goods and services a country has produced domestically for a specific period of
time)
● Business cycles: short-run output fluctuations
● Unemployment rates: measure unemployed workers in the labour force
○ Tells labour utilization in economy
○ Labour is significant input into economy’s production capacity
○ High unemployment decreases output
○ Some unemployment inevitable
○ Policy-makers are more concerned with unemployment that comes from growth
stagnation
● Consumer Price Index (CPI): overall price level
● Inflation: state of overall price increases as measured by the CPI
○ Rapid inflation may disrupt the saving-investment process
, ○ Businesses may not borrow money to expand because the cost of borrowing
rises
○ Households don’t want to save money because the future value of their value
may be lower
○ Leads to lower economic output and affects long-run economic growth
● Policy-makers: decide for long-term growth and reducing recession to keep economic
output consistent with full employment
● Monetary policy: conducted by Bank of Canada
○ Controls money supply, sets interest rates
○ Low interest rates stimulate output/employment but may create higher inflation
○ High rates tend to lower inflation, but may lower output/employment
● Fiscal policy: conducted by federal government
○ Uses spending/taxation to raise economic output
○ Higher government spending/lower taxes will boost economic output but may
bring a higher level of inflation and public debt
○ Lower government spending/higher taxes will keep inflation and public borrowing
in check but may lead to lower output and employment
● Opportunity cost: equal to the value of what you have to give up in order to get
something
● Marginal decision making: rational people compare the additional benefits of a choice
against the additional costs, without considering related benefits and costs of past
choices
● Sunk costs: costs that have already been incurred and cannot be recovered
Incentives:
● Asking how others will respond can prevent bad decisions by predicting undesirable side
effects
● Trade-offs changes affect choices people make
● Incentive: something that causes people to behave in a certain way by changing the
trade-offs they face
○ Positive incentive: makes people more likely to do something
○ Negative incentive: makes people less likely to do something
Efficiency: resources used in the most productive way to produce goods and services with
greatest societal value
● Under normal circumstances, individuals and firms will act to provide the things people
want
● Increasing efficiency: finding ways to better use resources to produce the things that
people want
● Disruptors of efficiency include:
○ Innovation
○ Market failure
○ Intervention
○ Goals other than profit
,Correlation and causation: economic analysis requires combining theory and observation with
scrutiny before drawing conclusions
● Correlation: if events appear to occur in relation to each other
○ Positively correlated: events seem to occur at the same time and move in the
same direction
○ Negatively correlated: increase in one event appears related to a decrease in
another
○ Uncorrelated: no consistent variable relationship
● Causation: one event brings about the other
● Reverse correlation: distinguishing dependent from independent variables
● Model: simplified representation of a complicated situation
● Circular flow model: flow of economic transactions in an economy
Good models:
● Predict cause and effect
● Make clear assumptions
● Describe real world accurately
Positive and normative analysis:
● Positive statement: statement about how the world actually works
● Normative statement: statement about how the world should be
Chapter 2:
Production Possibilities Frontier (PPF)
A graph comparison of two main questions to determine optimum blend of:
1. Wants and constraints of those involved?
, 2. What are the trade offs?
Assume:
2 million Canadians equally capable of each producing either:
A. 2 bushels wheat/day (4 M bushels/days) OR
E. 1 shirt/day (2 M shirts/day)
Any point on the A-E line is a prediction of the range of production possibilities for any
combination of either product with the same labour resource.
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