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Micro Economics University Grade 1 and High School Grade 12
Micro Economics University Grade 1 and High School Grade 12 Chapter 1- Charpter 6
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The Economic Problem - Chapter 1January 26, 2021 7:15 PM
The Economic Problem
Every day, we make choices to meet our wants. Wants vary widely from person to person; we may have a special preference for ice
cream sundaes or chocolate cakes, rock concerts or classical recitals, video games or comic books. Because we face so many choice
the sum total of wants is virtually unlimited. Our resources, however, are not. Thus, we have the economic problem.
economic resources: basic items that are used in all types of production, including natural, capital, and human resources
natural resources: the resources from nature that are used in production, including land, raw materials, and natu ral processes
capital resources: the processed materials, equipment, and buildings used in production; also known as capital
HUMAN RESOURCES
labour: human effort employed directly in production
entrepreneurship: initiative, risk-taking, and innovation necessary for production
microeconomics: the branch of economics that focuses on the behaviour of individual participants in various markets
macroeconomics: the branch of economics that takes a wide-ranging view of the economy, studying the behaviour of economic sectors
Economic Models
Economists use models to help them understand economic behaviour. Economic models—also known
as laws, principles, or theories—are generalizations or simplifications of economic reality.
variables: factors that have measurable values
independent variable:
the variable in a causal relationship that causes change in another variable
dependent variable:
the variable in a causal relationship that is affected by another variable
inverse relationship: a relationship in which a change in the independent variable causes a change in the
opposite direction of the dependent variable
direct relationship: a relationship in which a change in the independent variable causes a change in the same
direction of the dependent variable
THE NEED FOR ASSUMPTIONS
In order to focus on the relationship between two variables, economists must make assumptions to
temporarily simplify the real world.
ceteris paribus: the assumption that all other things remain the same
positive economics:
the study of economic facts and how the economy operates as it does -
“Canadians bought five million CDs last year” is a positive statement—a simple declaration of fact.
normative economics: the study of how the economy ought to operate -
In this type of economics, opinions or value judgements—known as normative statements—are common. “We should
reduce taxes” is an example of a normative statemen
ECONOMICS GRADE 12 Page 1
,Economic Choice -
Economists assume that whenever you make an economic choice, you are trying to maximize your own utility
utility: the satisfaction gained from any action
self-interest motive: the assumption that people act to maximize their own welfare
Opportunity Cost
Maximizing utility is only one part of making economic decisions. Acquiring anything prevents someone from pursuing an
alternative. Instead of measuring cost in terms of money, economists use a concept that accounts for the tradeoffs
resulting from any economic choice: opportunity cost. The opportunity cost of any action is the utility that could
have been gained by choosing the best possible alternative.
The Production Possibilities Model
Two Products
An immense range of goods and services are produced in the Canadian economy. The production possibilities
model, however, narrows the list to only two; for example, computers and hamburgers.
Fixed Resources and Technology
For the model, it is assumed that there is a set amount of available economic resources and that technology
remains constant. However, resources can be moved from the production of one good to the other. Workers who
make hamburgers, for example, can be shifted to the assembly of computers.
Full Production
In the production possibilities model, all economic resources are employed, that is, there is no excess. Also,
resources are used to their greatest capacity, no matter which good they are producing—in this case, computers
and hamburgers.
Law Of Increasing Opportunity Costs
The notion of opportunity cost is best seen when moving from one point to another on the production possibilities curve.
Notice that the curve in Figure 1.1 bows out to the right. This shape reflects what is called the law of increasing
opportunity costs, which states that as more of one product is produced, its opportunity cost in terms of the other
product increases
Economic Growth
In the long run, this society may experience economic growth, or an increase in the total output of goods and
services, either due to a rise in the amount of available resources or an improvement in technology. Both trends cause
ECONOMICS GRADE 12 Page 2
,services, either due to a rise in the amount of available resources or an improvement in technology. Both trends cause
an outward shift in the production possibilities curve,
Economic Systems
economic system: the organization of an economy, which represents a country’s distinct set of social customs, political institutions, and
economic practices
Traditional Economy
A traditional economy is one in which economic decisions depend on custom, such as a traditional division of
work between women and men. The mix of outputs, the organization of production, and the way in which outputs
are distributed tend to be passed on relatively unchanged from generation to generation. Religion and culture tend
to be considered to be at least as important as material welfare.
Market Economy
In a market economy, individuals are free to pursue their own self-interest. This type of economy is based on the
private ownership of economic resources and the use of markets in making economic decisions. In this system—often
referred to as capitalism— households use incomes earned from their economic resources by saving some and spending
the rest on consumer products. Businesses buy resources from households and employ these resources to provide the
consumer products demanded by households. Government performs only the political functions of upholding the legal
system and maintaining public security.
A market is a set of arrangements between buyers and sellers that allows them to trade items for set prices.
Product markets are those in which consumer products are traded. Resource markets are those in which
economic resources—natural resources, capital resources, and human resources—are traded.
BENEFITS OF A MARKET ECONOMY
Placing markets at the centre of economic activity can have benefits. The main benefits are associated with
consumer sovereignty, prices, and innovation.
ECONOMICS GRADE 12 Page 3
, consumer sovereignty, prices, and innovation.
Consumer Sovereignty
Market economies are characterized by consumer sovereignty, meaning that the decision of what to
produce is ultimately guided by the needs and wants of households in their role as consumers
Prices
Prices act as an important signalling device in a market economy. They do this by co-ordinating the activities
of buyers and sellers to stop either too much or too little of an item from being produced
Innovation
The incentive to make a profit in a market economy encourages innovation and entrepreneurship, which help
foster advances in technology
DRAWBACKS OF A MARKET ECONOMY
The main drawbacks of a market economy are associated with income distribution, possible market problems, and
potential instability of total output.
Income Distribution
Without intervention by governments, the distribution of income in a market economy can create significant
inequities. If households’ incomes are based solely on the ability to supply economic resources, then some
individuals in the economy might not earn enough to provide even for their basic needs.
Market Problems
Other deficiencies of market economies arise because private markets do not always operate in a way that benefits
society as a whole. Negative external effects of economic activity—for example, pollution—may require intervention
by governments to prevent harm to the society. Negative internal effects may also cause governments to step in,
for example, when one or a few companies control a certain product market, thus depriving consumers of the
advantages of competition.
Instability
Finally, market economies can display considerable instability in the total output produced from year to year. Such
fluctuations can harm the economy’s participants through substantial variations in prices or employment levels.
Command Economy
Opposite to a market economy is a command economy, in which all productive property—natural resources and
capital—is in the hands of government, and markets are largely replaced by central planning
BENEFITS OF A COMMAND ECONOMY
The reliance on planning rather than markets gives command economies some possible benefits related to
income distribution and economic growth.
Income Distribution
A country that adopts a command system can choose to distribute income among its citizens on the basis of
considerations other than purely economic ones. In these economies, an attempt is usually made to
distribute income more equally than would be the case with market economies.
Economic Growth
Central planners can focus on promoting the rate of economic growth by devoting more resources to capital
goods than would be the case in a market economy
ECONOMICS GRADE 12 Page 4
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