class 12 notes for economics chapter 1

1. Economics 12
Chapter 1 Notes

2. Economic Perspective
 Includes
 Scarcity & choice
 Purposeful behaviour
 Marginal analysis

3. Scarcity & choice
 Resources (time, money, water, oil, etc) are LIMITED,
therefore we must make CHOICES
 Opportunity cost = the next best choice/option
 What you would have done if your first choice was no
longer possible
 If options are ranked (1st, 2nd, 3rd) – opportunity cost is the
2nd ranked option, if you choose the 1st
 Opportunity cost is not the SUM of all choices

4. Purposeful behaviour
 Human behaviour reflects “rational self-interest”
 Ex. We seek opportunities to increase our UTILITY
 Utility = pleasure, happiness, satisfaction obtained
from consuming a good or service
 Resources (time, energy, money, etc) are allocated in
order to maximize satisfaction

5. Marginal Analysis:
Benefits & Cost
 All options have a marginal benefit and
marginal cost
 Marginal benefit = Extra/additional benefit
 Marginal cost = Extra/additional cost

6. Marginal benefit/cost example
You have eaten 2 hotdogs already, and you are getting
full. Hotdogs are $2.
What is the marginal benefit & cost of eating a 3rd hot
dog?
 Benefit = slight additional satisfaction, but satisfaction
is not as great as when you ate the first and 2nd hot
dog, because you are getting VERY full
 Cost = $2, plus potential discomfort from being TOO
full.
 Forgoing a $2 cupcake later? (opportunity cost)

7. Marginal benefit vs
Marginal cost
 Compare the two, and always choose the
option where the marginal benefit is highest
(considering cost)

8. Scientific Method
Economics relies on the scientific method
 Observation of real-world behaviour & outcomes
 Formulation of explanation of cause & effect
(hypothesis)
 Testing of hypothesis
 Acceptance/rejection/modification of hypothesis
 Hypothesis evolves into a theory after it has tested
positively (seen to be correct)

9. Economic theories
 Generalizations about how the economic world works
 When widely accepted, turns into economic principle
or law
 Enables predictions
 Many economic models are expressed graphically
 Example: supply & demand
 Low supply and high demand = high prices

10. Macroeconomics
 Examines economy as a whole
 Government, household, business sectors
 Uses aggregates (collections of specific units)
 Seeks to obtain overview of structure of economy &
relationships of major aggregates
 Example: total output, total unemployment, total income
 No detail given to specific units (1 individual, 1
company)

11. Microeconomics
 Micro (up close, microscopic, etc)
 Examines individual units
 A household
 A firm
 An industry
 Looks at very small segments of the economy

12. Positive & Normative
 Positive economics
 Facts, cause & effect relationships
 Theory development
 Concerns what IS
 Normative
 Value judgements
 What OUGHT TO BE
 Policy development in order to achieve future economic
goals

13. The economic problem
 Individual
 Limited income
 Unlimited wants
 Budget line

14. The economic problem
 Society
 Scarce resources
 Resource categories/INPUTS
 Land
 Labour
 Capital
 Entrepreneurial ability (p.12)
 Takes initiative in combining resources to produce good or
service
 Makes strategic business decisions
 Risk bearer – no guarantee of profit

15. Production possibilities model
 Scarce resources are used to produce goods and
services
 Assume
 Full employment
 Fixed resources
 Fixed technology
 2 goods

16. Production possibilities table
 Difference combinations of 2 products that can be
made with the available resources, assuming full
employment
 Economy produces only pizzas and robots
 Capital goods (robots) and consumer goods (pizzas)
Production Alternatives
Type of
product
A B C D E
Pizzas 0 1 2 3 4
Robots 10 9 7 4 0

17. Production possibilities table
 Consumer goods give MORE NOW, where capital
goods promise MUCH MORE LATER
 Scarcity prevents society from being able to have more
of both goods
 Some of 1 must be given up for more of another
Production Alternatives
Type of
product
A B C D E
Pizzas 0 1 2 3 4
Robots 10 9 7 4 0

18. Production possibilities curve
0
2
4
6
8
10
12
0 2 4 6 8 10
Robots
Pizzas
Unattainable
(outside of
curve)
Attainable

19. Production possibilities curve
 Shows different combinations of goods and services that
society can produce in fully employed economy
 Assumes fixed availability of supplies, resources
 Assumes constant technology
 Points ON the curve represents the maximum output of 2
products
 Points under the curve, do not use full production
 Less total output
 Points outside the curve are not attainable with current
resources and technology

20. Law of increasing opportunity
cost
 More pizzas means less robots
 From 0 pizzas to 1 pizza
 Opportunity cost = 1 robot
 From 1 pizza to 2 pizzas
 Opportunity cost = ?
Production Alternatives
Type of
product
A B C D E
Pizzas 0 1 2 3 4
Robots 10 9 7 4 0

21. Law of increasing opportunity
cost
 The opportunity cost of each additional pizza is
GREATER than the previous
 Illustrates the law of increasing opportunity costs
 As production of a particular good increases, the
opportunity cost of producing an additional unit rises
Production Alternatives
Type of
product
A B C D E
Pizzas 0 1 2 3 4
Robots 10 9 7 4 0

22. Shape of the curve
0
2
4
6
8
10
12
0 2 4 6 8 10
Robots
Pizzas
Unattainable
(outside of
curve)
Attainable
 Increasing opportunity cost is reflected
 Shows as move to more pizzas, giving larger and
larger amounts of robots

23. Economic rationale
 Rationale for increasing opportunity costs
 Resources are not completely adaptable to alternative
uses
 Many resources are better at producing one type of good
than another
 Some land is good for growing resources needed to make
pizza
 As pizza production expands, land that is less suited to this is
used, producing less efficiently

24. Optimal allocation
 The IDEAL or OPTIMAL allocation of resources occurs
when the marginal benefit = the marginal cost
 MB = MC

25. Growth (p19)
 Maximum output is increased
 Could be due to technology advance
 More resources are found
 Production possibilities curve shifts outward
0
2
4
6
8
10
12
0 5 10
Robots
Pizzas
0
5
10
15
0 5 10

26. Present choices vs future
possibilities
 By choosing to use resources for goods to consume
NOW, we give up the potential for greater growth in the
future
 Example, p 20.

27. International trade
 Allows for specialization
 One country may specialize in producing a type of
good due to the presence of resources or more skilled
labour
 Enable a nation to get more of a specific good at less of
a sacrifice than if it was produced at home

28. Handout
 Complete the handout
 Fill in the blanks
 True and false