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OTTAWA HSS 1100 - Chapter 1 The Basic Insights of Economics

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Chapter 1The Basic Insights of Economics- Economics = the study of how people manage resourceso Resources can also be intangible -time, ideas, relationship, job experience, tech- Economists tend to break down problems by asking a set of four questions:1. What are the wants and constraints of those involved?2. What are the trade-offs?3. How will others respond?4. Why isn’t everyone already doing it?ScarcityWhat are the wants and constraints of those involved?- Scarcity = wanting more than what we can get with the available resources o As a society, we can produce only so many things, and we have to decide how those things are divided among many people.- Given both rational behaviour and scarcity, we can expect people to work to get what they want, but to be constrained in their choices by the limited resources available to themOpportunity Cost and Marginal Decision MakingWhat are the trade-offs?- Trade off bw cost and benefit o Benefit is easy to see but cost isn’t If someone asked you how much your road trip cost and you responded by adding up the money you spent on gas, hotels, and food, you would be failing to capture some of the most important and interesting aspects of the trade-offs you made (such as how much fun you had)- Opportunity cost is equal to the value of what you have to give up in order to get somethingo Value of next best alternative- Marginal decision making describes the idea that 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 recoveredo Should not have baring on marginal decisions about what to do nextIncentivesHow will others respond?- If a trade-off faced by a lot of people changes, even by a small amount, the combined change in behaviour by everyone involved can add up to a big shift- Assumptions made about trade-offso How people respond to incentives Incentive = a trade-off faced by a lot of people changes, even by a small amount, the combined change in behaviour by everyone involved can add up to a big shift- +ve = something people more likely to doo Nothing happens in a vacuum you can’t change just one thing in the world without eliciting a response from othersEfficiencyWhy isn’t everyone already doing it?- If a genuine profit-making opportunity exists, someone will take advantage of it, and usually sooner rather than later.- Efficiency describes a situation in which resources are used in the most productive way possible to produce the goods and services that have the greatest total economic value to society- Innovation. Innovation is the explanation you’re hoping is correct. - Market failure. Market failures are an important cause of inefficiency.- Intervention. If a powerful force—often the government—intervenes in the economy, transactions cannot take place the way they normally would.- Goals other than profit. Maybe your idea won’t produce a profit. Individuals and governments have goals other than profit, of course—for example, creating great art or promoting social justice.An Economist’s Problem-Solving ToolboxCorrelation and Causation- When we see that two events occur together, we tend to assume that one causes the other- Correlation = observe a consistent relationship between two events or variableso If both tend to occur at the same time or move in the same direction, we say they are positively correlated.o If one event or variable increases while a related event or variable decreases, we say they are negatively correlated.- Causation = one event brings about the other- Correlation and causation can be confused in three major ways: o Correlation without causation Stock market outcomes happened to be correlated with Super Bowl outcomes for a number of years, but there is no logical way they could be caused by them.o Omitted variables Sometimes, two events that are correlated occur together because both are caused by the same underlying factor- Each has a causal relationship with a third factor rather than with each other.o Reverse causation When two events always happen together, it can be hard to say which causes the other.Model- Model = simplified representation of a complicated situationo Allow us to focus on important parts- Circular flow model = a simplified representation of how the economy’s transactions work together- What makes a good economic model?o Predicts cause and effecto Makes clear assumptionso Describes the real world accuratelyPositive and Normative Analysis- +ve = factual - -ve = statement that makes claimsChapter 2Production PossibilitiesDrawing the Production Possibilities Frontier- Product possibilities frontier - It is a line or curve that shows all the possible combinations of outputs that can be produced using all available resourcesChoosing Among Production Possibilities- What can the production possibilities frontier tell us about what combination of goods an economy will choose to produce?o Choosing a production point inside the frontier means a country could get more wheat, more shirts, or both, just by using all available workerso Once at the frontier, it will have to give up some of one good to get more of the other- Points on the frontier = efficiento They squeeze the most output possible from all available resources. - Points within (inside) the frontier = inefficient o Do not use all available resources.- We can predict that an economy will choose to produce at a point on the frontier rather than inside it.o PPF cannot tell us is which point on the frontier that will beShifting the Production Possibilities Frontier- Two main factors drive the change in Canadian production possibilitieso More workers More workers = more people available to produce shits and wheato Technological advances Absolute and Comparative Advantage- Absolute - If a producer can generate more output than others with a given amount of resources- Comparative - When a producer can make a good at a lower opportunity cost than other producersWhy Trade?Specialization- Specialization - the practice of spending all of your resources producing a particular goodo The problem with specialization is that each producer ends up with only one goodGains from Trade- GFT - This improvement in outcomes that occurs when specialized producers exchange goods and services- Overall, there is room for trade as long as the two countries differ in


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