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ECN 104 Week 1
Chapter 1

How People Make Decisions:

Principle #1: People Face Trade-offs
Giving one thing in order to obtain another
Society faces a trade-off between efficiency and equity
Efficiency – society getting the most out of it’s resources
Equity – how the resources are divided amongst society

Principle #2: Opportunity Costs
The cost of something is what you give up to get it

Principle #3: Rational People Thing at the Margin
Rational People – people who systematically and purposefully do the best they can to achieve their objectives
Marginal Changes – small incremental adjustments to a plan of action (ex. better to sell an empty seat for cheaper than to leave it empty and gain no $)
(Ex. Water and Diamond pg. 8)

Principle #4: People Respond to Incentives
Incentive – something that triggers a certain behaviour from consumers (ex. gas price rise causes people to buy more fuel efficient cars)

Principle #5: Trade Can Make Everyone Better Off
Import/Export between countries are more beneficial for society
We get products that we wouldn’t otherwise have access to on Canadian soil
Win-win situation when trading with other countries

Principal #6: Markets Are Usually a Good Way to Organize Economic Activities
Market Economy – an economy that allocates resources through the decentralized decisions of many firms and households as they interact in the markets for goods and services
Markets are successfully and indirectly guided by firms and households to a desirable outcome (it just works itself out AKA the “Magic Hand”)
When the government put restrictions on the economy or tries to control it; the effect of the “Magic Hand” can’t take place (ex. communist countries)
An economy that is run by the government is known as a centrally planned economy where the government decides what is produced, what the prices should be, who purchases, etc. (not an effective way to run the economy)
Price reflects both the value of the good and the cost to society’ of making the good, which guides sellers and buys to reach an outcome that maximizes welfare

Principle #7: Governments Can Sometimes Improve Market Outcomes
The “Magic Hand” can’t work if the government doesn’t enforce the rules and maintain the institutions that are key to the market economy
Property Rights – the ability of an individual to own and exercise control over scarce resources (ex. a farmer won’t farm, if he expects his crops/equipment to be stolen in the process)
We rely on government-provided services such as police to give use the security that we need to operate in the market
The reason why the government would intervene is because they want to promote efficiency and equity
Most government policies aim at either enlarging the economic “pie” or to change how the “pie” is divided amongst society
Market Failure – a situation in which a market left on its own fails to allocate resources efficiently (when the “Magic Hand” fails to do its magic)
A possible cause of market failure is externality – the impact of one person’s actions on the well being of a bystander (ex. pollution)
Another possible cause for market failure is market power – refers to the ability of a single economic actor (or small groups) to have a substantial influence on market prices (ex. an owner of the only gas station in town has market power over the gas business in their town)

Principle #8: A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services
Almost all living standards among countries is attributes to their productivity
Productivity – the quality of goods and services produced from each hour of a worker’s time
More productivity = higher standard of living; and vice-versa
Increase productivity by ensuring that workers are well educated, have the tools need to produce the goods/service, and have access to good technology

Principle #9: Price Rises When the Government Prints Too Much Money
Inflation – an increase in the overall level of prices in the economy
Inflation is caused when the government prints too much money
The value of money falls, when there is an increase in the quantity of money printed
An increase in the quantity of money will increase prices in the long-run

Principle #10: Society Faces a Short-Run Trade-off Between Inflation and Unemployment
Short-run effects of an increase in the quantity of money
Increasing the amount of money in the economy will stimulate the overall level of spending and this the demand of goods and services
Higher demand will cause firms to raise their prices, produce more, and hire more workers; more hiring = lower unemployment
Business Cycle – fluctuation in economic activity, such as employment or the production of goods and services
The short-run trade-off is a rise in inflation and decrease in unemployment
Policymakers control the trade-off between inflation and unemployment by using various policy instruments to put restrictions on the government’s spending, the amount it taxes, and the amount of money being printed