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Econ 102 The Canadian Economy
Chapter 1The Economic Problem
Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.
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Chapter Objectives
In this chapter, you will:consider the economic problem that underlies
the definition of economics; learn about the way economists specify
economic choice;examine the production choices an entire
economy faces, as demonstrated by the production possibilities model;
analyze the three basic economic questions and how various economic systems answer them.
Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.
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Outline of Topics
1.1 What Economists Do 1.2 Economic Choice 1.3 The Production Possibilities Model 1.4 Economic Systems
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1.1 What Economists Do The Economic Problem
Economists deal with the economic problem. Economic agents must continually make
choices. Their wants are unlimited. They face a limited supply of economic
resources. Economic resources
including natural, capital, and human resources ( see Definitions on page 3)
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1.1 What Economists Do Economics Defined
Economics is the study of how to distribute scarce resources among competing ends.Microeconomics focuses on individual
consumers and businesses.Macroeconomics takes a broad view
of the economy.
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1.1 What Economists Do Economic Models
Economic models:simplify economic realityshow how dependent variables are affected by
independent variables include inverse and/or direct relationships incorporate a variety of assumptions such as ceteris
paribusare classified as part of either positive economics
or normative economics (See Definitions on page 5 & 6)
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1.2 Economic Choice Utility Maximization
Economists assume that economic decision-makers maximize their own utility.Utility: the satisfaction gained from any
actionDecision-makers must keep in mind the
opportunity cost of each alternative.Opportunity cost: the utility that could
have been gained by choosing an action’s best alternative.
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1.3 The Production Possibilities Model
The production possibilities model is based on three assumptions:an economy makes only two products resources and technology are fixedall resources are employed to their fullest
capacity
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1.3 The Production Possibilities Model The Production Possibilities Curve (a)
The production possibilities curve shows a range of possible output combinations for an economy. It highlights the scarcity of resources. It has a concave shape, which reflects the
law of increasing opportunity costs.
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The Production Possibilities Curve (b)
Figure 1.1, page 8
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Production Possibilities Schedule
Hamburgers Computers point on graph
Production Possibilities Curve
0 1 2 3
1000
600
b
c
1000 0 a
900 1 b
600 2 c
0 3 d Computers
Ham
bur
gers
e
f
inefficient
unattainable
d
900
a
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The Law of Increasing Opportunity CostsFigure 1.2, page 10
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Production Possibilities Schedule
Hamburgers Opportunity Computers point Cost of on graph Computers
Production Possibilities Curve
0 1 2 3
1000
6001000 0
a 100
900 1 b
300
600 2 c
600
0 3 d Computers
Ham
bur
gers
As the quantityof computers
rises, so does theiropportunity cost.
a
b900
c
d
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Economic Growth:Outward Shifts in Production Possibilities
Production Possibilities Curve
0 3
1000
Computers
Ham
bur
gers
With morecomputers, the curve shifts out
in the nextperiod.
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1.4 Economic Systems
Economic Systems: the organization of an economy, which represents a country’s distinct set of social customs, political institutions, and economic practicesThe Basic Economic Questions: There are three basic questions any society must answer:what to producehow to produce for whom to produce
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1.4 Economic Systems
There are three systems to choose from: Traditional Economy: an economic system in
which economic decisions are made on the basis of custom.
Traditional economies focus on non-economic concerns and have tight social constraints.
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1.4 Economic Systems
Market Economy: an economic system based on private ownership and the use of markets in economic decision-making
Market economies are consumer-centered and innovative but create inequality and instability.
Benefits: Consumer sovereignty: the decision of what to
produce is ultimately guided by the needs and wants of household in their role as consumers
InnovationCopyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.
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1.4 Economic Systems
Drawbacks:Inequities of income distributionPossible market problems: eg, pollutionPossible Instability of total output
Command Economy: an economic system based on public ownership and central planning.Benefits:
Distribute income equallyEconomic growth
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1.4 Economic Systems Mixed Economy
Most countries fall between the extremes of traditional, market, and command economies.
Modern mixed economies: an economic system that combines aspects of a market economy and a command economy; production decisions are made both in private markets and by government
Traditional mixed economies: economic systems in which a traditional sectors co-exists with modern sectors
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The Range of Economic Systems Figure 1.4, page 16
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1.4 Economic System Economic Goals
There are seven major economic goals: economic efficiency income equity price stability full employment viable balance of payments economic growth environmental sustainability
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1.4 Economic SystemComplementary and Conflicting Economic Goals
Economic goals may be complementary.An example is the relationship between full
employment and economic growth. Economic goals may be conflicting.
An example is the relationship between price stability and full employment.
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The Founder of Modern Economics
Adam Smith:explained how the division of labour
increases productionargued that self interest is transformed by
the invisible hand of competition so that it creates significant economic benefits
stressed the principle of laissez faire, which means that governments should not intervene in economic activity
Copyright © 2002 by McGraw-Hill Ryerson Limited. All rights reserved.