Economics: Scarcity, Trade-offs and Economic Study

Chapter 1

• Economics involves decisions at a household level, which are similar to those at a societal level.
• A market economy is characterized by specialization and trade.
• Scarcity means that resources are limited, examples are money, time, land, and natural resources.
• Incentives are punishments or rewards influencing someone's actions.
• Trade-offs occur as a result of scarce resources.
• Marginal cost refers to the additional cost of one more unit of something.
• Opportunity cost is what is given up to obtain something.

Chapter 2

• Economic study shares a process involving a hypothesis, data collection, and hypothesis testing.
• Economic study differs by the difficulty of testing due to limitations on experimenting with the economy, necessitating more assumptions.
• Microeconomics studies the decisions and interactions of individuals, households, and firms.
• Macroeconomics studies economy-wide phenomena like inflation, unemployment, and growth
• Positive statements are descriptive and aim to describe the world as it is, which is a job done by economists acting as researchers/scientists.
• Normative statements are prescriptive and aim to prescribe how the world should be, which is a job done by economists acting as policy advisors.

Chapter 3

• A division of labor is more efficient for three reasons:
  • Increased dexterity in each worker.
  • Time saved from switching between tasks.
  • Inventions of machines that facilitate and abridge labor.
• Combining specialization with trade can increase the goods gained by both sides, dependent on opportunity cost and market size.
• Comparative advantage compares productivity between two parties by considering opportunity cost.

Chapter 4

• Demand is the quantity of a good people are willing to purchase over a period at a specific price.
• Supply is the quantity of a good firms are willing to produce over a period at a specific price.
• Equilibrium is a state of balance where supply and demand intersect.
• A normal good is one for which demand increases as income increases.
• An inferior good is one for which demand decreases as income increases.
• Complements are goods typically consumed together, so when the price of one changes, the demand for the other moves inversely.
• Substitutes are goods that can easily replace each other, so when the price of one changes, the demand for the other moves directly.
• Inputs are materials and skills used to produce a good.
• Preferences refer to what people like.
• Expectations are anticipated future price changes.

Chapter 5

• Gross Domestic Product (GDP) measures a nation's total income, excluding illegal goods, services, and household production, while including the value of final goods.
• GDP can be expressed as Y = C + I + G + NX, where:
  • Y = GDP
  • C = Consumption
  • I = Investment
  • G = Government Purchases
  • NX = Net Exports (exports minus imports)
• The GDP deflator is a measure of the price level, calculated as (Nominal GDP / Real GDP) x 100.
• GDP deflator is Nominal GDP/Real GDP x 100.
• Inflation rate in year 2 = (GDP deflator in year 2 – GDP deflator in year 1) / GDP deflator in year 1 x 100.

Chapter 6

• The inflation rate is the percentage change in the price level from the previous period.
• The Consumer Price Index (CPI) is an overall measure of the cost of goods and services bought by consumers.
• CPI = (Price of basket in current year / Price of basket in base year) x 100.
• Inflation rate in year 2 = (CPI in year 2 – CPI in year 1) / CPI in year 1 x 100.
• Commodity substitution bias, introduction of new goods, and unmeasured quality change affect CPI.
• Two differences between GDP deflator and CPI
  • GDP deflator reflects the prices of goods and services produced domestically.
  • GDP deflator compares the price of currently produced goods and services with the price of the same goods and services during the base year.
• Nominal interest rate is the interest rate usually reported without correcting for the effects of inflation.
• Real interest rate is the interest rate corrected for the effects of inflation.
• Real interest rate = Nominal interest rate – Inflation rate.

Chapter 7

• Productivity is the quantity of goods and services produced from each hour of a worker’s time.
• Productivity is a key determinant of living standards.
  • Growth in productivity is the key determinant of growth in living standards.
  • To enjoy a high standard of living, countries must produce a large quantity of goods and services.
• Saving and investment
  • Government encouragement of saving and investment encourages growth, and in the long run, raises the standard of living.
• Investment from abroad
  • Foreign direct investment (FDI) helps countries acquire new capital.
• Education
  • Investment in human capital is at least as important as physical capital for long-run economic success.
  • Brain drain can offset investment in domestic education.
• Health and nutrition
  • Poor countries are poor partly because their populations aren’t healthy, and populations aren’t healthy mostly because they are poor.
• Property rights and political stability
  • Countries with efficient court systems, honest governments and stable constitutions enjoy a higher standard of living.
• Free trade
  • Countries that eliminate trade restrictions often experience economic growth that would occur after a major technological advance.
• Research and development
  • Improved living standards today reflect technological knowledge advancement.
• Population growth
  • A larger population means a larger total output of goods, but not necessarily a higher standard of living for each citizen.

Chapter 8

• Financial markets: financial institutions through which savers can directly provide funds to borrowers
  • Bond: a certificate of indebtedness that specifies the obligation of the borrower to the holder
    • Characteristics include term and credit risk.
    • Debt finance is selling bonds to raise money.
  • Stock represents ownership in a firm and is a claim to its profits.
    • Equity finance is selling stocks to raise money.
  • Stock index: average of a group prices
• Financial intermediaries: financial institutions through which savers indirectly provide funds to borrowers.
  • Bank: primary function is to take deposits from savers and use them to make loans.
  • Mutual funds: institutions that sell shares to the public and use proceeds to buy a portfolio of stocks and bonds.
    • Diversification is allowed.
    • Access to professional money managers is given.
• Saving is the source of supply for loanable funds.
• Investment is the source of demand for it.
• Savings incentives: consumption taxes like GST, RRSP’s, TFSA, RESP
• Investment incentives: investment tax credit gives a tax advantage to firms building new factories or buying new equipment.
• Government debt is the sum of past budget deficits and surpluses
• S=1.
• Crowding out: a decrease in investment that results from government borrowing.
• Private saving = Y – T – C.
• Public saving = T - G.
• Budget surplus is when T > G.
• Budget Deficit is when T < G.

Overview of core economic principles: scarcity, trade-offs, market economies, and incentives. Introduces microeconomics, macroeconomics, and the scientific method in economic study.