introduction chapter 1: the nature of economics. consumers, businesses and government all make...

INTRODUCTION

Chapter 1: The Nature of Economics

Consumers, businesses and government all make choices

These choices determine how society uses it’s resources

For example people may choose to purchase huge quantities of personal computers, therefore society’s resources are used to produce these

The Government may choose to upgrade the highway system or improve education

HOW these choices are made is at the heart of economics

• ECONOMICS is the social science that studies how people use scarce resources to satisfy their unlimited wants.

SCARCITY AND CHOICE The resources for satisfying human wants are

limited Collectively we want more than we can produce

with our limited resources Economists help to determine the use of scarce

resources to satisfy the “most important” wants. Because resources are desirable and scarce, we

must make choices for the use of these resources ECONOMICS is the study of “choice”.

THE IMPORTANCE OF ECONOMICS Enables us to improve the performance of the

economy and help deal with many problems that face our country

eg. A decision to build more war planes instead of spending more money on education will have short run and long run implications

Enhances our understanding of world affairs Helps us be informed citizens Develops logical thinking and problem solving skills

• ECONOMISTS work in private firms, education, government, research, non-profit organizations, for themselves, and international organizations

ECONOMIC METHODOLOGY (the whirlybird)

The factors involved in real world economic events are often quite complex

The scientific economist creates and works with models or theories to abstract from the real world

A MODEL is a simplified version of the reality that facilitates the understanding of complex economic problem

ECONOMIC ASSUMPTIONS

Assumptions are statements that describe the model’s operating conditions

• The ceteris paribus assumption means, all things being equal.

PREDICTIONS

Economists formulate models and theories so that they can make economic predictions

Predictions are statements about the general direction of events from the fulfillment of certain conditions

Economic forecasting assigns future values to certain economic variables on the basis of known relations

Gives a specific value for a particular variable

Prediction:If interest rates increase, the level of investment

spending will fall, ceteris paribusForecast:By the end of the year, gas prices will fall by 10%

POSITIVE and NORMATIVE ECONOMICS

  Positive economic statements are statements of facts expressed in a

testable, or verifiable manner These statements may be true or false eg. There are 4000 students at IONA is a positive statement

(albeit a false statement) A positive economic statement is: an increase in interest rates will cause a

decrease in the demand for housing

Normative economic statements are value judgments or statements of opinion about what “ought to be”.

They cannot be verified Interest rates should be reduced is an example of a normative statement• More money should be spent on improving the environment

ECONOMIC VARIABLES A variable is anything that can assume different values

under different situations Anything that does not vary is a constant ENDOGENOUS VARIABLES are variables that can be

explained within a model EXOGENOUS VARIABLES are variables that are

determined by factors outside a model A STOCK VARIABLE is a quantity existing a particular

time eg. There are 7, 000 books in the library (no time dimension)

A FLOW VARIABLE is the measure of a change in a variable per unit of time eg. There are 600 books taken out of the library per day

• ECONOMIC THEORY helps us to understand how the economy functions and enables us to solve real-world problems.

ECONOMIC POLICY is a course of action designed to achieve some specific economic objective 

• Every society determines the priorities of their economic objectives eg. price stability, full employment, economic growth, equitable distribution of income, economic freedom, economic security, satisfactory balance of payments etc.

• These goals often conflict and therefore choices must be made

MICROECONOMICS

aka price theory deals with the behaviour of individual economic units

MACROECONOMICS aka Income and employment theory deals

with the behaviour of economic groups

Setting Economic Goals: A Canadian Model

• Political Stability • Economic Growth (3-5% per year)

• Increased Productivity & Efficiency • Equitable Distribution of Income (NOT equal)

• Price Stability (low inflation 1-3%) • Full Employment (6-7% Unemployment) • Stable Currency • Balance of Trade • Reduced Public Debt • Economic Freedom

• Environmental Responsibility

Canada’s Economic Goals

Complementary Goals • eg. To reach employment targets, interest rates on business loans are lowered to

promote new job creation. New job creation then improves income levels and encourages consumer spending.

Conflicting Goals• eg. increasing interest rates can promote price stability but will have an adverse effect

on employment rates and national production Political Stability • this can help long term planning and long term investment Reduced Public Debt• is it fair to spend today and leave the debt in the hands of future generations? Economic Growth• an increase in the total productive output of an economy  

Increased Productivity & Efficiency• scarce productive resources are put to efficient use in order

to get as much as possible from them to compete in global markets, production processes must become more efficient

Equitable Distribution of Income• dividing up the total national income – many interpretations

about what is a fair - redistribution of income• regional differences also come into play Price Stability• periods of inflation erode the purchasing power of the

dollar and raise the cost of living for Canadians living on fixed incomes

Full Employment• in an attempt to reach full employment targets, governments try to promote full

employment of the labour force• an unemployed labour force also represents a waste of human potential and can

cause serious hardship for unemployed workers and their families• as more and more technology is developed it becomes more and more difficult for

Canada to maintain full employment Viable Balance of Payments & Stable Currency• in a global economy, an international flow of goods and currency in transactions such

as importing, exporting, borrowing and lending has become increasingly important Economic Freedom• the freedom of choice available to workers, consumers and investors in the economy• in a market economy, consumers are free to purchase goods and services of their

choice, and also, through their purchasing decisions, to determine what goods and services are actually produced

Environmental Stewardship/Responsibility

• economic activity must be carried out without significantly harming the natural environment

• if we wish to be more responsible stewards of our planet and protect it for future generations, we have to adjust they way we carry out our economic activities

• this could mean potentially higher prices for consumers and lower profits for producers, but the negative effects on the environment must be reduced

• if Canadian environmental laws become too restrictive then Canadian goods become less competitive in world markets

• this also raises the moral issue – if Canada trades with a country that has low environmental standards, does this mean Canada’s government is condoning the other country’s policy? Clearly a normative economic issue with much to debate.