ECON1102 Chapter Notes - Chapter 1: Optimal Decision, Marginal Utility, Offshoring
Chapter 1: Economics Foundations and Models
Offshoring: Process of firms producing goods and services outside of their home
(also called outsourcing)
• Simple manufacturing offshored
• Jobs that require high skill level offshored
• Recently – customer service jobs offshored
Question of is offshoring good or bad?
Economics is used to answer these questions:
`
1. How are the prices of goods and services determined?
2. How does pollution affect the economy, and how should government policy
deal with these effects?
3. Why do firms engage in international trade, and how do government policies
affect international trade?
4. Why does government control the prices of some goods and services, and
what are the effects of those controls?
Scarcity: The situation in which unlimited wants exceed the limited resources
available to fulfil those wants
Resources: Inputs used to produce goods and services, including natural resources
(such as land, water and minerals), labour, capital and entrepreneurial ability. These
are also referred to as the factors of production
Economics: The study of the choices people and societies make to attain their
unlimited wants, given their scarce resources
Economic models: Simplified versions of reality used to analyse real-world and
economic situations
- Both macro and micro use models to explain observed phenomena
Fundamental questions that any economy must answer:
1. What goods and services will be produced?
2. How will the goods and services be produced?
3. Who will receive the goods and services?
Three Economic Ideas:
1. People are rational
- Economists assume that consumers and firms use as much of the
available information as they can to achieve their goals
- Weigh benefits and costs of each action → choose action only if
benefits>costs
2. People respond to incentives
3. Optimal decisions are made at the margin
- Marginal → extra/additional benefit or cost of a decision
- Optimal decision is to continue any activity up to the point where the
marginal benefit equals the marginal cost (MB=MC)
- Analysis that compares marginal benefits and marginal costs = marginal
analysis
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Market: A group of buyers and sellers of a good or service and the institution or
arrangement by which they come together to trade
Scarcity, Trade-Offs and The Economic Problem That Every Society Must
Solve:
• World of scarcity → limited amount of economic resources → can only
produce a limited amount of goods and services
• Society faces trade-offs – force society to make choices, i.e.
1. What goods and services will be produced?
2. How will the goods and services be produced?
3. Who will receive the goods and services produced?
Trade-off: The idea that, because of scarcity, producing more of one good or service
means producing less of another good or service
WHAT:
• Determined by the choices made by consumers, firms and governments
• When analysing the decision to choose between alternative options,
economists use the concept of opportunity cost
Opportunity Cost: The highest-value alternative that must be given up to engage in
an activity
HOW:
• In many cases firms face a trade-off between using more workers and more
machines
WHO:
• Who receives the goods and services depends on how income is distributed
• Individuals with the highest income have the ability to buy the most goods
and services
Centrally planned economies versus market economies:
• To answer the questions above → societies organise their economies in two
main ways:
Centrally Planned Economy: An economy in which the government decides how
economic resources will be allocated
• Follow government orders rather than satisfy consumer wants
• Not been successful in producing low-cost, high-quality goods and services
(standard of living tends to be quite low)
Market Economy: An economy in which the decisions of households and firms
interacting in markets allocate economic resources
• Rely on primarily privately owned firms to produce goods and services
• Must meet wants of consumers or will go out of business
• Markets, not government, determine who receives the goods and services
• Ultimately consumers who decide what goods and services will be produced
→ Consumer sovereignty
Consumer Sovereignty: The concept that in a market economy it is ultimately
consumers who decide what goods and services will be produced. This occurs
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Offshoring: process of firms producing goods and services outside of their home (also called outsourcing: simple manufacturing offshored, jobs that require high skill level offshored, recently customer service jobs offshored. Scarcity: the situation in which unlimited wants exceed the limited resources available to fulfil those wants. Resources: inputs used to produce goods and services, including natural resources (such as land, water and minerals), labour, capital and entrepreneurial ability. These are also referred to as the factors of production. Economics: the study of the choices people and societies make to attain their unlimited wants, given their scarce resources. Economic models: simplified versions of reality used to analyse real-world and economic situations. Both macro and micro use models to explain observed phenomena. Economists assume that consumers and firms use as much of the available information as they can to achieve their goals.
