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Lecture 01 - ECO100 - Introduction to Economics Lecture 1...

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ECO 100Y I d i Introduction to E i Economics Lecture 1: Introduction © Gustavo Indart Slide 1
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What is Economics? Economics is the science that studies how resources are used in order to satisfy human wants or needs Resources are characterized for being scarce and are characterized for being scarce and human wants for being unlimited There are 3 main types of resources: ¾ natural resources (land, minerals, water, etc.) ¾ h ( l d h i l) human resources (mental and physical) ¾ capital resources (tools, machinery, buildings, etc.) © Gustavo Indart Slide 2
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Commodities In a capitalist economy, resources are used to produce commodities (i.e., goods and services sold in the market) Resources used in capitalist production are called factors of production Commodities are produced in order to satisfy an effective demand based on human needs Human needs are satisfied through the consumption of commodities © Gustavo Indart Slide 3
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Economic Agents in a Capitalist Society Society as producer consists of firms ¾ A firm employs factors of production in order to produce commodities that it sells to other firms, to households, or to the government Society as consumer consists of households ¾ A household consists of all the people living under A consists of all the people living under one roof and who make joint financial decisions © Gustavo Indart Slide 4
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Underlying Behavioural Assumptions Producers try to maximize profits try to Consumers try to maximize their degree degree of satisfaction or utility © Gustavo Indart Slide 5
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Circular Flow of E di d I Expenditures and Income Commodities and factors of production are bought and sold in the market Firms supply commodities in the commodities market and demand factors of production in the factors market Households supply factors of production in the in the factors market , and demand commodities in the commodities market © Gustavo Indart Slide 6
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Flow of Expenditure and I Income FACTOR MARKETS Labour, land & capital Labour, land & capital Wages rent & FIRMS HOUSEHOLDS Wages, rent & interest Expenditures on goods & services GOODS MARKETS Goods & services Goods & services © Gustavo Indart Slide 7
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Microeconomics and Macroeconomics Microeconomics studies the decisions of individual households and firms (e.g., determination of the price for apples in the market for apples) Macroeconomics studies the economy as a whole (e.g., the determination of the price level for the economy as a whole) © Gustavo Indart Slide 8
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Economic Models Economists develop economic theories to explain how the economy works Economists develop economic theories by building and Economists develop economic theories by building and testing economic models An economic model is a simplification of the real world An economic model has two components: assumptions and implications © Gustavo Indart Slide 9
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Assumptions and I li i Implications Assumptions are the foundations on which the model is built ¾ Assumptions allow for a simplification of the real world Implications are the outcome of the model
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