Lecture Notes - ECONOMICS NOTES CHAPTER 1: Basic Principles...

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ECONOMICS NOTES CHAPTER 1: Basic Principles of Microeconomics Economics - the study of how society allocates its resources to satisfy people’s wants - resources are scarce, meaning they are usually limited - resources are what are used to produce something else (goods and services ie. labour, land, machinery) - there is a limit on how much production of goods and services can occur do the scarcity of resources Micro : focuses on individual parts of the economy- how households and firms interact Macro : focuses on the economy as a whole- how inflation, unemployment and economic growth affect economy Different Types of Economy Market Economy - allocates resources through the decentralized decisions of firms and households - households decide what to buy and who to work for - firms decide how much to produce and who to hire Command/ Centrally Planned Economy - all production and distribution decisions are made by a central authority (ie. government) Mixed Economy - a combination of both market and command economy Opportunity Costs - everything you have to give up in order to attain a certain something - the cost of the best foregone alternative - example: to attend McMaster it costs 25,000 a year; you could have spent that money on something else, such as a car o implicit costs o explicit costs Marginal Thinking - marginal changes are small, incremental adjustments to an existing plan of action - example: a firm will wonder “what will happen to the profit if we decide to produce one more good?” - people make decisions by comparing marginal benefits to marginal costs
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- when marginal benefits exceed marginal costs, a decision is proved worth it Adam Smith - observed that households and firms act as if they are guided by an “invisible hand” - consumers choose freely what they buy - producers choose freely what they produce and sell
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Lecture Notes - ECONOMICS NOTES CHAPTER 1: Basic Principles...

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