Chapter 1: Economic Issues and Concepts – Study Notes

Chapter 1: Economic Issues and Concepts

Introduction

This chapter introduces the foundational concepts of microeconomics, focusing on how societies use scarce resources to satisfy unlimited wants. It explores the nature of economic problems, the role of opportunity cost, the production possibilities boundary, and the structure of modern economies.

Issues of Pressing Concern

• Rapidly Rising Housing Costs

• Population Aging

• Climate Change

• Productivity Growth

• Indigenous Reconciliation

• Accelerating Technological Change

• Rising Protectionism

• Growing Income Inequality

• Government Debt and Priorities

These issues illustrate the real-world relevance of economic analysis and policy.

1.1 What Is Economics?

Definition and Resources

• Economics is the study of the use of scarce resources to satisfy unlimited human wants.

• Resources (Factors of Production):

  • Land – natural endowments

  • Labour – mental and physical human effort

  • Capital – tools, machinery, equipment

• Resources are used to produce goods (tangible, e.g., cars) and services (intangible, e.g., legal advice).

• Production is the act of making goods and services; consumption is the act of using them.

Scarcity and Choice

• Resources are scarce relative to human desires.

• Scarcity implies the need for choice—not all wants can be satisfied.

Opportunity Cost

• Making choices involves opportunity cost: the value of the next best alternative forgone when a choice is made.

• Example: Choosing between road repairs and new bicycle paths. If $12 million is available, and road repairs cost $1 million/km while new paths cost $0.5 million/km:

  • The opportunity cost of 1 km of road repairs is 2 km of new paths.

  • The opportunity cost of 1 km of new paths is 0.5 km of road repairs.

Budget Line and Attainability

• Points on or inside the budget line are attainable; points outside are unattainable.

• Example: At $12 million, one can repair 6 km of roads and build 12 km of new paths (attainable), but repairing 9 km and building 15 km (costing $16.5 million) is unattainable.

Applying Economic Concepts: The High Opportunity Cost of University

• The cost of a university degree includes not only tuition and books but also the income forgone from not working.

• Reasons for attending despite high costs: enjoyment of learning, expected higher future earnings, or miscalculation of costs.

The Production Possibilities Boundary (PPB)

• The PPB illustrates scarcity, choice, and opportunity cost.

• Points on the PPB are efficient and attainable; points inside are inefficient; points outside are unattainable.

Four Key Economic Problems

1. What Is Produced and How?

   • Resource allocation determines what and how much is produced.

   • Questions include: Which goods are produced? Is one combination better? Should government intervene?

2. What Is Consumed and by Whom?

   • Concerns the distribution of output among people.

   • Who gets more or less, and why? Should government alter this distribution?

3. Why Are Resources Sometimes Idle?

   • Idle resources mean the economy operates inside the PPB.

   • Should government address idle resources? Is some idleness necessary?

4. Is Productive Capacity Growing?

   • Economic growth shifts the PPB outward, allowing more production.

   • Before growth: some combinations unattainable; after growth: more combinations attainable.

Microeconomics and Macroeconomics

• Microeconomics studies the determination of prices and quantities of specific products and factors of production (problems 1 and 2).

• Macroeconomics studies economic aggregates such as total output, employment, and growth (problems 3 and 4).

Economics and Government Policy

• Government policies can:

  • Correct market failures (misallocation of resources)

  • Address fairness in distribution

  • Reduce idleness of resources

  • Promote economic growth

1.2 The Complexity of Modern Economies

The Nature of Market Economies

• Self-Organizing: When individuals act in their own self-interest, the collective outcome is coordinated.

• Efficiency: Resources are used to produce what people want with the least possible input.

• Adam Smith: Economic interactions are motivated by self-interest, not benevolence.

Incentives and Self-Interest

• Individuals pursue self-interest and respond to incentives.

• Sellers supply more at higher prices; buyers demand more at lower prices.

• Other values (e.g., ethics, culture) may also influence decisions.

The Decision Makers and Their Choices

• Consumers: Decide what to buy and how much.

• Producers: Decide what to produce and for whom.

• Government: Decides how to channel resources to productive use.

The Circular Flow of Income and Expenditure

The circular flow model shows the movement of goods, services, and payments between households (consumers) and firms (producers) through goods and factor markets.

Production and Trade

• Specialization of Labour: Workers focus on specific tasks to increase efficiency.

• Division of Labour: Production is broken into specialized tasks.

• Money and Trade: Money facilitates trade by eliminating the need for barter, which in turn supports specialization.

• Globalization: Increased importance of international trade, driven by lower transportation costs and advances in information technology. Presents challenges such as human rights and environmental concerns.

1.3 Is There an Alternative to the Market Economy?

Types of Economic Systems

• Traditional: Decisions based on customs and traditions.

• Command: Central authority makes economic decisions.

• Free-Market: Decisions made by individuals and firms in markets.

• Most economies are mixed economies, combining elements of all three systems.

The Great Debate

• Karl Marx argued for central planning to ensure just distribution, but most centrally planned economies failed to achieve high living standards and shifted toward freer markets.

Government in the Modern Mixed Economy

• Governments provide key institutions (private property, freedom of contract) and intervene to correct market failures, provide public goods, and address externalities.

• While markets often work well, government policy can sometimes improve outcomes for society.

Economics and Other Social Sciences

• Economics is interconnected with politics, history, philosophy, law, and sociology.

• Understanding economic issues often requires insights from other social sciences.

Key Terms and Concepts Table

Term	Definition	Example/Application
Scarcity	Limited resources relative to unlimited wants	Only enough resources to produce some, not all, desired goods
Opportunity Cost	Value of the next best alternative forgone	Choosing university over a job means giving up potential earnings
Production Possibilities Boundary (PPB)	Graph showing maximum attainable combinations of goods/services	Trade-off between road repairs and bike paths
Mixed Economy	Combines elements of traditional, command, and free-market systems	Canada's economy

Key Equations

• Opportunity Cost Formula: $\text{Opportunity Cost of Good A} = \frac{\text{Units of Good B forgone}}{\text{Units of Good A gained}}$