Chapter 1 The Economic Problem

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Strand 1
Economic Decision
Making
Course : CIA4U1
Teacher : Mr. Nicholson
Chapter Focus
• The economic problem – the problem of having
needs and unlimited wants, but limited
resources – that underlies the definition of
economics
• The types of reasoning and investigative
methods that economists use
• The production choices an entire economy
faces
• The three basic economic questions and how
various economic systems answer them
• The main economic goals of Canadian economy
and the ways in which they are related
The Economic Problem
• Needs – the essentials of life, such
as food and shelter
• Wants – desires for non-essential items
• Economic Problem – the problem of having
unlimited wants, but limited resources to satisfy
them
• Scarcity – the limited nature of resources,
which underlies the basic economic problem
• Economic Resources – basic items that are used
in all types of production,
including natural, capital,
and human resources
• Natural Resources – the resources from nature
that are used in production,
including land, raw
materials, and natural
process
• Capital Resources – the processed materials,
equipment, and buildings
used in production; also
known as capital
• Human Resources – the efforts of people involved
in production, including
labour and entrepreneurship
• Economics – the study of how to distribute
scarce resources among alternative ends
• Microeconomics – the branch of economics that
focuses on the behaviour of
individual participation in
various market
• Macroeconomics – the branch of economics that
takes a wide-ranging view of
the economy, studying the
behaviour of economic sectors
• Economic models – generalizations about or
simplifications of economic
reality; also know as laws,
principles, or theories
• Hypothesis – a tentative principle of an
observation or
insight, to be
tested for its validity
• Variables – factors that have measurable values
• Independent variables – the variable in a causal
relationship that causes
change in another variable
• Dependent variables – the variable in a causal
relationship that is affected by
another variable
• Inverse relationship – a relationship in which a
change in the independent variable causes a change in
the opposite direction of the dependent variable
• Direct relationship – a relationship in which a change
in the independent variable causes a change in the
same direction of the dependent variable
• Ceteris Paribus – the assumption that all other
things remain the same
• Division of labour – the extent to which jobs of
different workers are specialized into separate task
• Deduction – a type of reasoning in which one states
a hypothesis before examining the facts
• Induction – a type of reasoning in which one states
a hypothesis after examining the facts
• Positive economics – the study of economic facts
and how the economy operates as it does
• Normative economics – the study of how the
economy ought to operate
Economic Choice
• Utility – the satisfaction gained from any action
• Self-interest motive – the assumption that people act
to maximize their own welfare
• Opportunity Cost – the utility that could have been
gained by choosing an action’s best alternative
• Free Goods – items that are so plentiful that they do
not have any cost
• Economic value – the opportunity cost of product
The Production Possibilities
Model
• Consumer product – an item that gratifies people’s
needs and wants
• Capital good – an item that is used to produce other
products
• Production Possibilities Schedule – a table that
shows the possible output combinations for an
economy
• Production possibilities curve – a graph that shows
the possible output combinations
for an economy
Economic Systems
• Basic economic questions
– What to produce?
– How to produce?
– For whom to produce?
• Economic system - the organization of an
economy, which represents a country’s distinct
set of social customs, political institutions, and
economic practices
• Traditional economy – an economic system in
which economic decisions are made on the basis of
custom
• Market economy – an economic system based on
private ownership and the use of markets in
economic decision-making
• Command economy – an economic system based
on public ownership and central planning
• Modern mixed economy – an economic system
that combines aspects of a market economy and a
command economy
– Production decisions are made in both private
market and by government
• Traditional mixed economies – economic systems
in which a traditional sector co-exists with
modern sectors
• Laissez faire – the principle that governments
benefit society the most by not interfering in
economic activity
• Market – a set of arrangements between buyers
and sellers of a certain item
• Product markets – markets in which consumer, or
final, products are trade
• Resource markets – markets in which economic
resources are traded
• Circular flows – the circulation of money and the
circulation of consumer products and economic
resources in the economy
• Consumer sovereignty – the effect of consumer
needs and wants on production decisions
• Invisible hand – the tendency for competitive
markets to turn self-interested behaviour into
socially beneficial activity
• Private sector – the part of an economy in which
private markets dominate
• Public sector – the part of an economy in
which governments dominate
• Traditional sector – the part of an economy in
which custom and traditional production
techniques dominate
Economic Goals
• Economic Efficiency
• Income Equity
• Price Stability
• Full Employment
• Viable Balance of Payments
• Economic Growth
• Environmental Sustainability
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