CHAPTER 1: THE ECONOMIC PROBLEM
HOW ECONOMISTS THINK
Economists assume that people customarily engage in rational behavior:
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People are assumed to make choices by logically weighing the personal benefits and costs of
available actions.
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They then select the most attractive option.
SALAMI SLICING
The activity of gradually reducing something, usually in order to save money, by removing one
small amount of it after the other, in a way that is damaging
THE ECONOMIC PROBLEM
Economists deal with the economic problem, which presumes:
1.
Economic agents must continually make choices.
2.
Their wants are unlimited.
3.
They face a limited supply of economic resources
ECONOMIC RESOURCES
Economic resources include:
1.
Natural Resources
2.
Capital Resources
3.
Human Resources
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THE CANADIAN ECONOMY
Like most modern economies, can be categorized into 4 main sectors, which are often referred
to as the "economic sectors" or "industrial sectors."
These sectors represent different types of economic activities.
THE 4 MAIN SECTORS OF THE CANADIAN ECONOMY ARE:
1.
PRIMARY SECTOR (Natural Resources)
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This sector involves the extraction and production of natural resources.
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In Canada, it includes activities such as forestry, agriculture, mining, and fishing.
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Canada is known for its vast natural resource wealth, making this sector significant for
the country's economy.
2.
SECONDARY SECTOR (Manufacturing and Industry)
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The secondary sector involves the manufacturing and processing of raw materials into
finished goods.
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In Canada, it includes manufacturing industries like automotive manufacturing,
aerospace, and technology production.
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This sector plays a crucial role in adding value to raw materials and creating industrial
products.
3.
TERTIARY SECTOR (Services)
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The tertiary sector is the largest sector in most modern economies, including Canada.
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It encompasses services such as healthcare, education, finance, retail, tourism, and
professional services.
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The tertiary sector reflects the growing importance of service-based industries in the
Canadian economy.
4.
QUATERNARY SECTOR (Knowledge and Information Services)
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The quaternary sector is a subset of the tertiary sector that focuses on
knowledge-based and information-related services.
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It includes activities such as research and development, information technology,
education, and high-tech industries.
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This sector is becoming increasingly significant as technology and knowledge-based
industries grow.
These sectors together contribute to Canada's economic diversity and resilience. While the importance
of each sector may vary over time and in different regions of the country, they all play vital roles in
Canada's overall economic structure.
ECONOMICS DEFINED
Economics is divided into 2 branches:
1.
MICROECONOMICS: Focuses on the behavior of individual agents, such as consumers,
producers, and firms. It examines how these agents make decisions regarding resource
allocation, pricing, and production.
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Microeconomics delves into topics like: supply and demand, market structures,
consumer choice, production costs, and the effects of government policies on specific
industries or markets.
2.
MACROECONOMICS: Focuses on the production within a country and opportunities of trade
with other Countries.
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Macroeconomics explores topics such as: Gross Domestic Product (GDP), inflation,
unemployment, fiscal and monetary policy, economic growth, and the overall
performance, stability, and well-being of an economy at the national or global level.
ECONOMIC MODELS
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Simplify economic reality
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Show how dependent variables are affected by independent variables
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Include inverse and/or direct relationships
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Incorporate a variety of assumptions such as ceteris paribus
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Are classified as part of either positive economics or normative economics
POSITIVE AND NORMATIVE ECONOMICS
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POSITIVE: A positive statement is provable.
“Canadians bought five million high definition television last year ”
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NORMATIVE: A normative statement is opinion- based.
“We should reduce taxes”
ECONOMIC CHOICE
Economists assume that economic decision makers maximize their own utility.
➔ DECISION- MAKERS: Must keep in mind the opportunity cost of each alternative.
➔ OPPORTUNITY COST: Is defined as the utility of the best forgone alternative.
THE PRODUCTION POSSIBILITIES MODEL
The production possibilities model is based on 3 assumption:
1.
An economy makes only 2 products
2.
Resources and technology are fixed
3.
All resources are employed to their fullest capacity
THE PRODUCTION POSSIBILITIES CURVE ( a )
The production possibilities curve shows a range of possible output combinations for an economy
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It highlights the scarcity of resources.
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It has a concave shape, which reflects the law of increasing opportunity cost.
THE PRODUCTION POSSIBILITIES CURVE ( b )
THE LAW OF INCREASING OPPORTUNITY COSTS
ECONOMIC GROWTH
Economic growth occurs when:
➔
The production possibilities curve shifts outwards due to more resources or an improvement in
technology.
➔
The economy moves from a point within the area bounded by the production possibilities
curve to the curve itself.
ECONOMIC CONTRACTION
Economic contraction occurs when:
➔
The production possibilities curve shifts inward.
➔
The economy moves from a point on the production possibilities curves to a point within the
area bounded by the curve.
THE BASIC ECONOMIC QUESTIONS
There are 3 basic questions any society must answer:
1.
What to produce?
2.
How to produce?
3.
For whom to produce?
ECONOMIC SYSTEMS
There are 3 systems to choose from:
1.
TRADITIONAL: Economies focus on non-economic concerns and have tight social constraints.
2.
MARKET: Economies are consumer-centered and innovative but create inequality and
instability
3.
COMMAND: Economies equalize incomes but often have a lack of freedom
THE RANGE OF ECONOMIC SYSTEMS ( a )
Most countries have Mixed Economies
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Modern mixed economies included both private and public sectors
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Traditional mixed economies combine traditional sectors with private and/or public sectors
THE RANGE OF ECONOMIC SYSTEMS ( b )
ECONOMIC GOALS
There are 7 major economic goals:
1.
Economic Efficiency
2.
Income Equity
3.
Price Stability
4.
Full Employment
5.
Viable Balance of Payments
6.
Economic Growth
7.
Environmental Sustainability
COMPLEMENTARY AND CONFLICTING ECONOMIC GOALS
➔
Economic goals may be complementary
Example:
TThe relationship between full employment and economic growth
➔
Economic goals may be conflicting
Example:
TThe relationship between price stability full employment
CLIMATE CHANGE
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Concerns over climate change illustrate the complexities in accomplishing economic goals.
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The mainstream scientific prediction is that, if unchecked, the increase in carbon emissions will
cause average global temperatures to rise by between 1.5% and 6% by 2100.
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Attempts to reduce emissions worldwide, through the Kyoto Protocol, achieved only limited
success.
THE FOUNDER OF MODERN ECONOMICS
Adam Smith:
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Explained how the division of labour increases production
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Argued that self interest is transformed by the invisible hand of competition so that it creates
significant economic benefits
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Stressed the principle of laissez faire, which means that governments should not intervene in
economic activity