Download Chap. 1 - The Economic Problem involves value judgements

Chap. 1 - The Economic Problem
having unlimited wants but limited resources to attain or meet these wants
creates a tension, both internal and external - the necessity to constantly make choices
Economic Resources
"items" used in all types of production
1. Natural resources
provided by nature or are present in/on/around the planet
land, raw materials, natural processes
2. Capital resources
processed materials
buildings, equipment used in production
cash
3. Human resources
labour
skills
attitudes
Microeconomics
stiidies the way consumers and businesses interact in a given market
Macroeconomics
studies the entire/total economy of a region or country
Economic Models
are really theories or "laws"
1. Cause and Efifect
uses "variables" that have measurable values
2. Direct/Inverse Relationships
direct - all "variables" values move in the same direction
inverse - one "variable" goes up, the other "variable" value goes down
3, Need for Assumptions
assumes some "variables" temporarily do not change in order to simplify a problem
rationality assumption - people do mil not make decisions that will leave them worse off
4. Positive/Nonnative Economies
positive - why an economy operates the way it does
the study of economic facts, does not involve opinions or value judgements
normative - deals with how an economy "should" operate, theoretical
involves value judgements, whether things (decisions, policies) are good or
bad
utility - satisfaction gained from a decision or choice
opportunity cost -the tradeofifs resulting from any economic decision
what you could have had if you had used your resources for something else
Basic Economic Questions
1. What to produce?
2. How to Produce?
3. How will the output of production be distributed?
choices people collectively make as they answer these questions organizes a country's
economy
this results in the development of an economic system - social customs
political institutions
economic practices
Economics is a social science which studies the choices people/govemments/society make in
an attempt to satisfy their wants
Economic Systems
1. Traditional economy
was the only type of system in existence 150 yrs ago
choices/decisions were based on cultural customs
usually provided a very stable lifestyle
considered backward by modem European and N.A. cultiires
2. Market economy
also referred to as a "free" market economy or "capitalism"
based on : a. private ownership or resources
b. unrestricted competition
c. resource owners keep profits
market - a coming together of buyers and sellers to exchange goods/svcs according to a
mutual agreed upon system
benefits: a. consumer sovereignty
production based on the needs/wants of consumers
b. prices
theoretically prices are determined by consumer demand and business supply
c. innovation
new products/svcs are constantly being introduced or improved
encourages entrepreneurship
disadvantages a. income distribution
some people get rich, others live in poverty
b. private business does not always act in the best interest of the consumer
c. instability
prices, incomes, employment is constantly changing
a true/pure market economy does not exist today
3 Command economy
often called socialism or "communism"
based on: a based on "public" or gov't ownership of resources
b. competing businesses are not allowed to operate
c. if profits exist, gov't collects and distributes these
economic decisions are made by planners, usually gov't
benefits a. income distribution
profrts/wages usually distributed by gov't according to need
b. econoniic growth
can be sustained due to potentially more efficient use of resources
- disadvantages a. planning
good planning is difficult because future is basically unpredictable
b. inefificient
due to lack of a profit motive, no one cares about waste
there is no demand for quality
c. lack of freedom
no choice for consumers, often lacks political freedom as well
4 Mixed economy
combines the use of markets and gov't regulation in economic decisions
based on; a. private and gov't ownership of resources
b. coinpetition allowed but is usually regulated to some extent
c. resource owners keep profits, but are taxed by gov't
- benefits a, gov't can provide goods/svcs where entreprise does not exist
b. gov't can prevent business from taking advantage of consumers
disadvantages; confusion and often conflict over decision making results poor or no
decisions at all
Economic Goals of Canadian Economy
1. Economic efficiency
getting the highest benefit from our economies resources
2. Income equity
3. Price stability
attempt to minimize inflation
inflation - arise in the genera! level of prices for goods/svcs
results in a declining purchasing power
4. Full employment
unemployment - percentage of the national labour force that is involuntarily unemployed
5. Viable balance of payments
balance of payments - summary of all transactions between Canadians and foreigners that
involve exchanging Canadian dollars for other currencies
value of Canada's imports and exports should roughly balance one another out.
financial flows in and out of the country should be fairly evenly matched
6. Economic growth
increase in an economy's total output ofgoods/svcs fi-om one year to the next
7. Environmental sustainability
economic activity must not decrease the quality of our environment
Canadian Economy
80% of our total output is produced by the private sector
role of government
1. provides all major svcs: health care
education
law enforcement
public transit
postal svc
some public utilities
paid for with tax money
2. regulate the operation and practices of businesses: product standards
employment standards
some price regulation
3. Redistribution of income :
El - employment insurance
pensions
subsidy of some production
welfare
income tax and GST rebates