Joanne Haddad
Winter 2021
ECO1104 G
Course Schedule:
Mondays ~ 11:30am - 12:50pm
Thursdays ~ 1:00pm - 2:30pm
WEEK 1 ( JAN 11 - 14)
LECTURE 1 - INTRODUCTION
Syllabus Review
LECTURE 2 - CHAPTER 1
,CHAPTER 1 - Microeconomics and Life
A - What is Economics?
● Study of how people manage resources
○ Resources include tangible (physical such as cash, land) and intangible (ideas,
technology, experience)
● Decisions on how to allocate (manage) resources are make by individuals, groups, firms
Microeconomics - study of how individuals/firms manage resources
Macroeconomics - the study of the economy on a regional, national, international scale
Economists assume that when individuals make decisions:
- They compare all available choices
- They carry a rational behaviour: behave in the way that will best achieve (maximize) their goals,
but do not always have all the information
Economic Principles
● Scarcity
○ Constraints on obtaining everything wanted
● Opportunity cost; marginal decision making; Sunk costs
○ Given scarcity, people face trade-offs
● Incentives
○ Economic agents can alter people’s trade-offs by providing incentives/disincentives
● Efficiency
○ Market typically provide the highest value of goods/services
Rational Behaviour within a condition of Scarcity
1. What are the wants and constraints of those involved? (Scarcity)
2. What are the trade-offs? (decision making)
3. How ill others respond? (Incentives)
4. Why isn't everyone already doing it? ( Efficiency)
● Rational behaviour suggests that people's decisions depend on scarcity, opportunity costs,
incentives and efficiency
Scarcity ~ condition of wanting more than what is available in resources
● Fact of life
● People make decisions aimed at getting things that they want, but are constrained by
limited resources
● Given rational behaviour and scarcity, you can expect people to work to get what they
want (their motivations) using the limited resources at their disposal (their constraints)
○ Ex. factors of production, such as labour and technology; your weekly or
monthly allowances; land/water/high quality air; provincial budget
■ Individuals resources example:
● Time and money
, ■ Societies resources examples:
● Factors of production such as technology and labour
Decision Making
● People face trade-offs in every decision in life
● Trade-off: When making a decision between many options available, the trade-off is each of the
alternative options that are given up when making that decisions (each decision has multiple
trade-offs)
● Trade-offs arise when you must give up something to get something else
○ Answering the question of what are trade offs?
■ Tells us about the costs and benefits associated with a decision
● All decisions involve weighing trade-offs vs benefits
Opportunity Cost ~ Equal to the value of what you have to give up in order to get something
- Is is the value of the (next) best alternative
- Based on individual preferences, and costs
● Rational Behaviour dictates that when people choose between two things, the one with
the greater net benefit (benefits minus costs) is chosen
○ Benefits > Cost
=
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● Ex. You are faced with 2 options (Buying a laptop versus buying a tablet). Limited resources (not
enough money to purchase both)
○ Choosing between buying a laptop versus buying a tablet will depend on the value of the
laptop ( its net benefit, i.e benefit minus cost) versus the value of the tablet (its net
benefit, i.e. benefits minus cost)
○ Choose laptop if Laptop (net benefit) > Tablet (net benefit)
● Costs calculations might be misleading if they uniquely reflect the direct costs
○ True cost of something is not what you pay for it (only), but also the opportunity you lose
to do something else
● The full cost of doing something is the opportunity cost
Note: Make sure to be able to difference between Trade-off and Opportunity cost
Marginal Decision Making
● Economist assume that rational people make decisions at the margin
● They compare any additional benefits from a choice to the extra costs it brings
○ People behaving rationally when facing trade-offs, they will always choose to do
something if the marginal benefit is greater than the opportunity cost
■ They will never do it if the opportunity cost is greater than the marginal benefit
● Rational people compare additional benefits of a choice against the additional costs, without
considering related benefits and costs of past choices
, ○ There is thus no consideration of past benefits or costs, referred to as Sunk Costs
■ Sunk Costs ~ Costs that have already been incurred and cannot be recovered
Ex. A student has 4 “free hours” a week. She can become a tutor and offer “one hour” classes ( as much
as she wants) for 25$ per hour. How many hours in this case will she choose?
She will choose to tutor 4 classes for 4 hours because her
marginal benefit is greater than marginal cost.
Ex. Sunk Costs
You are selling your bike. You have already spent 100$ on repairs. At the last minute, the brakes break.
You can pay 60$ to have them repaired or sell the bike as it.
● In each of the following scenarios, should you have the brakes repaired? Explain?
A. The bike value is $650 if the breaks work and $570 if they don’t
B. The bike value is $600 if the breaks work and $550 if they don’t
Note: Key is to disregard the $100 already paid on repairs because they are SUNK COSTS
Think - what is the additional benefit from repairing? What is the additional cost from repairing?
Incentives ~ something that causes people to behave in a certain way by changing the trade-offs they face
● Positive Incentives ~ makes people more likely to do something (by lowering their opportunity
cost)
■ Ex. Bonus Marks (Connect Assignments), Salary to go to work
● Negative Incentives (disincentive) ~ makes then less likely to do t (by increasing their
opportunity cost)
■ Ex. Taxing polluting activities, speed tickets
○ Rational behaviour suggests that people respond to incentives
○ Asing how others will respond can prevent bad decisions by predicting undesirable side
effects
○ Trade-off changes affect choices people make
● The collective reaction to changing trade-offs is a central idea in economics. Asking How others
respond? Will give you a complete picture of how a particular decision affects the world. You can
assume that any action will bring a response, because people react to changes in their incentives
Efficiency ~ resources used i the most productive way to produce goods/services with greatest societal
value
