CH1 - Scarcity, Opportunity Cost, Trade, and Models

Scarcity and Choice
-> choose and make smart choices with the limited resources (money, time and energy)

Oppurtunity Cost
-> cost of the best alternative to give up
value of what you get > value of what you give up

Scarcity -> rises because of the limitation of what we can get out of our limited amount of "money, time and energy"


Economics -> individuals, business and government make best choices to get what they want and how the interact

Because of scarcity, every choice involves a trade off - have to give up something to get something else

it's more important than money (ex: if a person sleeps in than study, the opportunity cost would be really big for his exam) = smart decisions

key to smart choices - people are more likely to choose actions with rewards (positive incentives) and not actions with penalties (negative incentives)


*thing that motivates or encourages one to do somethings

Gains from trade
-> people are better off doing one thign and trading other thing with money

Voluntary Trade -> 2 people trade, each person feels that what ehy get is > than what they give up

Absolute advantages -> the ability to produce a product or service at a lower absolute cost than the other
*the minimum costs that an organisation must bear to remain in business

Comparative Advantage -> the ability to produce a product / service at a lower opportunity cost than the other producer

Opportunity cost = give / get
*comparative advantage (the lower opportunity cost) is the key to mutually benefit gains from trade

Production Possibilities Frontier (PPF)
-> max combination of product and servies that can be produced with existing inputs

Specialization according to comparative advantage which would allow outside the PPF - impossible to reach without trade


Free Trade - based on comparative advantage

even if one indivisual / country has an absolute advantage in producing everything at a low cost, comparative advantage allows mutually beneficial gains from specializing and trading

Think like an economist
-> economics model is a simplified version of the real world: household, business, government

Circular flow model of economic life:

  1. household
  2. business
  3. government - can set rules and how to interact in the economy

model happens when things are "unchanged" - " certain factors or conditions are held constant to facilitate the analysis of the effects of other variables or changes in isolation (e.g., changes in prices, income, or technology)

in input markets - household are sellers (labour), business are buyers


ex: labour, natural resources, capital equipment, entrepreneurial ability used to produce products and services


in output markets - household are buyers, business are sellers


government (in the middle) - set rules of the economy and how they interact

Micro & Macroeconomics

Microeconomics -> choices that indivisual, household, business and government make and how they interact in the market

Macroeconomics -> choices that a whole Canadian economy and the global economy. combined outcomes of all indivisual microeconomics choices

3 Key models for microeconomics

  1. choose only when "additional benefits" are > than "additional opportunity costs"


  1. count only additional benefit and additional opportunity cost
  • don't look back but forward as previous decisions or the money you spent can't be undone. shouldn't influence your choice
  1. count all additional benefits and cost including implict cost and externalizes
  • implicit costs -> oppurtunity cost of investing your own money / time
    en resulting in underinvestment. [positive externalities]

economics model assume that all other things do not change

Positive statement -> can be evaluated as true or false


Normative statement -> about what you believe, opinions, should be, and involves value judgments (which can't be factually checked)


*should and ought are usually normative statements

because of the limited money, time and energy, individual, business and government can ever satisfy our wants and “smart choices” are essential to make our lives

Marginal = additional
marginal benefits - additional benefits from the next choice
Marginal opportunity cost - additional opportunity cost from the next choice


- negative / positive externalities -> cost or benefits that affect other external to a choice or trade


ex: if you drive. car, you need to pay for insurance, repairs...etc, and also it will be a damage to the environment
-> unintended costs imposed on third parties due to economic activities, often leading to overproduction or overconsumption of related goods. [negative externalities]


ex: beautiful garden not only pretty but also attractiing
-> feeling that garden gives, nintended benefits created for third parties, oft

Negative / positive externalisites -> cost or benefits that affect other external to a choice or a trade