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Adam Smith (1723-1790) In The Wealth of Nations, Smith was the first to develop this insight fully: It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.
Copyright 2011 Pearson Canada Inc.
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Efficient Organization
And this spontaneous generated order works well? Yes, it is relatively efficient.
Loosely speaking, efficiency refers to organizing available resources to produce the goods and services that people most value, when they most want them, and by using the fewest possible resources to do so.
Adam Smith (1723-1790) An economy organized by free markets behaves almost as if it were guided by an invisible hand.
Copyright 2011 Pearson Canada Inc.
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Summarizing
ECONOMY: A complex system that self-organizes in an efficient way. How? Individuals moved by self-Interest and incentives. This determines market prices and quantities. This occurs within an institutional framework.
Copyright 2011 Pearson Canada Inc.
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What do we do in economics?
Economics is the study of the use of scarce resources to satisfy unlimited human wants.
Resources?
Scarce?
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Unattainable
Consider the choice that must be made by a child who has only 50 cents to spend. She wishes to spend it all on two types of candy.
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A
Attainable
Bubble gums cost 5 cents each and lollipops cost 10 cents each.
5
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Combination A is unattainable.
Quantity of Lollipops
Copyright 2011 Pearson Canada Inc.
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Combination B is attainable.
Unattainable
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The negatively sloped line provides a boundary between attainable and unattainable combinations.
The opportunity cost of getting 1 more lollipop is the 2 bubble gums that must be given up.
4 5
Attainable
Quantity of Lollipops
Copyright 2011 Pearson Canada Inc.
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The PPB illustrates: scarcity choice opportunity cost PPB Point d shows scarcity; it is unattainable with current resources. Points a and b show choice. They are both attainable, but which one will be chosen? The negative slope illustrates opportunity cost.
Copyright 2011 Pearson Canada Inc.
c b Attainable combinations
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What is the opportunity cost of producing an extra 15 units of X if the economy is producing 45 units of X and 600 units of Y? And if the economy was initially producing 60 units of X?
Copyright 2011 Pearson Canada Inc.
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What is the opportunity cost of producing an extra 15 units of X if the economy is producing 45 units of X and 600 units of Y? And if the economy was initially producing 60 units of X?
Copyright 2011 Pearson Canada Inc.
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In general, the opportunity cost for any activity includes three things: 1. The direct cost of the activity, plus 2. Whatever you give up in order to do the activity, minus 3. Whatever savings the activity generates
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What do we do in economics?
Economics is the study of the use of scarce resources to satisfy unlimited human wants.
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Growth in productive capacity is shown by an outward shift of the PPB. Point d was initially unattainable. But after sufficient growth, it becomes attainable.
Before growth
Macroeconomics study the determination of aggregates such as total output, price level, employment and growth
Copyright 2011 Pearson Canada Inc.
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Producers transform factor services into goods and services, which they then sell to individuals in goods markets, receiving payment in return. These are the incomes of producers. They use their income to pay for the factor services they use
Copyright 2011 Pearson Canada Inc.
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ay
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Goods Markets
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Individuals (consumers)
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Firms (producers)
Fa c to r
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Pa
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Factor Markets
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Division of labour extends the idea of specialization for the production of a single good or service.
Copyright 2011 Pearson Canada Inc.
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Globalization
Development of new technologies: change market economies Many of these recent changes are ref. as Globalization
Why is it possible?
Reduction of transportation costs Revolution in information technology Consequences: Consumers: tastes become more universal Producers: transnational companies (TNCs)
Copyright 2011 Pearson Canada Inc.
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Globalization Debate
Anti-globalization activists:
International trade: increase global income inequality
Defenders of globalization: International trade: the way to reduce poverty (e.g. China)
Is there a middle ground? Globalization and poverty: empirical findings show (-) link gains unequally distributed among society
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By the last few decades of the 20th century, most of these countries were unable to provide their citizens the rising living standards that existed in the more free-market economies.
In the last two decades of the 20th century, most governments replaced their systems of central planning with much freer markets.
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By the last few decades of the 20th century, most of centrally planned economies were unable to provide their citizens the rising living standards that existed in the more free-market economies. In the last two decades of the 20th century, most governments replaced their systems of central planning with much freer markets. The failure of the centrally planned economies does not demonstrate the superiority of completely free-market economies. Instead, it shows the superiority of mixed economies, with large elements of free markets.
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