Strand 1 Economic Decision Making

1. Strand 1 Economic Decision Making Course : CIA4U1 Teacher : Mr. Nicholson

2. Chapter Focus • The economic problem – the problem of having needs and unlimited wants, but limited resources – that underlies the definition of economics • The types of reasoning andinvestigativemethods that economists use • The production choices an entire economy faces • The three basic economic questions and how various economic systems answer them • The main economic goals of Canadian economy and the ways in which they are related

3. The Economic Problem • Needs– the essentials of life, such as food and shelter • Wants– desires for non-essential items • Economic Problem – the problem of having unlimited wants, but limited resources to satisfy them • Scarcity – the limited nature of resources, which underlies the basic economic problem • Economic Resources – basic items that are used in all types of production, including natural, capital, and human resources

4. Natural Resources – the resources from nature that are used in production, including land, raw materials, and natural process • Capital Resources– the processed materials, equipment, and buildings used in production; also known as capital • Human Resources–the efforts of people involved in production, including labour and entrepreneurship • Economics–the study of how to distribute scarce resources among alternative ends

5. Microeconomics – the branch of economics that focuses on the behaviour of individual participation in various market • Macroeconomics – the branch of economics that takes a wide-ranging view of the economy, studying the behaviour of economic sectors • Economic models – generalizations about or simplifications of economic reality; also know as laws, principles, or theories • Hypothesis – a tentative principle of an observation or insight, to be tested for its validity

6. Variables – factors that have measurable values • Independent variables – the variable in a causal relationship that causes change in another variable • Dependent variables – the variable in a causal relationship that is affected by another variable • Inverse relationship – a relationship in which a change in the independent variable causes a change in the opposite direction of the dependent variable • Direct relationship – a relationship in which a change in the independent variable causes a change in the same direction of the dependent variable

7. Ceteris Paribus – the assumption that all other things remain the same • Division of labour – the extent to which jobs of different workers are specialized into separate task • Deduction – a type of reasoning in which one states a hypothesis before examining the facts • Induction – a type of reasoning in which one states a hypothesis after examining the facts • Positive economics – the study of economic facts and how the economy operates as it does • Normative economics – the study of how the economy ought to operate

8. Economic Choice • Utility – the satisfaction gained from any action • Self-interest motive – the assumption that people act to maximize their own welfare • Opportunity Cost – the utility that could have been gained by choosing an action’s best alternative • Free Goods – items that are so plentiful that they do not have any cost • Economic value – the opportunity cost of product

9. The Production Possibilities Model • Consumer product – an item that gratifies people’s needs and wants • Capital good – an item that is used to produce other products • Production Possibilities Schedule – a table that shows the possible output combinations for an economy • Production possibilities curve – a graph that shows the possible output combinations for an economy

10. Economic Systems • Basic economic questions • What to produce? • How to produce? • For whom to produce? • Economic system - the organization of an economy, which represents a country’s distinct set of social customs, political institutions, and economic practices • Traditional economy – an economic system in which economic decisions are made on the basis of custom • Market economy – an economic system based on private ownership and the use of markets in economic decision-making

11. Command economy – an economic system based on public ownership and central planning • Modern mixed economy – an economic system that combines aspects of a market economy and a command economy • Production decisions are made in both private market and by government • Traditional mixed economies – economic systems in which a traditional sector co-exists with modern sectors • Laissez faire – the principle that governments benefit society the most by not interfering in economic activity • Market – a set of arrangements between buyers and sellers of a certain item

12. Product markets – markets in which consumer, or final, products are trade • Resource markets – markets in which economic resources are traded • Circular flows – the circulation of money and the circulation of consumer products and economic resources in the economy • Consumer sovereignty – the effect of consumer needs and wants on production decisions • Invisible hand – the tendency for competitive markets to turn self-interested behaviour into socially beneficial activity • Private sector – the part of an economy in which private markets dominate

13. Public sector – the part of an economy in which governments dominate • Traditional sector – the part of an economy in which custom and traditional production techniques dominate

14. Economic Goals • Economic Efficiency • Income Equity • Price Stability • Full Employment • Viable Balance of Payments • Economic Growth • Environmental Sustainability