ECON 10004 Midterm Review PDF

ECON 10004 Midterm Exam Review **Note: The following review is NOT to be considered a complete method of study! ALL students must display a good knowledge of ALL topics discussed throughout the semester.** 2.1 Scarcity (1 of 10) What scarcity is: It is the most basic concep...

ECON 10004 Midterm Exam Review **Note: The following review is NOT to be considered a complete method of study! ALL students must display a good knowledge of ALL topics discussed throughout the semester.** 2.1 Scarcity (1 of 10) What scarcity is: It is the most basic concept in all of economics. It occurs when the ingredients for producing things that people desire are insufficient to satisfy all wants. It means we never have enough of everything, including time, to satisfy our every desire. It is a fact of life. 2.1 Scarcity (3 of 10) Production Any activity that results in the conversion of resources into products that can be used in consumption Resources, or factors of production Inputs that are used to produce things that people want The Production Possibilities Curve Production Possibilities Curve (PPC) A curve representing all possible production combinations of two goods that can be produced. 2-4 The Production Possibilities Curve Combination Clothing (X) Food (Y) Opportunity Cost A 0 8 B 1 6 2 C 2 4 2 D 3 2 2 E 4 0 2 2-5 Applications of the Production Possibilities Curve Productive efficiency Occurs when an economy is producing the maximum output with given technology and resources. All points on the PPC are productively efficient. Allocative efficiency Is concerned with the mix of goods and services most valued by consumers. 2-6 The Production Possibilities Curve Combination Newsprint Automobiles Opportunity (X) (Y) Cost A 0 30 B 1 29 1 C 2 27 2 D 3 24 3 E 4 20 4 F 5 14 6 G 6 0 14 2-7 Applications of the Production Possibilities Curve Law of Increasing Opportunity Costs As society attempts to produce more of a good, the opportunity cost of additional units generally increases. PPC is concave to the origin with increasing opportunity cost 2-8  Applications of the Production Possibilities Curve A 30 B Opportunity cost is not (millions of units per year) constant because of a b C increasing relative cost 25 D c Automobiles 20 d E 15 e F Opportunity cost in forgone automobiles 10 To obtain: 05 1 million f additional tonnes of G newsprint 0 1 2 3 4 5 6 Newsprint (millions of tonnes per year) 2-9 The Production Possibilities Curve A Point R is unobtainable: due to lack of 30 B resources and technology C (millions of units per year) D R 25 Automobiles E 20 All points on the PPC curve are productively 15 F efficient. (Full employment of resources) 10 S Point S is inefficient. 05 Unemployment of resources. G 0 1 2 3 4 5 6 Newsprint (millions of tonnes per year) 2-10 Applications of the Production Possibilities Curve PPC and Trade-offs The PPC slopes downward to the right due to scarcity Individuals or society is forced to make choices that involve trade-offs. PPC and Unemployment Unemployment is represented by points being inside the PPC curve. 2-11 Economic Growth Economic growth refers to increasing the economy’s productive capacity or attaining a higher standard of living. Economic growth can be shown by increasing the PPC or shifting the PPC outward. Sources of economic growth include Technological improvement Increase in resources Increase in productivity 2-12 Economic Growth Consumption goods vs. Capital Goods To grow the PPC outward, we must forego consumption goods (products we consume) for capital goods (additional resources used to increase production) 2-13 Demand Demand (D) Refers to the quantities of a specific good or service that individuals are willing to purchase at various possible prices, other things being constant. (ceteris paribus) Law of Demand Quantity demanded (Qd) is inversely related to price (P), ceteris paribus. As P increases, Qd decreases. 3-14 3.1 Demand (2 of 7) Law of demand A negative, or inverse, relationship between the price of any good or service and the quantity demanded, holding other factors constant (ceteris paribus) When the price of a good goes up, people buy less of it, other things being equal. When the price of a good goes down, people buy more of it, other things being equal. Movement along Demand Curve Changes in Demand Versus Changes in Quantity Demanded A change in a good’s own price leads to a change in quantity demanded. This is a movement along the curve. 3-16 3.1 Demand (3 of 7) ‘Ceteris paribus’ What are we holding constant? Income (no increase or decrease) Tastes and preferences (no ‘switching’ brands) Prices of other goods (nothing else has changed) Many other factors Figure 3-1 The Individual Demand Schedule and the Individual Demand Curve, Panel (a) and (b) In panel (a), we show combinations A through E of the quantities of wireless earbuds demanded, measured in constant-quality units at prices ranging from $5 down to $1 apiece. These combinations are points on the demand schedule. In panel (b), we plot combinations A through E on a grid. The result is the individual demand curve for wireless earbuds. Copyright © 2023 Pearson Canada Inc. 3 - 18 3.2 Shifts in Demand (6 of 9) Substitutes Two goods are substitutes when a change in the price of one causes a shift in demand for the other in the same direction as the price change. For example, if the price of butter decreases, the demand will increase, while the demand for margarine (a substitute good) will decrease In the case of an increase in butter prices, demand for margarine will increase 3.2 Shifts in Demand (7 of 9) Complements Two goods are complements when a change in the price of one causes an opposite shift in the demand curve for the other. For example, if the price of peanut butter increases, the demand for jam (a complementary good) will decrease In the case of a decrease in the price of peanut butter, the opposite will be true 3.3 Supply (1 of 3) Supply A schedule showing the relationship between price and the quantity supplied for a specified time period, other things being equal The amount of a product or service that firms are willing to sell at alternative prices Supply Supply (S) Refers to the quantities of a specific good or service that firms are willing to sell at various possible prices, other things being constant. Law of Supply There is a direct relationship between the price of any good and its quantity supplied (Qs), holding other factors constant. As P increases, Qs increases 3-22 3.3 Supply (2 of 3) Law of supply The higher the price of a good, the more of that good sellers will make available over a specified time period, other things being equal (assuming ceteris paribus) At higher prices, a larger quantity will generally be supplied than at lower prices, all other things held constant. At lower prices, a smaller quantity will generally be supplied than at higher prices, all other things held constant. Movement along Supply Curve Changes in Supply Versus Changes in Quantity Supplied A change in a good’s own price leads to a change in quantity supplied. This is a movement along the curve. 3-24 3.4 Shifts in Supply (3 of 3) Changes in supply versus changes in quantity supplied: Whenever there is a change in a ceteris paribus condition, there will be a change in supply: The entire supply curve shifts to the right or to the left. The only thing that can cause the entire curve to move is a change in a determinant other than the good’s own price. A change in a good’s own price leads to a change in quantity supplied (a single point on a supply curve) for any given supply curve: This is a movement along the same supply curve. 3.4 Shifts in Supply (1 of 3) Scenario: A new method of manufacturing wireless earbuds significantly reduces the cost of production. Producers of wireless earbuds will supply more at any given price. This causes a shift of the entire supply curve outward to the right of the original supply curve If production became more costly, it would cause a shift of the entire supply curve inward to the left of the original supply curve The Other Determinants of Supply (supply shifters) 1) Cost of inputs – in production fall. (Supply shifts right) 2) Technology and productivity- Technological advancements, and increased labour productivity (Supply shifts right) 3) Taxes and Subsidies – decrease taxes and increase subsidies (Supply shifts right) 4) Price Expectations – expect cost of inputs to rise in the future increase supply of goods today (Supply shifts right) 5) Number of firms in the industry – increases. More firms producing a greater quantity (Supply shifts right) 3-27 3.5 Putting Demand and Supply Together (1 of 5) Equilibrium (market clearing) price The price that clears the market The price at which quantity demanded equals quantity supplied The price where the demand curve intersects the supply curve Figure 3-10 Putting Demand and Supply Together, Panel (a) Panel (a) (1) (2) (3) (4) (5) Price per Quantity Quantity Constant- Supplied Demanded Difference (2) − Quality (wireless (wireless (3) (wireless Wireless earbuds per earbuds per earbuds per Earbud year) year) year) Condition Excess quantity supplied $5 10 million 2 million 8 million (surplus) Excess quantity supplied 4 8 million 4 million 4 million (surplus) Market clearing 3 6 million 6 million 0 price–equilibrium (no surplus, no shortage) Excess quantity demanded 2 4 million 8 million −4 million (shortage) Excess quantity demanded 1 2 million 10 million −8 million (shortage) Copyright © 2023 Pearson Canada Inc. 3 - 29 Putting Demand and Supply Together Excess quantity supplied at price $5 S 5 D C Price per DVD ($) 4 Surplus - At P = $5: Qd (D) = 20 < Qs (C) = 100 3 - All prices above $3 Qs > Qd 2 - Price will be pushed down 1 D 0 20 40 60 80 100 Quantity of DVDs (millions of units per year) 3-30 Changes in Equilibrium Increase Demand Equilibrium price S and quantity E2 increase to P2 P2 and Q2. E1 P1 D2 D1 Q1 Q2 Quantity of DVDs 3-31 Changes in Equilibrium Decrease Demand More people prefer Blue ray disks instead of DVD’s. S At price P1 quantity E1 supplied exceeds P1 quantity demanded-- a surplus exists. D1 D2 Q2 Q1 Quantity of DVDs 3-32 Changes in Equilibrium Increase Supply S1 Technological improvement in DVD’s. E1 S2 At price P1 quantity P1 supplied exceeds quantity demanded-- a surplus exists. D Q1 Q3 Quantity of DVDs 3-33 Changes in Equilibrium Decrease Supply S3 Labour costs increase in the production of DVD’s. S1 At price P1 quantity demanded exceeds E1 quantity supplied-- P1 a shortage exists. D Q2 Q1 Quantity of DVDs 3-34 3.2 Shifts in Demand (5 of 9) Normal goods Goods for which demand rises as income rises. Most goods are normal goods. Inferior goods Goods for which demand falls as income rises Demand Shifters 1) Income Normal goods - as income increase, (Demand shifts right) Inferior goods - as income increase, (Demand shifts left) 2) The price of related goods Complements – the price of cereal falls we buy more milk (Demand for milk shifts right) Substitutes – the price of Coke doubles, we have an increase in demand for Pepsi (Demand for Pepsi shifts right) 3) Tastes and preferences – Increase advertising for eggs Increase in Demand for eggs. (Demand shifts right) 4) Expectations Expect Future prices to rise, buy more today (Demand shifts right) Expect Future Income to increase, spend more today on beef (Demand for beef shifts right) Expect Product availability to diminish soon – Buy more today (Demand shifts rightward) The Other Determinants of Demand (Demand Shifters) 1) Income Normal goods as income increase, we want more of these goods Inferior goods as income increase, we want less of these goods 2) The price of related goods Complements Car and gas, peanut butter and jelly Substitutes Coke or Pepsi, butter or margarine 3-37 Specialization and Greater Productivity Specialization Involves working at a relatively well- defined, limited endeavour. For example, individuals, regions, and nations produce a narrow range of products. Absolute Advantage The ability to perform a task using the fewest number of labour hours. Producing with least resources. 2-38 Specialization and Greater Productivity Comparative Advantage The ability to produce a good or service at the lower opportunity cost. A relative concept. Specialize in the production for which we have a comparative advantage. 2-39 Economic Systems The Three Basic Economic Questions Resource allocation addresses three economic questions: 1) What and how much will be produced? 2) How will it be produced? 3) For whom will it be produced? 2-40 Economic Systems Pure Command Economy Public ownership of all property resources. Centralized government planning answers the basic economic questions. Production planning is done through 5-year plans by centralized government. 2-41 Economic Systems Pure Capitalist Economy Private ownership of all property resources. Households and firms interact through a system of markets (demand and supply) to answer the basic economic questions. 2-42 5.2 The Other Economic Functions of Government (1 of 9) Providing a legal system Promoting competition Providing public goods Ensuring economy-wide stability 5.2 The Other Economic Functions of Government (4 of 9) Antitrust legislation Laws that restrict the formation of monopolies and regulate certain anticompetitive business practices Monopoly A firm that can determine the market price; in the extreme case, the only seller of a good or service 5.2 The Other Economic Functions of Government (5 of 9) Providing public goods: Goods to which the principle of rival consumption does not apply: These are goods that may be consumed jointly by many individuals at the same time. In contrast, private goods can be consumed by only one individual at a time. Private goods are subject to the principle of rival consumption 5.3 The Political Functions of Government (1 of 3) Government-sponsored goods Goods deemed socially desirable through the political process Example: Museums, sports stadiums Government-inhibited goods Goods deemed socially undesirable Example: Certain psychoactive drugs such as heroin, alcohol, tobacco 5.3 The Political Functions of Government (3 of 3) Transfer payments Money payments made by governments to individuals for which no services or goods are rendered in return Examples: Old Age Security, disability payments, employment insurance benefits Transfers in kind Payments that are in the form of goods and services Examples: education, health care services, subsidized public housing 6.2 Unemployment (4 of 8) Categories of individuals who are without work: Job loser Re-entrant Job leaver New entrant 6.2 Unemployment (8 of 8) Discouraged workers Individuals who have stopped looking for a job because they are convinced they will not find a suitable one Labour force participation rate The percentage of noninstitutionalized persons 15 years of age and older who are employed or seeking employment 6.3 The Major Types of Unemployment (1 of 6) Major types of unemployment: Frictional Structural Seasonal Cyclical 6.3 The Major Types of Unemployment (2 of 6) Frictional unemployment Unemployment caused by the fact that workers must search for appropriate job offers. This activity takes time, so they remain temporarily unemployed. 6.3 The Major Types of Unemployment (4 of 6) Seasonal unemployment Unemployment that varies from season to season. Cyclical unemployment Unemployment resulting from contractions or recession in economic activity. 6.4 Inflation and Deflation (1 of 9) Inflation A sustained increase in the average of all prices of goods and services in an economy Deflation A sustained decrease in the average of all prices of goods and services in an economy 6.4 Inflation and Deflation (5 of 9) Price index The cost of today’s market basket of goods, expressed as a percentage of the cost of the same market basket during a base year: cost of market basket today Price index = 100 cost of market basket in base year 6.4 Inflation and Deflation (7 of 9) Consumer Price Index (CPI) A statistical measure of a weighted average of prices of a specified set of goods and services purchased by wage earners in urban areas Market basket of 600 goods and services of a typical consumer 6.6 GDP, Inflation, and Unemployment: Business Fluctuations (3 of 4) Recession A period of time during which the rate of growth of business activity is consistently less than its long-term trend or is negative Depression An extremely severe recession Table 6-2 Calculating a Price Index for a Two-Good Market Basket (1) (2) (3) (4) (5) (6) Cost of 2022 Cost of Market 2012 Market Price market Basket Price Basket in per Basket in Commodity Quantity per Unit 2012 Unit 2022 Corn 100 bushels $4 $ 400 $8 $ 800 Digital 2 450 900 350 700 devices Blank Blank Blank Blank Totals Blank Blank $1,300 Blank $1,500 cost of market basket in 2022 $1,500 Price index = 100 = ×100 = 115.38 cost of market basket in base year 2012 $1,300 Copyright © 2023 Pearson Canada Inc. 3 - 57 5.5 Paying for the Public Sector: Systems of Taxation (5 of 11) Tax bracket A specified interval of income to which a specific and unique marginal tax rate is applied Average tax rate The total tax payment divided by total income Progressive taxation A tax system, in which, as income increases, a higher percentage of additional income is paid as taxes. 5.5 Paying for the Public Sector: Systems of Taxation (9 of 11) Progressive taxation: Marginal tax rate is the rate associated with that level of income. Eg. If you earn $25,000/year, your marginal tax rate is 30%. Marginal tax rate > Average tax rate Taxable Income Tax Rate Taxes $0–$10,000 5% $ 500 $10,001–$20,000 10% $1,000 $20,001–$30,000 30% $3,000 Average tax rate: add all three amounts and divide by total income. 4,500 / 30,000 = 0.15 = 15% average tax rate Table 5-1 Federal Marginal Income Tax Rates Marginal Tax Bracket Marginal Tax Rate $0–$48,535 15% $48,536–$97,069 20.5% $97,070–$150,473 26% $150,474–$214,368 29% $214,369 and up 33% These rates applied in 2020. SOURCE: Canada Revenue Agency, “Canadian Income Tax Rates for Individuals—Current and Previous Years” (https://www.canada.ca/en/revenue-agency/services/tax/individuals/frequently- asked-questions-individuals/canadian-income-tax-rates-individuals-currentprevious-years.html), January 21, 2020. Copyright © 2023 Pearson Canada Inc. 5 - 60