Econ 1010 Notes - AC Oct 8 (1) PDF

Economics is the study of choice Econ is the study of the allocation of scarce resources to satisfy unlimited wants and needs Scarce resources = factors of productions Land Labour (L) Capital (K) Scarcity - choice -- cost -opportunity cost OP cost is the cost (value) of the next best alternat...

Economics is the study of choice Econ is the study of the allocation of scarce resources to satisfy unlimited wants and needs Scarce resources = factors of productions Land Labour (L) Capital (K) Scarcity - choice -- cost -opportunity cost OP cost is the cost (value) of the next best alternative or it is what you gave up to make the choice Key Econ Issues 1. Productivity Growth 2. Population Aging 3. Climate change 4. Accelerated Tech change 5. Rising Protectionism 6. Growing Income inequality ***[Sept 10^th^]*** Production Possibility Boundary (Frontier or Curve) PPB - Graph showing all possible combinations of goods and services that can be produced given all available recourses or factors of production (FoP) - all points on the PPB are considered to be *efficient* b/c they use all the FoP (no idle resources) - all points inside the PPB are attainable but *inefficient* b/c they do not use all available FoP -- some resources are idle. - All points outside the PPB are unattainable b/c there are insufficient (not enough) FoP to produce that much G&S - An increase in FoP or productivity will increase the PPB - -that is the PPB will shift out on both axes b/c we have more resources to make more G&S - An increase in the FoP that improves only one product will cause the PPB to shift out on that axis only (See Fish & Milk -- increase pasteurization will improve milk production but not fish) **[Sept 12^th^]** Decision Makers and Their Choices -- How are Decisions Made? Maximizing Decisions -- Consumers and producers made decisions that maximize consumers' utility/satisfaction/happiness and firms' profits Choose the options that make us happiest Marginal Decisions -- Decision to consume or produce one more -- based on the number currently consumed or produced -- and compares the cost with the value of the next unit [Types of Economic Systems] They are defined by how each answers the 4 Econ Questions 1. Traditional -- all are answered based on traditional activities -- fishers farmer etc 2. Command -- 4 econ q's are answered by a single central authority that makes all econ decisions -- many inherent problems 3. Free Market -- answers the 4 econ q's via the interaction of consumers and producers in the markets 4. Mixed Market - has components of all 3 **[September 17^th^ ]** Normative statements -- statements of opinion believe or value -- not testable "I believe taxes should be lower" Positive statements -- statements of fact, they are testable with an appeal to data. "When taxes decrease people consume more." Variables Exogenous -- independent variable that affect the other variables in the model -- from above the Tax Rate is the exogenous variable. Endogenous variable -- dependent variable, it is affected by the exo variable -- from about that is the level od consumption Assumptions -- simplifying statements -- abstraction from reality that aides the analysis e.g. assume income is constant in the example above. Correlation -- when two or more things occur at the same time Causation -- one thing affects the other Positive correlation -- the two variables are related and move in the same direction -- both increase or decrease Negative Correlation -- the two variables are related and move in the oppositive direction -- one increases while the other decreases. Index numbers -- a ratio of values in a current year compared to the value in the base year. Researcher defines base year. Index = (Value in Current Year)/(Value in Base Year)\*100 E.G. Tuition in 2024 = \$2000 - base year Tuition in 2025 = \$2500 Find tuition Index in 2025 Tuition index in 2024 = \$2000/\$2000\*100 = 100 \*\*\*\*\*Index in Base year is always = 100!!!! Tuition Index in 2025 = \$2500/\$2000\*100 = 125 [Sept 19^th^ ] Demand -- refers to the entire relationship between all prices of a good and the amount desired at each price -- it is the whole Demand curve. Quantity Demanded -- refers to the amount of a good desired at one particular price -- it is a point on the Demand curve, There is an inverse relationship between price and quantity demanded. As Price increase quantity demanded decreases. Gives downward sloping D curve A change in price will not change D - curve doesn't shift - only move along the curve and change quantity demanded. There are several factors that influence D -- when we build a D curve we often hold many variables constant to establish the relationship. The term *ceteris Paribus* means "holding everything else constant" which allows analysis of one factor without influence of the other factors e.g. holding income constant while looking at Demand. [Factors that affect Demand -- things that shape and shift the D curve] 1. Good's own price -- as P increase Qty D decreases -- gives the shape of the D curve 2. Income -- as income goes up, consumers tend to buy more of a good at all prices. Whole D curve will shift outwards. & vice versa as income decrease D curve will shift in. 3. Price of other products a. Substitutes -- good that fulfill the same want or need as the good being analyzed. When the price of a substitute decreases consumers will buy more of the sub and less of the original good. Eg.when pear prices drop you buy less apples at all prices and the D curve for Apples will shift in. b. Complements -- two goods consumed together. When the price of a complement increases the demand for the good being analyzed will decrease -- D curve shifts in because the bundle of goods in now more expensive. E.g. when the price of eggs increase the Demand for bacon will decrease -- D curve shifts in. 4. Consumer's Tastes -- as consumers tastes change towards a good demand will increase -- e.g. Stanley mugs. 5. Population -- more people -- more demand -- curve shifts out 6. Significant changes in the weather -- more sandbags demanded as flooding increase. **[Sept 24^th^]** Supply -- is the entire relationships between the price of a good and the quantity supplied at each price. It is the entire Supply Curve. Quantity supplied refers to the amount supplied at one particular price. It is a point on the S curve. A change in price will cause a change in quantity supplied or a movement along the Supply Curve. S does not change with price. As price increase quantity supplied increases -- that is there is a positive correlations between Qty Supplied and price -- S curve is upward sloping. [The Determinants of Supply -- Variables that shift the supply curve] 1. Price of inputs -- as the price of inputs increases to is more expensive to produce goods so Suppliers will produce (supply) less at each price -- and the Supply curve will shift in towards the origin. And Supply will increase as the price of inputs decreases. 2. Technology -- improvements in Technology will (generally) increase amount supplied at each price -- and shifts S curve outward. 3. Government Taxes or Subsidies -- Taxes increase the cost of production and as taxes increase less will be supplied at each price -- S curve shifts in towards origin. Subsidies offset (lower) the cost of production -- so more will be supplied at each price -- S curve shifts out. 4. Prices of other Products a. Substitutes -- two goods produced using the same production process E.G. Chaga Rum and Rhubarb Vodka. What happens to the Supply of Rhubarb Vodka when the Price of Chaga Rum Increases? Less Rhubarb Vodka will be supplied b/c Chaga Rum is more higher priced. b. Complements -- Two goods that are produced from the same production process e.g. Lumber & sawdust -- What will happen to the supply of lumber when the price of sawdust wood pellets increases? Lumber Supply curve will shift out b/c firm will earn more producing both goods. 5. Significant changes in the weather -- will affect food production but also changes supply of some products -- e.g. more A/C in cars in north America 6. Number of Suppliers -- increasing the \# of suppliers will increase supply---- [Sept 26^th^ ] Firms and individuals are price takes -- that is they are too small to influence price in the whole market. Equilibrium in a market happens when the D & S curve intersect or when Qd = Qs -- this gives the equilibrium Price and Quantity **denoted as: Q\* and P\*** When the price is not at equilibrium market forces act to bring it back to equilibrium. If Price is too low -- it means Qty D is greater than Qty S -- that is there is excess D or a shortage. This causes upward pressure on prices. When Price begins to increase it causes a movement along the D & S curves -- Qd will decrease and Qs will increase until we get to the point where Qd = Qs = at equilibrium. When Price is greater than equilibrium price -- that is price is too high -- then Qty Supplied will be large and Qty Demanded will be smaller -- this is called excess Supply or a surplus. When there is too much supply prices are forced downward to try to sell of the excess. As P decreases -- Qs will decrease and Qd will increase - move along both curve until you get back to equilibrium where Qd = Qs. This is how the *invisible hand* adjusts the market. [D & S side shocks -- Changes in Market Equilibrium] [Or the Laws of D & S] When a market is in equilibrium it will stay in equil until something happens in the market to shift the equi. Changing the determinants of D & S will shift the curves. 1. Increase in D -- the D curve will shift outwards (increase with an increase in income, population, tastes, weather, and price of substitutes or a decrease in the price of a complement). When D increase the Equil doesn't change right away -- instead the price continues to be at the original equil price P~0~ after D increases -- this causes an excess D at that price (Qs \< Qd) which drives prices up -- move along the old S curve and the new D curve up to the new equilibrium point E~1~. At the new Equil point - Price has increased and Quantity has increased -- both **P\* & Q\* increase when Demand increases.** 2. Decrease in Demand -- Demand curve shifts in and now at the original price P~0~ Qty D is now less than Qty S (Qd , Qs) this means there is a surplus and that pressures prices to drop -- as prices are dropping Qd s increasing and Qs in decreasing -- move along D & S to the new Equil point E~2~ where equilibrium price and quantity have dropped. **Both P\* and Q\* will decrease when there is a decrease in D.** 3. Increase in Supply -- Supply curve shifts outwards (decrease in input prices, price of substitutes, tech improves, weather, \# of firms or an increase in price of complements) -- before the market adjusts it creates a surplus at the orginial price P~0~ -- that is Qd \< Qs and this causes pressure on prices to decline -- move along D & S to get to new equilibrium. **When Supply increase P\* will decrease and Q\* will increase.** 4. Decrease in Supply -- S curve shifts inwards -- before the market adjusts at the original price P~0~ the Qty Demanded is larger than the Qty Suppled (Qd \> Qs) which creates a shortage that drives prices up - - move along D and S curves to new equilibrium E~2~ at a higher price and lower quantity. **When Supply decreases Q\* will decrease and P\* will increase.** See notes on changes to both D & S on board. [Mathematical Example] Given the following equations representing the D and S curves find equilibrium P & Q. Qd = 100 - 3P Qs = 20 + 2P In equilibrium: Qd = Qs 100 - 3P = 20 + 2P 100 -- 20 = 2P + 3P 80 = 5P -- solve for equilibrium price P\* = 16 Now substitute P\* into Qd & Qs -- they should be the same (if not go back and try again) Qd = 100 -- 3P Qd = 100 -- 3(16) Qd = 52 Qs = 20 + 2P Qs = 20 + 2(16) = 52 **[Oct 1^st^]** See notes on Q 18 Ch 3. Chapter 4 -- Elasticity Elasticity -- refers to the responsiveness of one variable to changes in another variable. Own price elasticity of Demand -- refers to how quantity demanded changes in response to a change in the goods own price. We compare the percentage change in Qd with the percentage change in Price. Elasticity (usually denoted by Epislon or Eta) use E for notes. E = (%age change in Qd)/(%age change in P) **[Oct 3^rd^ ]** Always take the absolute value of the Own Price Elasticity of Demand B/c when P increases it causes Qd to decrease (and vie versa) so absolute value simplifies the work. When E = 1 it means the % change in Qd is the same and the % change in Price When E \> 1 it is considered to be Elastic & we know that the % change in Qd is larger than the % change in P When E \< 1 it is considered to be In elastic & we know that the % change in Qd is smaller than the % change in P Elasticity and total revenue Total Revenue = Total Expenditure (TE) TE = Price x Quantity Total Expen will be affected by the own price elasticity of a good. That is -- TE will move in the same direction as the larger of the change in Price or Quantity. EG. What will happen to the TE on an elastic good when the price of the good increases? Elastic means % change in Qd is larger than % change in P There fore TE will move with the change in quantity. And, since price is increasing we know that Qd is decreasing and thus we can expect TE to decrease when the price on an elastic good increases. Total Expenditure (TE) & Elasticity In general TE will change in the direction of the larger of the % change in Qd or the % change in P. Elastic goods have % change in Qd \> % change in P -- therefore the TE will move in the direction of the changes in Qd. -- that is if Price decreased then Qd will increase by more and TE would increase too. And Vice versa when Price increases. Inelastic goods have % change in Qd \< % change in P -- therefore the TE will move in the direction of the change in P -- that is if Price decreased then Qd would increase by less and TE would decrease with the Price. And vice versa when price increases. To solve these problems you need to know the elasticity and the direction of the change in price. **Supply Elasticity E~s~** Measures the responsiveness of Quantity supplied to a change in price. Es = (%change in Qs)/ (% change in P) Es \> 1 means % change in Qs \> % Change in P -- good has elastic supply Es \< 1 means the % change in Qs \< % change in P -- good has inelastic supply. Elasticity of supply depends on how quickly & easily a firm can change a product line e.g. can switch products (e.g. peppermint knobs & barrel candy) or increase capacity (e.g. if not operating at 100% capacity) and elasticity will increase over time as firms can expand their capacity (build a bigger factory & hire more people) or have more time to switch their products (corn fields to rutabaga). **Elasticity and taxes** When a tax is placed on a good it creates a "tax shifted supply curve" -- basically shifts the S curve left. The burden or incidence of a tax refers to who pays more of the tax -- demanders or suppliers. - Inelastic goods have few substitutes and in general the tax in passed onto the consumer from the supplier. E.g. the change in price that consumers pay (compared to equilibrium) is greater than the change in price suppliers receive. Note: Tax = Pc -- Ps Pc -- tax = Ps **Income (Y) Elasticity E~y~** Measures the responsiveness of Qd to a change in income. Ey = (% change in Qd)/(% change Income) When Ey \> 1 Good is Elasticy & means % change in Qd \> % change in P When Ey \< 1 Good is Inelastic & means & change in Qd is \< % change in P However -- we also look at income elasticity with respect to zero. We define normal goods as goods we increase Qd for when income increases -- and this gives a positive income elasticity Ey \> 0 - & Qd & P move together. Inferior goods are goods we buy less of when our income increases. This gives a negative Ey \< 0 b/c Qd and Y are moving in opposite directions. **Cross Price Elasticity of Demand E~xy~** Measures the responsiveness of Qd of one good to a change in the price of another good. Exy = (%change in Qd of Good X)/(%change in the P of Good Y) Complements -- goods used together -- when the Price of Good Y increases the Qd of Good X will decline. This gives a negative cross price elasticity Exy \< 0 Substitutes - goods that can be used in place of one another. When the price of Good Y increases the Qd of Good X will also increase. This gives a positive cross price elasticity Exy \> 0