Econ 1050 Chapters 1-9 Lecture Notes PDF

lOMoARcPSD|24671036 Econ 1050 Chapters 1-9 - Lecture notes 1-9 Introductory Microeconomics SFW (University of Guelph) Scan to open on Studocu Studocu is not sponsored or endorsed by any college or university Downloaded by Tyler Argue (tyl...

lOMoARcPSD|24671036 Econ 1050 Chapters 1-9 - Lecture notes 1-9 Introductory Microeconomics SFW (University of Guelph) Scan to open on Studocu Studocu is not sponsored or endorsed by any college or university Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 Table of Contents Chapter 1- What is Economics?.....Pg. 3 Chapter 2- The Economic Problem.....Pg. 9 Chapter 3- Demand and Supply.....Pg. 12 Chapter 4- Elasticity.....Pg. 17 Chapter 5- Efficiency and Equity.....Pg. 22 Chapter 6- Government Actions in Markets.....Pg. 26 Chapter 7- Global Markets in Action.....Pg. 31 Chapter 8- Utility and Demand.....Pg. 35 Chapter 9- Possibilities, Preferences and Choices.....Pg. 39 1 Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 Chapter 1- What is Economics? Scarcity: inability to get everything we want -What we want and what we can have is limited by many different factors · Income · Prices · Time · Taxes -Limited by productive resources available, i.e.: · Gifts of nature · Human labour · Ingenuity · Tools/equipment -When making a decision you have lose something to gain something (opportunity cost) Incentive: a reward that encourages an action or a penalty that discourages one -Incentives reconcile choices -An incentive is prices, if the cost of a good is too high we offend wait for a sale to buy the product Economics: the social science that studies the choices that individuals, businesses, government, and entire societies make as they come with Scarcity and the incentives that influence and reconcile those choices The subject has two parts: · Microeconomics · Macroeconomics Microeconomics: the study of the choices that individuals and businesses make, the way these choices interact in markets, and influence of governments Macroeconomics: the study of the performance of the National economy and the global economy -Goods and services are objects that people value and produce to satisfy wants Goods are physical objects Services are tasks performed Factors of production: the resources used to produce goods and services · Land · Labour · Capital · Entrepreneurship -Agriculture and manufacturing are a smaller percentage of a country's products and services produced 2 Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 Labour: The work time and work effort that people devote to producing goods and services is called Human Capital: knowledge and skill that people obtain from education, on-the-job training, and work experience Capital: Tools, instruments, machines, buildings, and other constructions that businesses use to produce goods and services -Financial capital includes money, stocks, and bonds, physical capital used to produce goods and services Entrepreneurship: the human resource that organizes labour, and capital -Larger the income the more opportunity to purchase, with a larger option of goods -Income can be earned by: Rent (land) Wages (labour) Interest (capital) Profit (entrepreneurship) -Labour earns the most income (70% of all income) -Income from wages is not distributed evenly among all people (Pro athlete vs. server) -Wage distribution is also different for people, i.e.: · Men earns more than women · Whites earn more than minorities · University graduates earn more than high school graduates Self-interest: the choices that you think are the best ones available for you are choices made in your self-interest -All choices are made with self-interest i.e.: pizza delivered to house because of convenience, not because the delivery man needs a job Social Interest: choices that are the best ones for society as a whole i.e. a profitable business pays their employees more than others, the employees gain more all the while the company is still profitable Efficient: Resource use is efficient if it is not possible to make someone better off without making someone else worse off -Social Interest questions · Globalization · Information-age monopolies · Climate change · Economic instability 3 Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 Globalization: expansion of international trade, borrowing and lending, and investment i.e. Nike produces new shoe, Malaysian works make them i.e. China Airlines buys jet from Bombardier in Canada -Globalization expands production but also destroys jobs locally · -Workers have to learn new skills or take service jobs (often with low pay) -Globalization takes place in self-interest -Consumer: to buy low cost good and services -Firms: to produce goods or service at low cost and sell high Information-age monopolies served for self-interest · -People received phones, laptops, Internet, etc. · -Companies (i.e. Microsoft) produced low quality products sold at high prices Creating pollution in self-interest · -Taking hot showers, driving instead of walking, etc. Government bailing out banks that took large loans on assets with little value, in self- interest -Karl Marx, along with other communist wanted to replace market capitalism (privately owned and operated industry) with central planning (government run and operated industry) and socialist -Occupy Wall Street focused on the top 1%, is a similar protest to that of Karl Marx -Economists argue that politicians are ill equip to control the market, but some social- interest intervention is needed Six key ideas that define economic way of thinking: · Tradeoff · Rational Choices vs. benefits and costs · Benefit · Costs · Margin · Incentives Tradeoff: a constraint that involves giving up one thing to get something else i.e. studying instead of go to the movies Rational Choice: a choice that compares costs and benefits and achieves the greatest benefit over cost for the person making the choice 4 Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 Only the wants of the person making a choice are relevant to determine its rationality i.e. You like your coffee black but your friend likes DD’s, therefore its rational for you to get an espresso and your friend to get a cappuccino Cost usually comes into play when coming benefits and making a choice Benefit: the gain or pleasure that it beings and is determined by preferences Preferences: a description of a person’s likes and dislikes and the intensity of those feelings If something brings you joy (i.e. playing a video game) that’s a large benefit to you, however if some you have little interest in (i.e. watching soccer) that activity brings you a small benefit Benefit is measured by what a person is willing to give up to get something i.e. giving up time and money to go to school, because it has a large benefit vs. only giving up $1 for a slice of pizza Opportunity Cost: the highest valued alternative that we must give up to get something i.e. Being in school: -Things you can’t do with your time, things you can’t afford -Given opportunity to earn an income Margin: when a choice is made by comparing a little more of something with its cost, the choice is made at the margin i.e. studying longer or going out with friends; a choice being made with margin Marginal benefit: the benefit that a person receives from consuming one more unit of a good or service. It is measured as the maximum amount that a person is willing to pay for one more unit of the good or service i.e. studying the night before a test boosting your grade, marginal benefit doesn’t include the mark you would have achieved without the extra night of studying Marginal cost: the opportunity cost of producing one more unit of a good or service. It is the best alternative forgone. It is calculated as the increase in total cost divided by the increase in output i.e. studying an extra night takes away from leisure activities you had planned Making a decision you compare marginal benefit and marginal cost If the marginal cost exceeds the marginal benefit, you don’t do that activity Self-interested acts get the most benefit for you based on your view about benefit 5 Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 Economists try to predict the incentives that result in choices being made for social-interest or self-interest Incentive: Positive Statement: what is currently believed about the way the work operates i.e. global warming is being caused by carbon emissions. This can be test to whether it is true or not Normative Statement: it depends on values and cannot be tested i.e. cutting coal use to reduce the effects of global warming. Its an opinion and cannot be tested Economic model: a description of some aspect of the economic world that includes only those features of the world that are needed for the purpose at hand i.e. a cell phone network may include features such as the price of calls, the number of cell phone users, volume of calls. The model would ignore cell phone colours and ringtones A model is tested by comparing predictions with facts; done by putting people is a decision-making situation and changing one factor at a time gauging their reactions 6 Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 Chapter 2- The Economic Problem Production Possibilities Frontier (PPF): The boundary between those combinations of goods and services that can be produced and those combinations that cannot -The PPF model is illustrated using to varying goods, while all other goods remain constant -A point outside the PPF is unattainable and cannot be satisfy; also shows sacristy as the point describes what we cannot have -Points inside the PPF are attainable and can be satisfied Production Efficiency: a situation in which goods and services are produced at the lowest possible cost -Production efficiency occurs when a point is on the PPF; any point within the PPF displays inefficiency -Choices made along the PPF involve a tradeoff; when producing more of one good or service you give up producing the other when the point lies on the PPF -All tradeoffs include an opportunity cost Opportunity Cost: The highest valued alternative that we must give up to get something -Opportunity cost is a ratio; this means the addition of one good or service is the inverse of the opportunity cost of the other -The outward-bowed shaped of the PPF reflects increasing opportunity cost -The PPF is bowed outward because resources are not equally productive in all activities i.e. using a pizza chief to produce cola, and a cola expert to produce pizza Allocative efficiency: a situation in which goods and services are produced at the lowest possible cost and in the quantities that provide the greatest possible benefit. We cannot produce more of any good without giving up some of another good that we value more highly -Production efficiency is at achieved at every point on the PPF -When goods or services are produced at the greatest possible benefit we have achieved allocative efficiency; measured by comparing cost and benefits Marginal cost: the opportunity cost of producing one more unit of a good or service. It is the best alternative forgone. It is calculated as the increase in total cost divided by the increase in output 7 Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 -Marginal cost calculated from the slope, as X increases PPF gets steeper and marginal cost of X increases Marginal Benefit: the benefit that a person receives from consuming one more unit of a good or service. It is measured as the maximum amount that a person is willing to pay for one more unit of the good or service Preferences: a description of a person’s likes and dislikes and the intensity of those feelings -Benefit is subjective to people preferences -Marginal benefit and preferences stand in contrast to marginal cost and production possibilities Marginal benefit curve: a curve that shows the relationship between the marginal benefit of a good and the quantity of that good consumed -Marginal benefit curve is unrelated to PPF and cannot be derived from it -Measured by what people are willing to pay for an additional unit of a good or service -The most you are willing to pay for something is its marginal benefit -The Principle of Decreasing Marginal Benefit is the smaller the marginal benefit the less we are willing to pay for an additional unit -Basic reason marginal benefit changes is that we like variety; the more we consume the less we want it -i.e. pizza is hard to get and you buy a few slices a year vs. you eat pizza daily; you will pay more for the slice a few times a year than for a slice when you have it daily -Allocative efficiency is producing on a point on the PPF that we prefer most Economic Growth: The expansion of production possibilities -Economic growth increases standard of living; doesn’t overcome scarcity and avoid opportunity cost Technological change: the development of new goods and of better ways of producing goods and services Capital accumulation: the growth of capital resources, including human capital -Economic growth comes from technological change and capital accumulation -New technologies and new capital have an opportunity cost -The amount by which our production possibilities expand depends on the resources we devote to technological change and capital accumulation 8 Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 -If an economy devotes all its factors of production to producing consumption goods and services and none to technology and services, its production possibilities stay the same -To expand production possibilities in the future an economy must devote fewer resources to producing, and more to technology and accumulating capital -Specialization is producing only one good or few goods Comparative advantage: a person or country has a comparative advantage in an activity if that person or country can perform the activity at a lower opportunity cost than anyone else or any other country Absolute advantage: a person has an absolute advantage if that person is more productive than another person -Absolute advantage involves comparing production, production per hour -Comparative advantage involves comparing opportunity costs -If a PPF is linear (not bowed out) the ability to produce is the same no matter how time is divided between the two activities -Central economic planning doesn’t work because economic planners don’t know people’s production possibilities and preferences; production ends up inside PPF -Decentralized coordination works best; four complementary social institutions are needed (firms, markets, property rights, money) Firm: an economic unit that hires factors of production and organizes those factors to produce and sell goods and services Market: any arrangement that enables buyers and sellers to get information and to do business with each other Property rights: the social arrangements that govern the ownership, use, and disposal of anything that people value. Property rights are enforceable in the courts -Real property includes land, buildings, and equipment -Financial property includes stocks, bonds, and money in the bank -Intellectual property is the intangible product of creative effort; books, music, computer programs, and inventions; protected by copyrights and patents Money: any commodity or token that is generally acceptable as a means of payment -Firms choose the quantities of factors of production to hire; Households specialize and choose the quantities of factors of production to hire (factor markets) -Households choose the quantities of goods and services to buy; firms choose the quantities to produce (goods market) -Households receive incomes and make expenditures on goods and services 9 Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 Circular Flows in the Market Economy · Households choose the quantities of land, labour, capital and entrepreneurial services to sell or rent to firms in exchange for wages, rent, interest and profits · Firms choose the quantities of factors of production to hire and the quantities of goods and services to produce · Counterclockwise are real flows: the flow of factors of production from households to firms and the flow of goods and services from firms to households · Clockwise are payments: flow of incomes from firms to households and the flow expenditure on goods and services from households to firms -Markets coordinate decisions through price adjustments i.e. people are not buying hamburgers because they are too costly, reducing the price allows for people to eat them for often 10 Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 Chapter 3- Supply and Demand Competitive market: a market that has many buyers and many sellers, so no single buyer or seller can influence the price -Producers offer items for sale only if the price is high enough to cover their opportunity cost; consumers respond by seeking cheaper alternatives to expensive items Money Price: the number of dollars that must be given up in exchange for a good or service Relative Price: the ratio of the price of one good or service to the price of another good or service. A relative price is an opportunity cost -To calculate we divide the money price of a good by the money price of a “basket” of all goods (price index) -If you demand something then you; want it, can afford it, and plan to buy it -Wants are the unlimited desire or wishes that people have for goods and services Quantity demanded: the amount of a good or service that consumers plan to buy during a given time period at a particular price -Quantity demanded and quantity actually bought are not necessarily the same; sometimes the quantity demanded exceeds the amount of goods available, so the quantity bought is less than the quantity demanded -Quantity demanded is measured as an amount per unit of time i.e. coffee demanded is 1 cup a day, 7 a week, or 365 a year -One factor that influences buying plans is price Law of demand: other things remaining the same, the higher the price of a good, the smaller is the quantity demanded of it; the lower the price of a good, the larger is the quantity demanded of it -Higher price reduce the quantity demanded because: · Substitution effect · Income effect -Substitution effect is when the price of a good rises and its relative price, its opportunity cost, rises -As opportunity cost of good rises, the incentive to economize on its use and switch to a substitute becomes stronger -Income effect is when a price rises; the price rises relative to income. Faced with a higher price and an unchanged income, people cannot afford to buy all things they 11 Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 previously bought, causing them to decrease the quantities demanded of certain goods and services Substitution effect example: cost of energy bar goes up; less expensive energy drink is consumed instead -Income Effect example: people buy less energy bars as the price goes up, and more energy drinks Demand: the entire relationship between the price of the good and the quantity demanded of it when all other influences on buyers’ plans remain the same. It is illustrated by curve and described by a demand schedule -Demand curve is the distinction between demand and quantity demanded -Demand Curve: a curve that shows the relationship between the quantity demanded of a good and its price when all other influences on consumers’ planned purchases remain the same -Demand schedule lists the quantities demanded at each price when all the other influences on consumers’ planned purchases remain the same i.e. at $0.50 demand is 22 million a week, but at $2.50 demand is 5 million a week -Willingness and ability to pay is a measure of marginal benefit Change in demand: A change in buyers’ plans that occurs when some influence on those plans other than the price of the good changes. It is illustrated by a shift of the demand curve -When demand increases the demand curve shifts rightward and the quantity demanded at each price is greater Six main factors bring change in demand... · The price of related goods · Expected future prices · Income · Expected future income and credit · Population · Preferences Substitute: a good that can be used in place of another good -The quantity of a good or service that consumers plan to buy depends on the price of its substitute Complement: a good that is used in conjunction with another good --The quantity of a good or service that consumers plan to buy depends on the price of its complement 12 Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 -If the expected future price of a good that can be stored rise the opportunity cost will be lower now than in the future when the price is expected to rise (and via versa) -When income increases, consumer buy more; via versa when income decrease, consumer buy less Normal good: a good for which demand increases as income increases Inferior good: a good for which demand decreases as income increases -Expected future income or credit demand for a good may increase i.e. you are receiving a big bonus in the future, so you buy a vehicle today before you receive the bonus -Larger population create a large demand, and a smaller population create a smaller demand -Age also effect demand: a aging population may increase the demand for nursing homes and a younger population (ages 20-24) may increase the demand for university educations -Preferences determine the value that people place on each good and service Change in the quantity demanded: a change in buyers’ plans that occurs when the price of a good changes but all other influences on buyers’ plan remain unchanged. It is illustrated by a movement along the demand curve -The entire demand curve shows demand; therefore a shift in the demand curve shows a change in demand -If the price of the good changes we illustrate the effect as a movement along the demand curve -A fall in the price of a good increases quantity demanded; movement down along the demand curve -A rise in the price of a good decreases the quantity demanded; movement up along the demand curve -If price of a good remains constant, and other influences on buying change, a change in demand of the good occurs; illustrated as a shift of the demand curve i.e. more people workout a gym and buy more protein bars regardless of price; rightward shift of demand curve -Resources and technology are the constraints that limit what is possible -Supply reflects a decision about which technologically feasible items to produce Quantity supplied: the amount of a good or service that producers plan to sell during a given time period at a particular price -Quantity supplied is not necessarily the same amount as the quantity actually sold -Quantity supplied and quantity demanded measured as an amount per unit of time 13 Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 Law of Supply: other things remaining the same, the higher the price of a good the greater is the quantity supplied of it; the lower the price of a good, the smaller is the quantity supplied -A higher price increase the quantity supplied because of marginal cost increase -As the quantity of produced of any good increase, the marginal cost of producing the good increases -If the price received for the good does not cover the marginal cost of producing it, it is not worth producing it Supply: the entire relationship between the price of a good and the quantity supplied of it when all other influences on producers’ planned sales remain the same. It is described by a supply schedule and illustrated by a supply curve --Quantity supplied refers to a point on a supply curve Supply Curve: a curve that shows the relationship between the quantity supplied of a good and its price when all other influences on producers’ planned sales remain the same -A supply schedule lists the quantities supplied at each price -Supply curve is a graph of quantity supplied on the x-axis and the price on the y-axis -The lowest price at which someone is willing to sell is a minimum supply price curve (this lowest price is the marginal cost) Change in supply: a change in sellers’ plans that occurs when some influence on those plans other than the price of the good changes. It is illustrated by a shift of the supply curve Six main factors bring changes in supply: · The prices of factors of production · The prices of related goods produced · Expected future prices · The number of suppliers · Technology · The state of nature -The prices of the factors of production used to produce a good influence its supply i.e. In 2008 when price of jet fuel increases, the supply of air travel decreased -Substitutes in production are good that can be produced by using the production -Complements in production are goods that must be produced together -An increase in the expected future price of a good causes supply to decrease today and increase in the future -The more firms producing a good, the higher its supply; likewise as a firm is introduced supply increase and when a firm closes supply decreases 14 Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 -Technology refers to production methods that increase efficiency; these lower the cost of goods in the long term -State of nature includes all the forces that influence production: includes weather, and natural environment Change in the quantity supplied: a change in sellers’ plans that occurs when the price of a good changes but all other influences on sellers’ plans remain unchanged. It is illustrated by a movement along the supply curve -The supply of goods/services: Decrease if: Increase if: The price of a factor of production used The price of a factor of production used to produce the good/service rises to produce a good/service falls The price of a substitute in production The price of a substitute in production rises falls · The price of a complement in · The price of a complement in production falls production rises · The expected future price of a · The expected future price of a good/service rises good/service falls · The number of suppliers of a · The number of suppliers of a good/service decreases good/service increases · A technology change decreases · A technology change increases a good/service production good/service production · A natural event decrease a · A natural event increases a good/service production good/service production Equilibrium price: the price at which the quantity demanded equals the quantity supplied Equilibrium quantity: the quantity bought and sold at the equilibrium price -A market moves toward its equilibrium because: · Price regulates buying and selling plans · Price adjusts when plans don’t match 15 Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 Chapter 4- Elasticity Price elasticity of demand: A units free measure of the responsiveness of the quantity demanded of a good to a change in its price, when all other influences on buyer’s plans remain the same. -If the demand curve is steep, the quantity demanded of the good/service isn’t very responsive to a change in price -If the demand curve is almost flat, the quantity demanded is very responsive to a change in price -Calculating Price Elasticity of Demand Price elasticity of demand = Percentage change in quantity demanded Percentage change in price -To calculate the price elasticity of demand change is expressed as a percentage of the average price and the percentage of the average quantity -i.e. Original price $20.50 changes to $19.50, calculated as %∆ P = ∆ P/Pave x 100 = ($1/$20) x 100 = 5% Original quantity demand 9, new quantity demanded 11 %∆ Q = ∆ Q/Qave x 100 = (2/10) x 100 = 20% Price elasticity of demand= %∆ Q/%∆ P = 20%/5% =4 -Price elasticity of demand is a unit-free measure, and is an absolute value Perfectly inelastic demand: demand with a price elasticity of zero; the quantity demanded remains constant when the price changes i.e. insulin, must be bought every month to live no matter its cost Unit elastic demand: demand with a price elasticity of 1: the percentage change in the quantity demanded equals the percentage change in the price Inelastic demand: a demand with a price elasticity between 0 and 1; the percentage change in the quantity demanded is less than the percentage change in price i.e. food and shelter 16 Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 Perfectly elastic demand: demand with an infinite price elasticity; the quantity demanded changes by an infinitely large percentage in response to a tiny price change i.e. 2 pop machines side by side with the same selection and one has a lower price Elastic demand: demand with a price elasticity greater than 1; other things remaining the same, the percentage change in the quantity demanded exceeds the percentage change in price i.e. automobiles and furniture -Factors that influence the elasticity of demand... · The closeness of substitutes · The proportion of income spent on the good · The time elapsed since the price change -The closer the substitutes for a good, the more elastic demand for it -Necessities (i.e. food and shelter) have poor substitutes, therefore generally has an inelastic demand, via versa luxury items generally have elastic demand -The greater the proportion of income spent on a good the more elastic is the demand for it -The longer the time that has elapsed since a price change, the more elastic is demand i.e. 1970 energy crisis when cost of gas sky rocketed due to low supply people still consumed the same amount. As time passed more fuel-efficient cars were introduced decreasing demand -Elasticity of demand is not the same as slope -The points of a linear demand curve reflect different price elasticity’s of demand as follows: · At the midpoint =1 · Above the midpoint >1 · Below the midpoint 1, it is elastic;