ECON 1050 Midterm Review Notes PDF

lOMoARcPSD|24671036 ECON 1050 midterm review notes 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 (tylerarg@icloud....

lOMoARcPSD|24671036 ECON 1050 midterm review notes 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 1 ECON 1050 (Adomait)- Midterm Review (Ch. 1-9) Chapter 1 Chapter 1 Scarcity: the inability to get everything we want Incentive: reward that encourages an action or a penalty that discourages one (e.g. price drops create incentive for people to buy more) Economics: social science that studies the choices that individuals, businesses, governments and entire societies make as they cope with scarcity and the incentives and reconcile these choices Microeconomics: study of choices that individuals and businesses make Macroeconomics: study of performance of the national economy and the global economy Goods and services: objects that people value and produce to satisfy human wants (goods are physical, services are tasks) Big economic question: 1. How do choices end up determining what, how, and for whom goods and services are produced? 2. How can choices made in the pursuit of self-interest also promote the social interest? Factors of production: productive resources used to make goods and services  Land: natural resources (ex. oil, water, gas, coal, forests, fish)  Labour: work time and effort people devote to producing goods and services  quality of labour depends on human capital: knowledge and skill people obtain from Education  Land: natural resources (i.e oil, water, gas, coal, forests, fish)  Labour: work time and effort people devote to producing goods and services o Quality of labour depends on human capital: knowledge and skill people obtain from education  Capital: tools, equipment, machines, buildings used to produce goods and services o Financial capital= money, stocks, bonds  Entrepreneurship: human resource that organizes labour, land and capital (new ideas)  Land earns rent  Labour earns wages  Capital earns interest  Entrepreneurship earns profit Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 2  Capital: tools, equipment, machines, buildings used to produce goods and services  Financial capital = money, stocks, bonds  Entrepreneurship: human resource that organizes labour, land and capital (new ideas)  Land earns rent  Labour earns wages  Capital earns interest  Entrepreneurship earns profit Self-interest: choice that is the best one available for you Social interest: choice that leads to outcome that is the best for society as a whole Efficiency: when available resources are used to produce goods and services at lowest possible Cost Globalization: the expansion of international trade, borrowing and lending and investment The information-age economy: the technological change of 1990-2000 Natural resource depletion: exhaustion of natural resources in a region (ex. when Japanese, Spanish and Russian trawlers scoop up fish in international waters, no one keeps track of the quantities of fish they catch) Economic instability: bank’s choices to lend and people’s choices to borrow were made in self- Interest Trade-off: giving up one thing to get another (ex. guns vs. butter) Rational choice: assumes that people will always make prudent, logical decisions with greatest Benefit Benefit: gain or pleasure from doing something Preferences: what a person likes/dislikes and the intensity of those feelings Opportunity cost: highest valued alternative that must be given up; “the benefits you could have received by taking an alternative action” Margin: compare benefit of something with its cost Marginal benefit: benefit that arises from an increase in activity Marginal cost: the opportunity cost of an increase in activity  Positive statement: able to test whether its right or wrong  Normative statement: what ought to be Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 3 To make a decision -> compare marginal benefit to marginal cost (whichever is greater is the one you choose to follow) Economic model: description of some aspect of the economic world; simpler than the situation it represents and is tested by comparing predictions with facts Natural experiments: study in which experimental conditions are determined by nature or by other factors out of the control of the experimenters (ex. Canada has higher employment benefits than the US, people in two nations are similar, to study the effect of unemployment benefits they may compare the two) Statistical experiment: looks for correlations (ex. cigarette smoke vs. lung cancer) Economic experiment: puts people in a decision-making situation and varies the influence of one factor at a time to discover how they respond Personal economic policy: questions concerning self, involve marginal benefit and marginal cost (ex. should you take out a student loan? Should you get a weekend job? Business economic policy: business questions involve the evaluation of marginal cost and benefit (ex. can Microsoft compete with Google in the search engine business?) Government economic policy: government questions involve evaluation of marginal cost and benefit (ex. should the federal government cut taxes?) Scatter diagram: graph that plots the value of one variable against the value of another variable; describes whether or not a relationship exists between two variables Different types of graphs:  Variables that move in the opposite direction (negative/ indirect relationship)  Variables that move in the opposite direction (negative/ indirect relationship)  Variables that have a maximum and a minimum Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 4  Variables that are unrelated o Unrelated y constant unrelated x constant Slope: change in the value of the variable measured on the y-axis divided by the change in the value of the variable measured on the x-axis Slope = ∆y/∆x Ceteris paribus: all things remain the same Linear equation: y= ax + b  A and B are fixed numbers = constants  Values of x and y are variables  B = slope (flips up or down)  a = y-intercept (moves graph up and down) Chapter 2 Production Possibilities Frontier: boundary between those combinations of goods and services that can be produced and those that cannot Production efficiency: producing goods and services at the lowest possible cost (point inside PPF is inefficient; point outside is unattainable) Opportunity cost in a PPF: highest valued alternative forgone (ex. producing pizza or cola) Allocative efficiency: when goods and services are produced at the lowest possible cost and in the quantities that provide the greatest possible benefit Marginal benefit curve: curve showing relationship between the marginal benefit of the good Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 5 and the quantity consumed Marginal cost: cost of producing one more unit of it -> calculated using PPF Marginal benefit: benefit of from consuming one more unit of it -> calculated by the most people are willing to pay for an additional unit of it Economic growth: expansion of production possibilities; does not overcome scarcity and avoid opportunity cost Capital accumulation: growth of capital resources, including human capital Technological change: the development of new goods and better ways of producing goods and Services Comparative advantage: activity if that person can perform the activity at a lower opportunity cost than anyone else Absolute advantage: person who is more productive than others 4 complementary social institutions needed to make decentralized coordination work: Firm: economic unit that hires factors of production and organizes factors to produce and  Firm: economic unit that hires factors of production and organizes factors to produce and sell good (Tims)  Market: any arrangement that enables buyers and sellers to get information and do business with each other (world oil market)  Property rights: social arrangements that govern the ownership use and disposal of anything people value o Real property: and, buildings o Financial property: stocks, bonds o Intellectual property: things protected by copyright (*without property rights we would be hunting and gathering like cavemen) Money: a commodity or token generally accepted as payment (makes trade much more efficient) Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 6 Households: specialize and choose the quantities of labour, land, capital and entrepreneurial services that sell or rent to firms  choose the quantities of goods and services to buy  receive income and make expenditures Firms: choose the quantities of factors of production to hire  choose the quantities to produce Households to firms go through factor market Firms to households go through good markets Chapter 3 Competitive market: a market with many buyers and sellers (no single person can influence the price) Money price: the price of an object is the number of dollars that must be given up in exchange for it Relative price: ratio of one price to another Quantity demanded: amount that consumers plan to buy during a given time period at a particular price Law of demand: the higher the price of a good, the smaller the quantity demanded; the lower the price of a good, the greater the quantity demanded Why does a higher price reduce the quantity demanded? 1.Substitution effect:  substitutes are other goods that can be used in its place  when opportunity cost rises, people switch to substitutes 2. Income effect:  income stays the same when prices rise  people cannot buy all the things they previous bought Demand: the entire relationship between the price of a good and the quantity demanded of that good Demand curve: illustrates quantity demanded and its price when all other influences on consumer’s prices stay the same Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 7 Change in demand: when any factor influences buying plans changes (ex. rise in income) Demand is determined by…  Price of related goods o substitute: a good that can be used in place of another good; ex. hot dogs and hamburgers o complement: a good that is used in conjunction with another good; ex. fries & ketchup  Income o when income increases, consumers buy more of most goods; when income decreases, consumers buy less o Normal Good: when income increases, demand increases (ex. buying a steak vs. a hamburger) o Inferior Good: when income increases, demand decreases (ex. instant noodles) o Neutral Good: when income increases, no change in demand (ex. birth control, insulin)  Preferences/ Tastes o determine the value put on goods and services o depend on weather, information, fashion etc  Future Prices (expectation) o if expected price rises, the opportunity cost is lower today than it will be in the future (Florida frost = buy more now; boxing day = buy more later)  Future Income/ Credit (expectation) o when future income increases, demand for good might increase now (ex. go into debt right now and buy car, knowing there will be a year end bonus)  Government intervention o taxes will affect demand (high taxes = low demand, low taxes = high demand)  Population o size and age structure affects demand (ex. big older pop., small younger pop.) o larger population = greater demand (ex. demand for parking spots in Toronto vs. Thunder Bay) o age affects demand for certain goods and services (ex. demand for university vs. old age homes Change in Quantity Demanded vs. Change in Demand  Point on the curve = quantity demanded at a given price Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 8  Movement along curve = change in quantity demanded  Variables that move in the same direction (positive/direct relationship)  Variables that move in the opposite direction (negative/indirect relationship  Variables that are unrelated - Decrease in demand Increase in demand Quantity supplied: amount that producers plan to sell during a given time period at a specific price Law of supply: the higher the price of a good, the greater the quantity supplied; the lower the price, the smaller the quantity supplied Supply: entire relationship between the price of a good and quantity supplied Supply curve: illustrates quantity supplied and price when all influences on producer’s sales remain the same Minimum supply price: shows lowest point at which someone is willing to sell; lowest price = marginal cost Change in supply: when any factors influence selling plans other than the price of the good changes Supply is affected by the prices of…  Factors of production o price of a factor of production rises, the lowest price a producer is willing to accept for that good rises (ex. if the price of cotton rises, t-shirts are more expensive)  Related goods produced Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 9 o If the price of a related good rises, firms switch production from first good to related good o related goods = substitutes (energy bars/energy gel) can be made using the same resources; complements (cowhide/beef) goods that must be made together  Government intervention o Taxes/subsidies/quotas will affect the change in supply (subsidized = more supply; quota = less supply)  Future Prices (expected) o if expected future prices rise, the return from selling the good increases (more valuable than today) o ex. not selling Christmas ornaments in summer, expecting future prices to rise in the winter (supply less today, supply more in the future)  Number of Suppliers o the more suppliers, the more goods; the less goods  Nature o natural forces that influence production (ex. extreme weather kills crops)  Technology o when new methods are discovered, lowers the cost of producing good Change in Quantity Supplied vs. Change in Supply - Point on the curve = quantity supplied at a given price - Movement along curve = change in quantity supplied Decrease in supply Increase in supply Equilibrium price: quantity demanded = quantity supplied Equilibrium quantity: quantity bought and sold at equilibrium price Price adjustments:  Shortage: forces prices up, need an increase of output  Surplus: forces prices down, need to scale back production Increase in demand, decrease in supply:  Creates a shortage at the original price  Price rises and quantity increases Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 10  To eliminate shortage, price must rise Decrease in Demand, increase in supply:  Creates a surplus at the original price  Price falls and quantity decreases  To eliminate surplus, price must fall Chapter 4 Elasticity of demand is calculated by using: Price elasticity of demand: units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans are the same Absolute value: price of elasticity of demand is usually a negate, absolute value is just the number without negate Elastic: when the quantity demanded changes by a lot in response to a small price change Inelastic: when the quantity demanded changes by a little in response to a large price change Perfectly inelastic demand: quantity demanded remains constant when price changes (ex. insulin); equals infinity Unit elastic demand: percentage change in the price, elasticity equal 1 Perfectly elastic demand: quantity demanded changes by an infinitely large percentage Elastic demand: how sensitive the demand for a good is to changes in other economic variables Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 11 Total revenue: price of the good multiplied by the quantity sold  If demand is elastic, 1% price cut increases the quantity sold by more than 1% o Total revenue increases  If demand is inelastic, 1% price cut increases the quantity sold by less than 1% o Total revenue decreases  If demand in unit elastic, 1% price cut increases the quantity sold by 1% o Total revenue doesn’t change Total revenue test: estimating the price elasticity of demand by observing the change in total revenue that results from a change in price  Elastic demand= spend more on an item when the price falls  Unit elastic= spend same amount when the price falls  Inelastic demand= spend less on an item when price falls Factors that influence the elasticity of demand:  Closeness of substitutes o necessities usually have poor substitutes = inelastic demand (ex. insulin) o luxuries usually have many substitutes = elastic demand (ex. cars)  Proportion of income spent on good, the more elastic/inelastic is the demand for it [ex. spend 90% of your income on a Ferrari (elastic); spend 90% of your income on bread (inelastic)]  Time elapsed since the price change; the more elastic is demand (ex. diamond earrings are the same price for a year) Cross elasticity of demand: measure of the responsiveness of the demand for a good to a change in the price of a substitute or complement Cross elasticity of demand = Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 12 It is POSITIVE for a substitute It is NEGATIVE for a complement Substitute: rise in the price of a burger (substitute for pizza) = + demand for pizza Demand for pizza + rise in the price of a burger = POSITIVE CROSS PRICE ELASTICITY Complement: rise in the price of a drink (complement to pizza) = − demand for pizza Demand for pizza + rise in the price of a drink = NEGATIVE CROSS PRICE ELASTICITY Income elasticity of demand: measure of the responsiveness of the demand for a good or service to a change in income Income elasticity of demand = Income elasticity: Positive or negative? * greater than 1 (normal good, income elastic) * positive and less than 1 (normal good, income inelastic) * negative (inferior good) **When demand is income elastic, percentage of income spent on that good increases as income increases (ex. luxury items)** **When demand is income inelastic, the percentage of income spent on that good decreases as income increases (ex. inferior goods)** Inferior goods: if the income elasticity is negative, the amount spent on it decreases when income increases (ex. potatoes, rice)  low-income consumers buy most of these goods Elasticity of supply: measures responsiveness of the quantity supplied to a change in the price of a good when all other influences remain the same Elasticity of supply = 3 time frames for supply:  Momentary supply: when the price of a good changes, the intermediate response of the quantity supplied is determined by the momentary supply of that good o Inelastic: ex. oranges that have been picked, packed and shipped o Elastic: ex. long-distance phone calls; more quantity demanded/supplied at one time Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 13  Short run supply: when some of the possible adjustments to production can be made o Inelastic: ex. firms working their labour force overtime to increase output; firms laying off workers or reduce their hours of work to decrease their output  Long run supply: the response of the quantity supplied to a price change after all the technologically possible ways of adjusting supply have been exploited o Elastic: ex. new production plant built, workers trained to operate it; may take several years Chapter 5 Market price: allocates to those who are willing and able to pay that price to get the resource (ex. poor people can’t affor to pay for school)  Works best with non-essential goods  works best with non-essential goods Command system: allocates to those by the order (command) of someone in authority  works best with clear authority, responsibility and easy to monitor activities being performed  Works best with clear authority, responsibility and easy to monitor activities being performed Majority rule: allocates in the way that majority voters choose (ex. electing government to make big decisions)  Works best when decisions being made affect large numbers of people  works best when decisions being made affect large numbers of people Contest: allocates to a winner/a group of winners (ex. manager offers company workers a big prize; motivation to work hard)  Works best when few people end up with the big prize, people work harder in the process of trying to win  works best when few people end up with the big prize, people work harder in the First-come, first-served: allocates to those who are first in line (ex. casual restaurants with no reservations)  Works best when a scarce resource can serve just one user at a time in a sequence Lottery: allocates to those who pick the winning numbers, draw the lucky cards or come up lucky on a game system  Works bets when there is no effective way to distinguish among users of a scarce resource Personal characteristics: allocates to people with the “right” characteristics (i.e choosing a marriage partner; discriminating against visible minorities)  Works bets when it is specific, matters most to you Force (ex. Theft)  Ill o War, using military force by one nation against another Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 14 o Theft, taking property of others without consent  Good o Legal system, to enforce contracts, use force if necessary o Transferring wealth from rich to poor Benefit, cost & surplus Demand = willingness to pay, value Value = what you get Price = what you pay Measure marginal benefit by maximum price that is willingly paid for another unit of the Good **Demand curve is a marginal benefit curve** **Market demand curve is the marginal social benefit curve** Market demand: relationship between the price of a good and the quantity demanded by all buyers Market demand curve: horizontal sum of the individual demand curves; formed by adding the quantites demanded by all the individuals at each price Consumer surplus: the excess of the benefit received from a good over the amount paid for it Supply, cost and minimum supply-price Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 15 Cost = what a firm gives up when it produces a good or service Price = what a firm receives when it sells a good or service Marginal cost: minimum price that producers must receive to induce them to offer one more unit of a good or service for sale **Supply curve is a marginal cost curve** **Market supply curve is the marginal cost curve** Individual supply: the relationship between the price of a good and the quantity supplied by a single producer Market supply: the relationship between the price of a good and the quantity supplied by all producers Producer surplus: the excess of the amount received from the sale of a good or service over the cost of producing it Marginal social benefit: the marginal benefit to the entire society Social cost: the marginal cost to society Total surplus: sum of the consumer surplus and the producer surplus Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 16 Market failure: when a market delivers an inefficient outcome  Can occur when too little or too much of an item is produced (over/under production) Underproduction & overproduction  Deadweight loss= decrease in total surplus that results from an inefficient level of production  Social loss= the deadweight loss in the entire society Sources of Market Failure: Price regulations: can block price adjustments (ex. minimum wage) Quantity regulations: can limit amount allowed to produce (ex. quota on farm produce) Taxes: taxes decrease the quantity produced -> underproduction Subsidies: payments from government to producers decrease prices paid by buyers and increase prices received by sellers - > overproduction Externalities: cost or benefit that affects someone other than seller or buyer  External cost: utility burns coal, no thought to cost of climate change: overproduction  External benefit: install smoke detector, decreases neighbours fire risk, benefit: underproduction Public good: a good or service consumed by everyone even if they don’t pay for it (ex. air, national defense) Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 17 Common resources: owned by no one but it is available to everyone (ex. fish in international waters) Monopoly: a firm that is the sole provider of a good or service; self-interest is to maximize profit, producing too little and charging too high a price -> underproduction High Transactions Costs: the costs of the esrvices that enable a market to bring buyers and sellers together = transactions costs  high transaction costs may equal underproduction Alternatives to the market: i.e. using one of the different allocation methods to solve these inefficiencies Is the competitive market fair? All ideas about fairness can be divided into 2 broad groups: 1. it’s not fair if the result isn’t fair 2. it’s not fair if the rules aren’t fair Utilitarianism: principle that states that we should strive to achieve “the greatest happiness for the greatest number”  philosopher Robert Nozick argues in his 1974 book Anarchy, State, and Utopia that the idea of fairness as an outcome/ result can’t work and must based on fairness of rules. Big Trade-Off: tradeoff between efficiency and fairness Symmetry Principle: requirement that people in similar situations be treated similarly -> equality of opportunity 1. Enforce laws that establish and protect private property 2. Private property may be transferred from one person to another only by voluntary exchange Fairness and Efficiency: If private property rights are enforced and if voluntary exchange takes place, resources = efficient if there are no:  price and quantity regulations  taxes and subsidies  externalities (benefits and costs)  public goods and common resources  monopolies  high transactions costs **Case study: water shortage in natural disaster:** Market price: fixed amount  those who pay to get water (large profit)  those who cannot pay do not have water  in the rules view this is fair, in the results view the outcome is unlikely fair Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 18 Nonmarket methods:  Command - decides who is most deserving/needy  Contest – water goes to those who are best at contest  First-come, first-served –those who place lowest value on time  Lottery – water goes to the lucky  Personal characteristics – “old, young, pregnant” Market Price with Taxes: inefficient (because of deadweight loss) Rules: Tax is unfair Results: Perhaps fair Chapter 6 Price ceiling/price cap: government regulation that makes it illegal to charge a price higher than a specified level Rent ceiling: when price ceiling is applied to housing market  Rent ceiling set below equilibrium rent creates: o Housing shortage: demand exceeds supply o Increased search activity: looking for new housing o A black market A rent ceiling set below equilibrium = inefficient underproduction of housing services  Marginal social benefit exceeds marginal social cost  Deadweight loss shrinks the consumer and product surplus Are rent ceilings fair? Fair rules = anything blocking voluntary exchange is unfair Fair results = fair outcome benefits the less well off (poor) Possible mechanisms for allocation of housing:  lottery  first come, first served  discrimination Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 19 Price floor: makes it illegal to charge a price lower than a specified level A price floor set below equilibrium = no effect Price floor above the equilibrium price = big effects Minimum wage: price floor applied to the labour market  unfair result= those who have and keep their jobs benefit  minimum wage s inefficiency of minimum wage Taxes incidence: division of the burden of a tax between buyers and sellers tax on seller= less supply tax on buyer= less demand Tax with perfectly inelastic demand = buyers pay Tax with perfectly elastic demand = sellers pay Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 20 Tax with perfectly inelastic supply = sellers pay Tax with perfectly elastic supply = buyers pay Benefits principle: the proposition that people should pay taxes equal to the benefits they receive from the services provided by the government (i.e tuition paid for students who go to school) Ability to pay principle: the proposition that people should pay taxes according to how easily they can bear the burden of the tax (rich pay more, poor pay less) Taxes and efficiency Production quota: an upper limit to the quantity of a good that may be produced in a specific period  production quota below equilibrium quantity results in:  production quota below equilibrium quantity results in: o decrease in supply o rise in price o decrease in marginal cost o inefficient underproduction o incentive to cheat and overproduce A subsidy is a payment made by the government to a producer.  A subsidy (opposite of a production quota) results in:  A subsidy (opposite of a production quota) results in: o increase in supply o fall in price, increase in quantity produced o increase in marginal cost o inefficient overproduction Chapter 7 7 Imports: goods and services we buy from other countries Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 21 Exports: goods and services we sell to other countries Comparative advantage drives international trade -> person can produce a good/service at a lower opportunity cost (ex. India can make shirts cheaper and more efficiently) Learning-By-Doing: Learning-By-Doing is the basis of dynamic comparative advantage Dynamic comparative advantage: comparative advantage that a person or country has acquired by specializing in an activity and becoming the lowest-cost producer With imports, quantity produced decreases, quantity bought increases Gains and losses with imports:  producer surplus shrinks ©  consumer surplus expands (A+B+D)  increase in total surplus (CS +PS) With exports, quantity produced increases, quantity bought decreases Gains and losses in a market with exports:  producer surplus expands (C+B+D)  consumer surplus shrinks (B)  increase in total surplus (D) Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 22 International trade restrictions: Tariff: tax on a good imposed by importing country  tariffs cause:  tariffs cause: o rise in the price of a good o decrease in purchases o increase in domestic production o decrease in imports o tariff revenue Import quota: limits maximum quantity of a good Effects of a tariff and import quotas:  Canadian consumers of the good lose  Canadian producers of the good gain  Canadian consumers lose more than  Canadian producers gain  Society loses: a deadweight loss will arise Winners and losers from tariff (1) Winners and losers from an import quota (2) With tariffs and import quotas: -Consumer surplus shrinks -Producer surplus expands -Creates a deadweight loss  Health/ safety/ regulation barriers  Voluntary export restraints Export subsidy: payment by the government to the producer of the exported good (illegal under NATO, WTO) Infant-industry Argument: necessary to protect a new industry to enable it to grow into a mature industry to compete in world market Dumping: foreign firm sells its exports at a lower price than cost of production (ex. China making computer chips at a very low price, selling it for an artificially low price so that Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 23 all competition is wiped out) - > trying to gain global monopoly Protection:  Saves jobs  Allows us to compete with cheap foregin labour  Penalizes lax environmental standards  Prevents rich countries from exploiting developing countries  Saves jobs  Allows us to compete with cheap, foreign labour  Penalizes lax environmental standards  Prevents rich countries from exploiting developing countries Outsourcing: buying finished goods, services from other firms in Canada; firms from outside of Canada Offshoring: hiring foreign labour/produce in other countries, buying finished goods and services from foreign countries Offshore outsourcing: buying finished goods and services from outside of Canada Chapter 8 Choices made are influenced by: 1. Consumption possibilities a. All the things that a person can afford to buy 2. Preferences a. Likes and dislikes Utility: benefit or satisfaction from a consuming a good or service Total utility: is the total benefit a person gets from the consumption of goods.  More consumption= more total utility  Total utility increases when the quantity of a good increases Marginal Utility: from a good is the change in total utility that results from a unit-increase in the quantity of the good consumed  Quantity consumed increases, marginal utility decreases; decrease because the quantity of the good consumed increases the principle of the diminishing marginal utility Spreadsheet solution: Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 24  Direct way to find the utility- maximizing choice is to make a table in a spreadsheet and do the calculations 1. Find the just affordable combinations 2. Find the total utility for each just-affordable combination 3. The utility-maximizing combination in the consumers’ choice Consumer equilibrium: the situation in which the consumer has allocated all of their available income in the way that maximizes their total utility  More natural way of finding the CE is use the idea of choices made at the margin Marginal utility: the increase in total utility that results from consuming one more unit of the good  Positive marginal utility: increase in what people enjoy  Diminishing marginal utility: marginal utility decreases as a consumption of a good increases Marginal utility per dollar: marginal utility from a good that results from spending one more on it  The marginal utility from a good/ price= marginal utility per dollar Utility maximizing rule  Consumer’s total utility is maximized by following rule: 1. Spend all available income 2. Equalize the marginal utility per dollar for all good Prediction of Marginal Utility Theory  Price of a good falls the quantity demanded of the good increases- demand curve slopes downward o Change in price of a good changes the demand of the other  Example of pop vs movie o Fall I price of the movie increases the quantity of movies demanded- a movement along the demand curve for movies and decreases the demand for pop- a shift of the demand curve for pop o Rise in price of pop decreases the demand for the amount of pop she wants to drink- movement along the demand curve o Income increases, demand for normal good increases Paradox Value  Water vs diamond o Marginal utility for water is small, but total utility is large o Marginal utility for diamonds is large but the total utility is small Paradox resolved Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 25  Resolved by distinguishing between total utility and marginal utility o Water price is low- total utility is high and marginal utility is small o Diamond price is high- total utility small and marginal utility high o Marginal utility for both is equal Value and consumer surplus  Supply of water is perfectly elastic, so quantity consumed is large and consumer surplus is large  Supply of diamonds is perfectly inelastic, so price is high and consumer surplus is low Ways of explaining consumer choices  Behavioural economics: studies the ways in which limits on the human brain’s ability to compute and implement rational decisions influences economic behaviour- both the decisions people make and the consequences of those decisions for the way market work o 3 obstacles  Bounded rationality: bounded by the computer power of the human brain; with uncertainty people can’t make choices and rely on decision-making methods  Bounded will-power: less-than-perfect will power that prevents people from making decisions that will be later regretted  Bounded self-interest: limited self-interest that sometimes results in supressing own interests to help others  Endowment effect: tendency for people to value something more highly simply because they own it  Neuroeconomics: study of the activity of the human brain when a person makes an economic decision o Decisions are made:  In the pre-frontal cortex where memories are stores and data analyzed and might be deemed rational  In the hippocampus where memories of anxiety and fear are stored and might be deemed irrational Chapter 9 Budget lines: describes the limits to its consumption choices  Divisible and indivisible goods: can be bought in any quantity desired (i.e gas)  Affordable and unaffordable goods: anything outside of a budget line is unaffordable and what’s inside is affordable Budget equation: budget line can be known as a budget equation  Starts with: expenditure= income  Expenditure = sum of each price of good x quantity bought o Budget equation: Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 26 Real income: income expressed as a quantity of goods the household can afford to buy Relative price: price of one good divided by the price of another good  Magnitude of the slope of the budget line Change in Price and Income  Change in money (income) bring a parallel shift in the budget lines o Slope of budget doesn’t change because relative price remains the same  Change in price brings a movement from the y-intersection making the budget line steeper or flatter Indifference curve: line that shows combinations of goods among which a consumer is indifferent o Possible combinations: preferred, not preferred, and point C o Indifference curve is Io. Anything below is not preferred and anything preferred is above the curve Marginal rate of submission: the rate at which a person will give up good y (good on y-axis) to get an additional unit for good x (good on the x- axis) while remaining indifferent  Marginal slope of indifferent curve measures the marginal rate of substitution  If marginal curve is steep marginal rate of submission is high. Person is willing to give up large quantity of y to get x  If marginal curve us flat marginal rate of submission is low. Person is willing to give up small quantity of y to get x Diminishing marginal rate of substitution: general tendency for a person to be willing to give up less of good y to get one more unit of good x, while at the same time remain indifferent as the quantity of good x increases Degree of Substitutability  Shape of the indifference curves reveals the degree if substitutability between two goods Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 27 Best affordable choice 1. On budget line 2. On the highest attainable indifference curve 3. Has a marginal rate of substitution between the goods equal to the price of the two goods Price effect: change in the price of a good on the quantity of the good consumed Income effect: change in income on the quantity of goods consumed Price always increases for the quantity bought can be proven by: 1. Substitution effect: the effect of a change in price on the quantity bought when the consumer remains on the same indifference curve a. Direction of the substitution effect never varies: when the relative price of a good falls, consumer substitutes more of that good for another good b. This effect is the reason the demand curve slopes downward 2. Income effect: effect in the change in income making the quantity bough increase so the consumer moves to a different indifference curve a. For a normal good the income effect reinforces the substitution effect and is the second reason why the demand curve slopes down Inferior goods  Income increases, quantity bought decreases  Is negative and works against the substitution effect; as long as substitution effect dominates, demand curve still slopes downward  If the negative income effect s stronger than the substitution effect, a lower price for inferior goods brings a decrease in the quantity demanded- demand curve slopes downward Downloaded by Tyler Argue ([email protected])  lOMoARcPSD|24671036 28 Income effectBenefits principle: the proposition that people should pay taxes equal to the benefits Downloaded by Tyler Argue ([email protected])