Economics Final Review: Analyzing Economic Issues - PDF
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Uploaded by TalentedCarnelian2365
2025
Anni W
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This document is a comprehensive economics final review created by Anni W and dated 2025/06/05, likely for the CIA4U1-01 course. It covers fundamental economic concepts, including decision-making, scarcity, production possibilities, market structures, price elasticity, and an introduction to macroeconomics such as GDP calculation, fiscal, and monetary policies, offering a thorough overview of key economic principles.
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1 CIA4U1-01 Analyzing Current Economic Issues Anni W 2025/06/05 Economics Final...
1 CIA4U1-01 Analyzing Current Economic Issues Anni W 2025/06/05 Economics Final Review ★ Units: Bold/All Caps ★ Main topics: Italic/Underline UNIT 1: ECONOMIC THEORY 1. Decision Making 1.1. Short-range 1.1.1. Will I study or stream a movie? 1.2. Mid-range 1.2.1. How badly do I need a new winter coat? What material should it be? What’s my budget? 1.3. Long-range 1.3.1. Will I go to college/university next fall or take a full-time job for $2.50 above minimum wage and start saving for a home? 1.4. Definition of Decision Making 1.4.1. Using time, energy, money, or materials to do one thing instead of another 1.4.2. Facing questions about what we need, what we want, and what we can afford 2. The Economic Problem (Scarcity) 2.1. Definition 2.1.1. Unlimited needs and wants, limited resources available (i.e. income, savings) 2.1.2. This results in the need to economize and use resources wisely 2.2. Wise Use 2.2.1. Further our personal/group goals while consuming the least amount of available resources 2.3. Choice 2.3.1. “What to produce” 2.3.2. E.g. farming, mining, use of lumber, steel, water 2 2.4. Policy 2.4.1. “Who gets what’s produced” 2.4.2. E.g. Tariffs, taxation, subsidies, price floor/ceiling, quotas, regulations 2.5. Opportunity Cost 2.5.1. “How to produce?” 2.5.2. E.g. new technology, mechanization, increased efficiency 2.5.3. Definition 2.5.3.1. Sum of all losses from taking one course of action over another 2.5.3.2. Utility of the best forgone alternative 3. Production Possibilities Frontier (PPF) 3.1. Conditions of a PPF 3.1.1. An economy only makes two products 3.1.2. Resources & technology are fixed 3.1.3. All resources are employed to their full capacity 3.2. Adam Smith’s Argument 3.2.1. Division of labor creates production 3.2.2. Self interest in transformed by the invisible hand of competition and creates economic benefits 3.2.3. Laissez-faire capitalism, no government intervention 3.3. Sample PPF 3.3.1. As quantity increases, opportunity cost increases, each incremental unit has higher opportunity cost to manufacture 3.4. Law of Increasing Opportunity Cost 3.4.1. Cost of 1 unit of product A may be less than 1 unit of product B at the beginning (when shifting from alternative A to alternative B) 3 3.4.2. Additional units (B to C, C to D, etc.) reveal law of increasing opportunity cost 3.4.2.1. For society, the opportunity cost of each additional unit of pizzas is greater than the opportunity cost of the preceding one 3.4.2.2. Reflected in the bowed out shape of the curve (i.e. it is not straight) 3.4.3. Why? 3.4.3.1. Economic resources are not completely adaptable to alternative uses, and many resources are better at producing one type of good versus others 3.5. Implications on Being on Different Parts of the PPF 3.5.1. On PPF: balance/trade off between two goods, operating at maximum efficiency 3.5.2. Within PPF: operating inefficiently 3.5.3. Moving on PPF: reallocation of resources (more/less labor since land and capital are fixed) 3.5.4. Extending outward: technological innovation 3.5.5. Inward shift: loss of production, technology 3.6. Law of Increasing Relative Cost 3.6.1. Definition: in order to get greater amounts of one products ever-increasing amounts of the other product must be sacrificed 3.6.2. Represented by the bowed out shape of the PPF 3.7. Law of Diminishing Returns 3.7.1. Definition: based on the relationship between an input and the resulting output, the output will increase when input is increased but only to a certain point 3.7.2. After that point, increasing inputs does not have an appreciable effect on production 4 3.8. Economic Growth 3.8.1. X-axis only and Y-axis only 3.8.2. Both unequally and both equally 4. Comparative & Absolute Advantage 4.1. Comparative Advantage 4.1.1. Ability to produce something at a lower opportunity cost than others 4.1.2. Law of Comparative Advantage: an individual, firm, region, or country with the lowest opportunity cost of producing a good should specialize 4.1.2.1. Specialization of labor increases production 4.1.2.2. Ability to perform more than one “task” = utility 4.1.3. Advantages of Trade 4.1.3.1. Price, choice (variety), resources, economies of scale, competition, allocation of resources and source of foreign exchange 4.1.4. Disadvantages of Trade 4.1.4.1. Needs perfect knowledge, transport costs, limited economies, fluctuations in price, nature of the goods (perfectly transferable), 5 factors of production, assumes free trade, lack of political freedom 4.2. Absolute Advantage 4.2.1. Definition: the ability to produce something using fewer resources than other producers 5. Types of Economies 5.1. Traditional Economy 5.1.1. Economic decisions depend on custom, division of work 5.1.2. Mix of outputs, organization of production 5.1.3. Traditional economies widespread poverty & social restriction restrains human potential, people must follow customs rather than having freedoms 5.2. Market Economy 5.2.1. Individuals pursue their own self-interest (link: Laissez Faire) 5.2.2. Based on private ownership of economic resources and use of markets to make economic decisions, referred to as capitalism 5.2.3. Benefits: 5.2.3.1. Consumer sovereignty, what to produce decided by needs and wants, money votes for production of goods and services, prices coordinates buying/selling behavior to limit over and under production, producers respond to changes in demand, encourages innovation 5.2.4. Drawbacks: 5.2.4.1. Inequities in distribution of income, private economies may not benefit society as a whole, government intervention may be required at times to prevent harm, instability in total output from year to year, which can have a negative influence employment and prices, very few real-world examples of capitalism 5.3. Command Economy 5.3.1. Total opposite of market economy 5.3.2. All resources/capital are controlled by the government 5.3.3. Markets are replaced by central planning: decides what is produced, how it is produced, and how it should be distributed 5.3.4. Benefits: 5.3.4.1. Income distribution: other considerations outside of economics, more equal vs a market economy 5.3.4.2. Economic growth: promote rate of economic growth by devoting more resources to capital goods vs market economy 6 5.3.5. Drawbacks: 5.3.5.1. Planning, efficiency, and individual freedom challenges 5.3.5.2. Pure command economies are very rare due to these deficiencies 5.3.5.3. Planning an economy requires a tremendous amount of information 5.3.5.4. Incorrect estimates lead to overproduction/underproduction 5.3.5.5. Inefficiencies lead to waste, profit doesn’t encourage efficiencies 5.3.5.6. Corruption of government officials, lack of freedom, personal growth 5.4. Mixed Market Economies 5.4.1. Most countries fall in between traditional, market, and command 5.4.2. Combines use of markets and government presence in decision making 5.4.3. Private sector (ownership) and public sector (government intervention) 5.4.3.1. i.e. levying taxes, subsidies, regulations, etc. 6. Leadership Types 6.1. Facism 6.1.1. Political philosophy, movement, regime that exalts nation above the individual (centralized autocratic government) 6.1.2. Headed by a dictatorial leader, focuses on severe economic and social regimentation and forcible suppression of opposition 6.2. Socialism 6.2.1. Collective/government ownership and control of the means of production and distribution of goods 6.2.2. Little to no private property 6.2.3. Maximizes access to resources for all, works for the collective good of the people 6.3. Communism 6.3.1. Elimination of private property and a system in which goods are owned in common and available to all 6.3.2. Single party controls state-owned means of production 7 6.3.3. Aims to be classless, no wealthy, no poor 6.4. Factors Affecting Political Evolution 6.4.1. Demographics (population growth, rural-urban) 6.4.2. Resources (scarcity) 6.4.3. Globalization (military conflict, ideologies) 6.4.4. Oppression (economic disparity) 6.4.5. Technology (policies, MNCs, TNCs) 6.4.6. Colonialism, imperialism 7. Positive and Normative Economics 7.1. Positive Economics 7.1.1. Analysis of factual information, “analytical” economics 7.1.2. Descriptive: factual observations that can be verified or confirmed 7.1.2.1. E.g. lumber exports go down $20 in the past 8 months 8 7.1.3. Condition: forecasts based on identified patterns and occurrences 7.1.3.1. E.g. reducing taxes will cause people to spend more 7.2. Normative Economics 7.2.1. Statements that express opinions, values, beliefs, “policy” economics 7.2.1.1. E.g. government should provide affordable day care for working parents 8. Goals of the Canadian Economy 8.1. Political Stability 8.1.1. Consistency in policy-making, promote investor/consumer confidence, develops long-term planning and investment 8.1.2. E.g. Quebec referendums, 4 year elections, USA/Canada tariffs, free trade, political ruling party 8.2. Reduced Public Debt 8.2.1. Slowing government spending so that revenue and expenses can level off to reduce the amount owed from borrowing 8.2.2. E.g. reduced spending, increased tax revenue, bonds, interest rates, bailout/default 8.3. Economic Growth (GDP) 8.3.1. Increase in economy’s total production of goods or services, an outward shift in the economy’s PPF 8.3.2. E.g. new resources, increase in skilled labor force, technological innovations, more efficient production, increase in wages 8.4. Increase Productivity (Efficiency) 8.4.1. The efficient use of scarce productive resources to obtain the maximum possible output, a result of healthy competition 8.4.2. E.g. worker productivity, workplace training programs, incentives and bonuses, reduce meetings, set clear objectives 8.5. Equitable Distribution of Income 8.5.1. Fair division of wealth and total national output, find the balance between efficiency and equality 8.5.2. E.g. transfer payments, socialized health care, free public education, social welfare and services, increase taxes 9 8.6. Price Stability (Inflation >> %) 8.6.1. Inflation/deflation are symptoms of an unhealthy economy, stable prices are indicators of healthy economies 8.6.2. E.g. increased cost of living, Great Depression of the 1930s, fiscal policy, raise/lower taxes, adjust government spending 8.7. “Full” Employment 8.7.1. All members of the labor force are working, production is on the national PPC 8.7.2. Defined as 6-7% of the labor force being out of work 8.7.3. E.g. Great Depression, economic downturn, worker productivity and efficiency, mechanization, increased labor costs 8.8. Balance Payments and Currency 8.8.1. Annual dollar value of trade, international flow of goods and currency in transactions (import, export, borrow and lend) 8.8.2. E.g. changes in employment rates, cash flow within a country, cost of living, import/export amounts, lower exchange rates 8.9. Economic Freedom (“Markets”) 8.9.1. Freedom of choice presented to workers, consumers, and investors, market economy, principles of consumer sovereignty 8.9.2. E.g. freedom of purchasing choice, freedom of personal spending, government intervention, property rights, free trade 8.10. Environment Stewardship 8.10.1. Economic activity should not significantly harm the natural environment, reduce pollution of air, water, earth, and minimize depletion of natural resources 8.10.2. E.g. carbon emissions tax, environmental laws, optimize energy usage, effective waste management, invest in renewable energy 9. Economic Fallacies 9.1. Definition 9.1.1. Commonly defined as a hypothesis that has often been proved false, but it still accepted by many people because it appears, at first glance, to make sense 10 9.2. Fallacy of Composition 9.2.1. There are several things that may be true from an individual perspective, but become false when examined in light of the economy as a whole 9.2.2. What’s good for the individual may not be good for society or vice versa 9.2.3. E.g. Farmers clear more land to earn more profit, if every farmer does this, supply would go up, driving price down 9.3. Post Hoc Fallacy 9.3.1. Based on the assumption that since event B happened after event A, A must have caused B 9.3.2. Most times, it is more chance than anything else 9.3.3. E.g. new government brings new policy, economy gets better, so people assume the new policy caused the economy to improve 9.4. The Fallacy of Single Causation 9.4.1. Based on the premise a single factor or person caused a particular event to occur 9.4.2. E.g. the stock market crash of 1929 caused the Great Depression 10. Important Economic Theorists 10.1. Adam Smith 10.1.1. Father of Economics and capitalism, believed in self interest, invisible hand, laissez-faire capitalism, and market mechanisms 10.2. Thomas Robert Malthus 10.2.1. Population control (low wages), population grows exponentially, food grows linearly (diminishing returns), increase in statistical analysis, ‘positive’ vs ‘preventative’ checks 10.3. David Ricardo 10.3.1. Comparative vs absolute advantage, free trade, iron law of wages, low wages increase population 10.4. Karl Marx 10.4.1. Self interest leads to the destruction of capitalism, communist revolution, everyone should share resources equally and requires government intervention 11 10.5. John Maynard Keynes 10.5.1. Government intervention stimulates employment, spending, and growth during downturns on the economy, father of current fiscal policy 10.6. Joan Robinson 10.6.1. Imperfect competition leads to market dominance 10.7. John Kenneth Galbraith 10.7.1. Private affluence leads to public squalor, government spending leads to social balance 10.8. Milton Friedman 10.8.1. Free markets resolve economic problems, government leads to weak economy, influence economic growth by regulation money supply and interest rates UNIT 2: MICROECONOMICS 1. Supply and Demand 1.1. Laws of Supply and Demand 1.1.1. Supply: Quantity supplied as price increases 1.1.2. Demand: Quantity demanded increases as price decreases 1.2. Surplus and Shortage 12 1.3. Changes in Supply 1.4. Changes in Demand 2. Factors Impacting Supply and Demand 2.1. Changes in Number of Producers 2.1.1. If a particular good seems to provide attractive profits, new businesses will soon start to produce similar goods 2.1.2. The result is that supply will increase as more of these goods enter the market 2.1.3. When supply increases, if demand remains the same, prices will decrease because of increased competition 2.2. Changes in Price 2.2.1. If the price of a good decreases, then people may stop producing it 2.2.2. For example, if the price of wheat decreases, farmers may shift production from wheat to corn or soybeans 13 2.2.3. The wheat supply will then decrease as the corn or soybean supply increases 2.3. Changes in Technology 2.3.1. Changes in technology can reduce the cost of production, encouraging more businesses to start producing a product, increasing supply 2.3.2. For example, as computer-chip technology has improved, computers have become much more powerful, much cheaper to produce, and more affordable to many more consumers 2.3.3. This improvement has drastically increased the supply of PCs and laptop computers worldwide 2.4. Changing Expectations for the Future 2.4.1. Producers must always plan ahead to forecast sales, production, financing, and marketing 2.4.2. Many producers try to predict economic conditions and consumer demand for two to five years in advance 2.4.3. As conditions change, they increase or decrease production accordingly, and this increases or decreases supply 2.4.4. Imagine the planning and forecasting that must take place before a new car rolls off the assembly line (e.g. determining what colors consumers will want this season) 2.5. Changing Production Costs 2.5.1. If a local baker can find a lower cost source for sugar and flour, he or she can produce more goods for the same cost of production 2.5.2. In this case, the supply will increase because the baker wants to increase profit 2.5.3. If production becomes more expensive, then supply will decrease 3. Factors Impacting Demand 3.1. Changing Consumer Income 3.1.1. Generally speaking, as income increases, people tend to buy more than before 3.1.2. For example, a pay raise may result in someone buying a new flat-screen TV, renting a cottage for a holiday, or buying new living room furniture 3.1.3. However, for some types of goods, the opposite can be true 3.1.4. For example, an increase in income may result in the purchase of fewer grocery items because people are buying more restaurant meals 14 3.2. Changing Consumer Tastes 3.2.1. Changes in consumer tastes over time can cause an increase in demand for fashionable items and a decrease in demand for what is perceived as unfashionable 3.2.2. For example, certain styles of jeans come into fashion, go out of fashion, and come back into fashion 3.3. Changing Expectations for the Future 3.3.1. If consumers expect that either prices or income will increase in the future, they will often purchase more in anticipation of the change 3.3.2. An upward change in expectations results in an increase in demand 3.3.3. However, if consumers expect the prices or income to decrease, then demand will decrease as well 3.4. Changes in Population 3.4.1. An increase in population creates an increase in the need for housing, cars, roads, waterworks and sewers, schools, grocery stores, hospitals, clothes, and nearly every good and service imaginable 3.4.2. As certain segments of the population increase, demand for goods associated with those segments increases as well 3.4.3. Presently in Canada, there is an increase in the population of people over the age of 55 3.4.4. As a result, demand is increasing for healthcare 3.4.4.1. E.g. certain sports activities, such as golf, and housing, in the form of adult lifestyle and retirement homes 4. Markets 4.1. Definition 4.1.1. Network of buyers and sellers for a product or serve, more specifically the demand for a product in the price-determination process 4.1.2. Can be physical places (i.e. stores) or take the form of online spaces, like a stock market exchange via the internet only 4.1.3. This is in relation to what a person can and is willing to buy 4.1.4. For example, if you like a product but would not pay for it at its listed price you are not in demand of that product 4.1.5. If you are willing to pay for an inferior product you would be in demand for that inferior product instead 4.2. Other Uses 4.2.1. Term used in the collective sense to refer to all buyers and sellers of a particular good or service 15 4.2.2. Term used in the relationship between buyers and sellers to arrive at a mutually acceptable price and quantity 4.3. Additional Non-Price Factors Related to Markets 4.3.1. Substitute Goods 4.3.1.1. Used in place of other goods 4.3.1.2. If the price of product A goes up, B will be purchased instead 4.3.1.3. E.g. Coca Cola & Pepsi, Pizza Hut & Pizza Pizza, etc. 4.3.2. Complementary Goods 4.3.2.1. Used in tandem with other goods 4.3.2.2. If the price of product A goes up or down, B will be purchased more or less in relation 4.3.2.3. E.g. Automobiles and tires, bread and butter, etc. 4.4. Determining a Market 4.4.1. While demand from a theoretical perspective is what people want at given prices, market demand refers to the total demanded by all the consumers willing and able to buy 5. Price Elasticity of Supply 5.1. Definition 5.1.1. Suppliers will provide more as prices rise because their profits will increase 5.1.2. Measures how responsive the quantity supplied by a seller is to a rise or fall in price 5.2. Formula 5.2.1. P = price, Q = quantity, Qs = original quantity, Ps = original price, ΔQs = Qs new - Qs old, ΔPs = Ps new - Ps old % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑠𝑢𝑝𝑝𝑙𝑖𝑒𝑑 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 𝑋 5.2.2. 𝐸𝑠 = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 𝑋 Δ𝑄𝑠 = Δ𝑃𝑠 5.3. Reading the Coefficient 5.3.1. Elastic when Es > 1 5.3.2. Unit elastic when Es = 1 5.3.3. Inelastic when Es < 1 5.3.4. Perfectly elastic when Es = infinity 5.3.5. Perfectly inelastic when Es = 0 16 5.4. Factors Affecting Supply Elasticity 5.4.1. Time 5.4.1.1. The longer the time period a seller has to increase production, the more elastic the supply will be 5.4.1.2. E.g. tomato growers need time to increase production, so supply is inelastic until more enters the market 5.4.1.2.1. Short run = inelastic, long run = elastic 5.4.2. Ease of Storage 5.4.2.1. When prices drop, sellers can sell at a lower price or store it in inventory and sell when price rises 5.4.2.2. E.g. steel is easy to store and has high supply elasticity whereas agriculture is hard to store and has low supply elasticity 5.4.3. Cost Factors 5.4.3.1. Increasing output can be expensive, in industries with lower input levels, supply is more elastic 5.4.3.2. E.g. car production can increase in the short term by working overtime, but in the long run, they may need to build new factories (costly) 6. Price Elasticity of Demand 6.1. Definition 6.1.1. Deals with price related changes to the demand curve 6.1.2. Responsiveness of quantities demanded and supplied to changes in price 6.1.3. Consumers will buy more of a product when price falls and less when price rises 6.2. Formula 6.2.1. P = price, Q = quantity, Qs = original quantity, Ps = original price, ΔQd = Qd new - Qd old, ΔPd = Pd new - Pd old % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑠𝑢𝑝𝑝𝑙𝑖𝑒𝑑 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 𝑋 6.2.2. 𝐸𝑑 = % 𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡 𝑋 Δ𝑄𝑑 = Δ𝑃𝑑 6.3. Reading the Coefficient 6.3.1. If the percentage change in quantity is more than the percentage change in price, the good is price elastic (>1) 6.3.2. If it is less, the good in inelastic ( 1) 7.1.1. Condition in which the percentage change in quantity demanded is greater than the percentage change in price 7.1.2. Demand is elastic when the elasticity coefficient is greater than 1 7.1.3. When demand is elastic, a decrease in price will result in an increase in total revenue 7.1.3.1. Total revenue = price multiplied by quantity demanded 18 7.2. Inelastic Demand (Ed < 1) 7.2.1. Condition in which the given percent change in price causes a smaller percentage change in quantity demanded 7.2.2. Demand is inelastic when the elasticity coefficient is less than 1 7.2.3. When demand is inelastic, a decrease in price will result in a decrease in total revenue 7.3. Unitary Elastic Demand (Ed = 1) 7.3.1. Condition in which the percentage change in quantity demanded is equal to the percentage change in price 7.3.2. In this case, the elasticity coefficient is 1 7.3.3. The amount of money spent on a good or service does not vary with change in price 7.3.4. Therefore, total revenue will remain the same at any price 7.4. Perfectly Elastic Demand (Ed = infinity) 7.4.1. In this extreme case, at a given price, buyers are willing to buy as much of a good or service as a seller is willing to sell 7.4.2. At higher prices, buyers will buy nothing 7.4.3. The demand curve is perfectly horizontal 19 7.5. Perfectly Inelastic Demand (Ed = 0) 7.5.1. In this other extreme case, at any price, demand is always the same 7.5.2. The demand curve is perfectly vertical 8. Market Structures 8.1. Monopolies 8.1.1. Price Makers 8.1.2. A single seller, often with no close substitutes and significant barriers to entry 8.1.2.1. Barriers include economics of scale (AC), legal barriers, ownership of essential resources, aggressive tactics 8.1.3. The monopolist will have a different demand curve than perfectly competitive markets (downward sloping like that of the entire perfectly competitive market, the firm is the industry) 8.1.4. The monopolist is limited in its output to the level of demand 8.1.5. E.g. hydro companies, some pharmaceuticals, professional sports teams and contracts 8.2. Oligopolies 8.2.1. Stereotypically a few large firms, barriers to entry, differentiated or non-differentiated goods, interdependence and strategic thinking 8.2.2. Consider the competition ratio, how many firms control market share (by percentage) 8.2.3. Game theory is used to identify tendencies 20 8.2.4. Different types of oligopolies 8.2.4.1. Formal collusive oligopolies (cartels), rare 8.2.4.2. Non-collusive oligopolies 8.2.4.2.1. Price competition 8.2.4.2.2. Non-price competition 8.2.5. E.g. Organization for Petroleum Exporting Countries (OPEC), auto industry, telecommunications (service providers) 8.3. Monopolistically Competitive Markets 8.3.1. Most industries act as monopolistically competitive 8.3.2. Behaviors land somewhere between monopolies and perfectly competitive businesses 8.3.3. Market share or market power is the driving force in decision making 8.3.4. Little to no barriers of entry and exit 8.3.5. Large number of firms, many of them small 8.3.6. Differ products for profit maximization in a number of ways 8.3.6.1. Appearance, service, design, expertise, location, and brand recognition 8.3.7. E.g. most food products, retail outlets like clothing and footwear, etc. 8.4. Perfectly Competitive Markets 8.4.1. Price takers 8.4.2. Each producer produces a small amount of the overall quantity in the market, therefore they have little to no control over the price 8.4.3. Products are identical, each firm can substitute for another firm’s goods/services 8.4.4. Surpluses and shortages are nearly non-existent 8.4.5. Market entry and exit are easy (thus, ease of entry limits large profits and ease of exit will limit losses, few get rich but few are also left losing money) 8.4.6. Efficient, unlike other markets where creating demand through lower supply can be the norm 8.4.7. E.g. agricultural products, low-tech manufactured goods, low-skilled labor 9. Summary of Market Structures 9.1. Market Structures Definition 9.1.1. There are certain market characteristics that influence pricing and output behavior 9.1.2. Different markets have different characteristics 21 9.1.3. “Perfect competition” and “Monopoly” are at opposite ends on a continuum 9.1.4. Perfectly Competitive and Monopolistically Competitive businesses tend to be very elastic 9.1.4.1. Enough producers that a price change can eliminate a firm from the market 9.1.5. Oligoplies and Monopolies tend to be very inelastic 9.1.5.1. Enough market control that a price change does not eliminate a firm from the market 9.2. Six Main Barriers in Oligopolies and Monopolies 9.2.1. Increasing returns to scale 9.2.2. Experience in production 9.2.3. Restricted ownership of resources 9.2.4. Legal obstacles (i.e. patents) 9.2.5. Market abuses (collusion, price discrimination) 9.2.6. Advertising 10. Revenue and Production Costs 10.1. Revenue 10.1.1. Two important concepts: 10.1.1.1. Calculating Total Revenue 10.1.1.1.1. Price of the Product x Quantity of the Product sold 10.1.1.2. Revenue approach to elasticity Price Elasticity Elasticity Coefficient Price ($) Total Revenue (TR) Elastic Ed > 1 Increase Decrease Elastic Ed > 1 Decrease Increase Unitary elastic Ed = 1 Increase/Decrease No Change Inelastic Ed < 1 Increase Increase Inelastic Ed < 1 Decrease Decrease 10.2. Key Definitions 10.2.1. Total Product (TP) 10.2.1.1. Overall level of output 22 10.2.2. Marginal Product (MP) 10.2.2.1. Difference between the Total Product (TP) and difference in labor (QL) 10.2.3. Average Product (AP) 10.2.3.1. Total product (TP) divided by the amount of labor (QL) 10.2.4. Fixed Cost (FC or TFC) 10.2.4.1. Same costs regardless of output 10.2.5. Variable Cost (VC or TVC) 10.2.5.1. Changes with levels of production 10.2.6. Total Cost (TC = TFC + TVC) 10.2.6.1. Entire cost of producing a certain level of output 23 10.2.7. Average Costs (AFC/AVC/ATC) 10.2.7.1. AFC = TFC/Q 10.2.7.2. AVC = ΔTVC/Q 10.2.7.3. ATC = TC/Q 10.2.8. Marginal Cost 10.2.8.1. Cost for producer to produce an additional unit 10.2.8.2. ΔTC/ΔQ 10.3. Economies of Scale 10.3.1. Economies of Scale (increasing returns to scale) 10.3.2. Constant Returns to Scale 10.3.3. Diseconomics of Scale (decreasing returns to scale) 11. Law of Diminishing Returns & Marginal Product 11.1. Marginal Productivity & Diminishing Return 11.1.1. In the short run, a company can simply hire more workers and have existing employees work longer hours 11.1.1.1. Variations in the quantity of labor, not capital or land 11.1.2. Productivity Definition 24 11.1.2.1. Amount of output attributable to a unit of input 11.2. Keys in Increasing Production 11.2.1. The change in the total product attributable to the last worker hired is known as the Marginal Product (MP) 11.2.2. The output per worker is known as the Average Product (AP) 12. Perfectly Competitive Markets 12.1. Side by Side Graph 12.1.1. Perfectly competitive markets have a horizontal demand curve at the prevailing market price 12.1.2. Demand = Marginal Revenue = Average Revenue 12.1.3. Profit maximization occurs when marginal revenue equals marginal cost 12.1.3.1. Output should be increased if MR > MC 12.1.3.2. Output should be decreased if MC > MR 12.1.4. Conditions met by perfectly competitive markets 12.1.4.1. Minimum price = minimum average cost 12.1.4.2. Marginal cos pricing = marginal cost 13. Imperfectly Competitive Markets 13.1. Definition 13.1.1. Different price and production points versus perfectly competitive markets 13.2. Oligopolies & Monopolistic Competition 13.2.1. Characterized by rivalry, faces a fractured demand curve 13.2.2. A firm raising the price of its product will see competitors keep their price the same so demand flattens out 25 13.2.3. A firm lowering the price finds rivals doing the same to compete 13.2.4. An increase in price past a certain point will push market share to rivals 13.2.5. Forms of Competition 13.2.5.1. Price leadership, collusion, cartels 13.2.6. They meet neither minimum cost pricing nor marginal cost pricing rules found in other industries where MC = MR at the demand curve 13.2.7. Graph for oligopoly and monopolistic competition are similar to monopoly (shown below) the only difference is the slope of the demand curve 13.2.7.1. Monopolistic is more flat, oligopoly is more steep 13.3. Monopolies 13.3.1. Differ slightly in that the price they charge is higher at lower quantities than in other competitive markets 13.3.2. Usually have to adopt average-cost pricing to make sure regulated monopolies break even (if they are not already profitable) 13.3.3. They can limit output in some cases to further increase the price they charge by artificial demand 13.3.4. Graph shown below 26 14. Government Intervention 14.1. Disequilibrium 14.1.1. Non-equilibrium prices can occur in free markets because of imperfect information and uncertainty, but usually doesn’t last for long 14.1.2. Governments can impose non-equilibrium prices on markets for extended periods to control prices with price ceilings or price floors 14.2. Price Ceiling 14.2.1. A maximum price that can be charged in a market 14.2.2. An effective price ceiling is below the equilibrium price level 14.2.3. Economic Consequences 14.2.3.1. Market price below the equilibrium level 14.2.3.2. Quantity supplied will be less than quantity demanded 14.2.3.3. Shortages will occur 14.2.3.3.1. Shortage: quantity demand exceeds quantity supplied (not the same thing as scarcity) 14.2.3.4. Deterioration of product quality 14.2.3.5. Black markets 14.2.4. E.g. rent control, government wants to keep affordable housing prices 14.3. Price Floor 14.3.1. Minimum price that can be charged in a market 14.3.2. Effective price floor forces prices to remain above equilibrium 14.3.3. Economic Consequences 14.3.3.1. Market price above the equilibrium 14.3.3.2. Quantity supplied is greater than quantity demanded 14.3.3.3. Surpluses will occur 14.3.3.4. Suppliers compete for customers by improving product quantity 27 14.3.4. E.g. minimum wage, focuses on labor and human need to make a decent living 15. Market Failures 15.1. Lack of Public Goods 15.1.1. Public goods are goods that would not be provided in free markets, and they are non-excludable and non-rivalrous (making it pointless for private individuals to provide the good themselves) 15.1.2. Examples of public goods include national defense and flood barriers 15.1.3. Non-excludable definition 15.1.3.1. Impossible to stop other people from consuming it once it has been provided 15.1.3.2. E.g. if a private individual creates a flood barrier to protect a house, other people in the area also benefit, even if they have not paid 15.1.3.3. This leads to the free-rider problem 15.1.4. Non-rivalrous definition 15.1.4.1. One person consuming it does not prevent another from consuming it as well 15.1.4.2. E.g. if one person eats an ice cream, then another person cannot also consume said ice cream, whereas a flood barrier does not stop other people from also being protected, causing no incentive for a private individual to build the barrier 15.1.5. The lack of public goods in a free market is a type of market failure 15.1.6. Some forms of government intervention 15.1.6.1. Providing public goods themselves, e.g. national defence, roads, street lighting, and lighthouses; created out of taxpayers’ money to fund provisions 28 15.1.6.2. Subsidize private firms, covering all costs, to provide the good 15.2. Under-Supply of Merit Goods 15.2.1. Goods that are underprovided by the market, and thus, under-consumed 15.2.2. Goods that the government thinks provide positive benefits for both the consumer and society, and think it should be consumed to a greater degree 15.2.3. Some examples include education, health care, sports facilities, etc. 15.2.4. Governments will attempt to increase supply and consumption in a variety of ways, including directly providing them, subsidizing them, etc. 15.2.4.1. The cost is thus shared among taxpayers 15.3. Over-Supply of Demerit Goods 15.3.1. Goods that are over-provided by the market and thus, over-consumed 15.3.2. Goods that the government thinks are bad for both consumers and society, and want to see it consumed at a lesser degree 15.3.3. Examples include cigarettes, alcohol, hard drugs, etc… 15.3.4. Governments will attempt to reduce supply/demand by legislation or other methods, but still does not completely reduce its consumption 15.4. Existence of Externalities 15.4.1. Occurs when the production or consumption of a good or service has an effect on a third party 15.4.1.1. If it is harmful, it is a negative externality and that external cost must be added to private costs to reflect the full cost to society 15.4.1.2. If it is beneficial, it is a positive externality and that benefit must be added to the private benefits 15.4.2. Marginal Social Cost (MSC) = Marginal Private Cost (MPC) when there is no external cost 15.4.3. Marginal Social Benefit (MPB) = Marginal Private Benefit (MPB) when there is no external utility or benefit 15.5. Negative Externalities of Production 15.5.1. Occurs when the production of a good or service creates external costs that are damaging to third parties 15.5.1.1. Mostly environmental problems 15.5.2. E.g. if a paint factory emits fumes that are harmful to people in the area, there is a cost to the community that is greater than the costs of production paid by the firm 15.5.3. Marginal social cost of production is greater than marginal private cost 29 15.5.4. In a free market, this situation would continue due to profit maximizing incentives 15.5.5. Some forms of government intervention include 15.5.5.1. Tax the firm to increase firm’s private cost to the point where MPC = MSC, where the government has ‘internalized the externality’ 15.5.5.2. The government could legislate and ban pollution of firms or restrict output 15.5.5.3. Tradeable emission permits, firms are licensed to emit up to a certain amount of pollution, and when it is all used up, firms can buy, sell, and trade the permits on the market 15.6. Positive Externalities of Production 15.6.1. Occur when the production of a good or service creates positive external benefit 15.6.2. E.g. High quality training for employees that may go to other firms who do not have to spend this cost 15.6.3. Society gains from production even if the producers do not 15.6.4. Some forms of government intervention may include 15.6.4.1. Subsidize the firms that are producing this good until the MPC curve reaches the MSC curve 15.6.4.2. Providing vocational training through the state (if the good is related to training) 30 15.7. Negative Externalities of Consumption 15.7.1. Goods that, when consumed by individuals, also affect third parties 15.7.2. Examples include cigarettes and secondary smoking, cars and air pollution, and loud music/noise pollution 15.7.3. MSB < MPB, private utility is diminished by the negative utility suffered by a third party 15.7.4. Some forms of government intervention include 15.7.4.1. Banning the consumption of a good (making it illegal), which would be difficult to do due to the effect it would have on such industries 15.7.4.2. Imposing indirect taxes, shifting MSC curve up, reducing consumption 15.8. Positive Externalities of Consumption 15.8.1. Goods or services which, when consumed, create external benefits to third parties 15.8.2. E.g. when people use healthcare services, they are less likely to pass on illnesses to those around them, creating a positive externality 15.8.3. MSB > MPB 15.8.4. Some forms of government intervention include: 15.8.4.1. Subsidize the supply of these goods, shifting the MSC curve downward to reach the socially efficient level of consumption 15.8.4.2. Positive advertising to encourage more consumption of these goods, shifting MPB to the right toward the MSB curve 31 UNIT 3: MACROECONOMICS 1. Macroeconomics Introduction 1.1. Definition 1.1.1. Study of the economy as a whole, addressing the overall national economy 1.1.2. All the markets, including consumers, workers, and firms together, create the big picture of our economy 1.2. Macroeconomic Measures 1.2.1. There are 3 main macroeconomic measures that receive the most attention: employment levels, output (economic growth), and price stability 1.2.2. In addition, 2 other important measures also receive attention: income distribution and external stability (balance of trade) 1.2.3. Output 1.2.3.1. Gross Domestic Product (GDP) 1.2.3.1.1. GDP income approach 1.2.3.1.2. GDP expenditure approach 1.2.4. Employment Levels 1.2.4.1. Types of unemployment 1.2.4.2. Calculating unemployment 1.2.4.2.1. Business Cycle (Bank of Canada) 1.2.5. Price Stability 1.2.5.1. Inflation 1.2.5.2. Consumer Price Index (CPI) 1.2.6. Others 1.2.6.1. Income Distribution (Lorenz Curve) 1.2.6.2. External stability (favorable balance of trade) 1.3. Leakages and Injections 32 2. GDP Calculations 2.1. Definition 2.1.1. GDP: total value of all goods and services produced within a country in one year 2.1.2. Only include final goods and services to avoid the issue of multiple counting during phases of production 2.2. Expenditure Approach 2.2.1. GDPE = C + G + I + (X - M) 2.2.2. C = Consumption, what households spend on goods and services (i.e. cars, food, gas, appliances, clothing) 2.2.3. G = Government purchases, the value of goods and services purchased by all levels of government (i.e. wages, employees, office supplies, schools, hospitals) 2.2.4. I = Investment, includes purchases of new capital goods for use in the production process, construction of buildings, etc. 2.2.5. X - M = Net exports, X = exports and M = imports, subtracted from GDP because they do not represent Canadian production 2.3. Income Approach 2.3.1. Adds up all the income earned by different factors of production (wages, rent, interest, profit) 2.4. Calculating Changes in GDP 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑌𝑟 2 − 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑌𝑟 1 2.4.1. % 𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝐺𝐷𝑃 = 𝑅𝑒𝑎𝑙 𝐺𝐷𝑃 𝑌𝑟 1 2.4.2. GDP per capita: GDP/population, the higher the per capita real GDP the more well-off citizens are 2.4.3. Nominal GDP: accounts for changes in price level, including inflation 2.4.4. Real GDP: in constant dollars 3. Limitations to GDP Calculation 3.1. Relation to Population (%) 3.1.1. Comparing GDP for different years is misleading if population has changed significantly 3.1.2. Dividing GDP by its population reveals GDP per capita, which better reflects GDP in relation to population 33 3.2. Inflation (CPI/%) 3.2.1. Some changes in total GDP can be attributed to increases in price due to inflation and some of it due to changes in amount produced 3.3. Non-Market Production 3.3.1. GDP does not count output with no dollar value attached to it 3.3.2. E.g. productive services of homemakers, voluntary services to charitable organizations 3.4. Underground Markets 3.4.1. No measurement for transactions for which no ‘paper trail’ exists 3.4.2. E.g. illegal activities, ‘under the table’ transactions 3.5. GDP as a Measure of Standard of Living 3.5.1. Nature of Goods 3.5.1.1. Inclusion of all types of goods and services that are produced weakens GDP as a measure of well-being 3.5.2. Leisure 3.5.2.1. GDP does not account for standard of living given the undesired option of working 24/7 3.5.3. Environmental Degradation 3.5.3.1. GDP does not consider negative environmental effects of economic production 3.5.4. Income Distribution 3.5.4.1. Does not consider income distribution equality, standard of living is not universal across a country 3.6. Other Factors Not Listed 3.6.1. Inaccuracies 3.6.1.1. Adjustments (tax), analysis of data, missed stats/figures 3.6.2. Under Recorded Markets 3.6.2.1. Subsistence living (farmers), black or informal markets for products or jobs done with legal products/services done illegally, jobs for cash, not claimed through taxation 3.6.3. External Costs 3.6.3.1. Impacts on quality of life (health), costs of resources being depleted 3.6.3.2. E.g. future value of a forest as trees are cut down 34 3.6.4. Quality of Life Concerns 3.6.4.1. External health benefits/drawbacks, value of volunteer work or taking care of young/elderly people not accurately shown in the GDPe 3.6.5. Composition of Output 3.6.5.1. Choice over what to include in GDP calculation 3.6.5.2. E.g. American GDP calculation comes from military expenditures 3.6.6. Green GDP 3.6.6.1. Environmental impacts 3.6.6.2. E.g. oil spills, pollution, cost of environmental clean ups, etc. 4. Aggregate Supply and Demand 4.1. Aggregate Demand 4.1.1. Total demand for goods and services in the nation’s economy 4.1.2. Downward sloping because at higher prices, consumers, firms, government, and foreign customers are less willing to buy, and they are more likely to buy at lower prices 4.1.3. At each price level, AD is equivalent to the GDP that would occur at that price level, the sum of all consumption, investment, government spending, and net exports 4.1.4. For real economic growth to occur, real GDP must grow 4.1.4.1. Aggregate quantity demanded must increase at each price level 4.2. Aggregate Supply 4.2.1. Total supply of goods and services produced in the nation’s economy 4.2.2. Upward sloping because at higher prices firms have an incentive to produce more, and at lower prices they are likely to produce less 35 4.3. Shifts in Aggregate Demand 4.3.1. If consumer confidence in the economy falls and people reduce spending, aggregate demand can fall (Ad3), reducing real output and prices and possibly dropping the country into a recession 4.3.2. If money supply large is too large, excessive consumer demand can push up the aggregate demand (Ad2), raising real output and prices and possibly pushing the country into serious inflation 4.4. Shifts in Short Run Aggregate Supply 4.5. Shifts in Long Run Aggregate Supply 4.6. Factors Impacting Aggregate Demand (Ad) 4.6.1. Consumption: use of consumer income, paid to government (taxes), saved for future use, spent on imports 36 4.6.2. Changes in investment: future expectations cause increases and decreases in investment 4.6.3. Changes in government spending: increased spending causes increased aggregate demand 4.6.4. Changes in trade: domestic rate of inflation, relative levels of income, value of Canadian dollar 4.7. Factors Impacting Aggregate Supply 4.7.1. Changes in price of inputs: price of land labor, and capital increase, causing firms to produce less at each price level, and the vice versa 4.7.2. Changes in input availability: more inputs lead to increased supply 4.7.3. Changes in efficiency: improvements in technology increase productivity in the workforce 5. Demand and Supply of Labor 5.1. Market Demand and Market Supply of Labor 5.1.1. Basic Factors of Production: land labor, and capital 5.1.2. How much of each factor used depends on the price of each input, and how much revenue it is likely to provide 5.1.3. Labor markets are a system of interrelated factors based on supply and demand, similar to markets for other goods 5.2. Main Differences 5.2.1. Households are suppliers 5.2.2. Business firms are the consumers 5.2.3. The price is the wage rate 37 5.3. Demand for Labor 5.3.1. The demand for goods and services is known as direct demand because consumers determine it directly as they use their dollars to indicate the value of utility that they receive from a good/service at various prices 5.3.2. Demand for labor comes from businesses and industries and price is now the wage rate 5.3.3. Demand for resources, including labor, is known as derived demand because it is dependent on, derived from, consumer demand for the goods or services being produced 5.3.4. The greater the demand for a good or service, the greater the quantity of labor demanded to produce it 5.3.5. Marginal Revenue Product of Labor (MRPL) 5.3.5.1. Concept that explains how the demand for labor is derived 5.3.5.2. Marginal Product = additional output created from the addition of one more labor unit 5.3.5.3. MRPL = additional revenue generated from one more unit of labor 5.4. Market Demand for Labor Curve 5.4.1. A change in the demand for the produce of labor 5.4.2. A change in the price of the other productive resources (i.e. any capital products like equipment) 5.4.3. A change in worker productivity (technology, laws, etc.) 5.5. Supply of Labor 5.5.1. Market Labor Supply Curve: the number of people willing to offer their services to firms at each of the possible wage rates 5.5.2. This curve is upward sloping because the opportunity cost of working is the value of what you could have earned doing something else in the same time or the value placed on leisure 5.5.3. As wage rates increase, opportunity cost increases for more individuals, so more people are willing to offer their services and labor market 5.5.4. Factors Affecting Labor Supply 5.5.4.1. Qualifications: in some fields you have to have certain qualifications (i.e. a doctor or teacher) but in other fields you need less (i.e. pizza delivery) 5.5.4.2. Geographic Location: large populated areas have greater quantity of labor at each wage than those in isolated areas 5.5.4.3. Nature of the Job: jobs that are deemed unpleasant (undertaker, or ditch digger) have less willing to do the job 38 6. Consumer Price Index 6.1. Definition 6.1.1. A broad measure of the cost of living in Canada 6.1.2. The CPI is the most important indicator because of wide spread use, e.g. to calculate changes in government payments such as the Canada Pension Plan and Old Age Security 6.1.3. Statistics Canada tracks, on a monthly basis, the retail price of a representative shopping basket of about 600 goods and services from an average household’s expenditure on food, housing, transportation, furniture, clothing, and recreation 6.1.4. The percentage of the total basket that any item occupies is called the weight, and reflects typical consumer spending patterns 6.2. Calculating CPI 6.2.1. Prices are measured against a base year 6.2.2. The base year is currently 2002, and the basket for that year is given the value of 100 6.2.3. The rate of change of the CPI is typically reported as the percentage change in the index over the past 12 months 6.3. Updating the CPI 6.3.1. Changed by Statistics Canada to reflect broad changes in consumer spending habits, as well as to take account of changes in products and services 6.3.2. Due to difficulties in measuring price changes due to changes in the quality of products and other factors, CPI may contain a certain measurement bias that prevents it from giving a completely accurate picture of inflation 6.4. Measurement Bias in the Canadian CPI 6.4.1. CPI is used to make cost-of-living adjustments in wages and salaries and to index the income tax system and social benefits such as pensions 6.4.2. The Bank of Canada is expected to keep inflation, as measured by the total CPI, at an annual rate of 2 per cent over the medium term 6.4.3. Sources of Measurement Bias 6.4.3.1. Commodity-Substitution Bias 6.4.3.1.1. The cost to the consumer of buying a fixed basket of goods and services, the contents of which are updated only once every two years 39 6.4.3.1.2. Consumers can and do substitute cheaper items for those that become more expensive when the relative prices of different products change between basket updates 6.4.3.1.3. Thus, the actual increase in the overall cost of living is less than the income in the cost of buying the original fixed cost 6.4.3.2. New Goods Bias 6.4.3.2.1. New products that come onto the market between updates of the consumer basket can also be a source of measurement bias 6.4.3.2.2. The relative prices of some of these new products drop considerably following their introduction 6.4.3.2.3. If price decreases happen before the basket is updated to include the new goods, the overall CPI will overstate the true cost of living 6.4.3.3. Quality Change Bias 6.4.3.3.1. CPI aims to measure the pure price change of a basket of consumer goods and services of constant quality by comparing their prices at two points in time 6.4.3.3.2. In fact, quality improvements may decrease the prices of certain items 6.4.3.3.3. Although Statistics Canada uses various methods to correct prices for quality changes, these adjustments may not fully remove the bias 6.4.3.4. Outlet Substitution Bias 6.4.3.4.1. Entry into Canada of new discount retailers and large warehouse stores has resulted in shifts in market shares from high to low price retailers 6.4.4. Bank of Canada research suggests that the four main sources of bias, taken together, cause the CPI to overstate increases in the cost of living by about 0.5% per year 6.5. Inflation Rate Calculation 𝑌𝑟 2 − 𝑌𝑟 1 6.5.1. 𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑅𝑎𝑡𝑒 (%) = 𝑌𝑟 1 × 100% 7. Employment Economic Indicators 7.1. Types of Disparities 7.1.1. Geographical Disparities 7.1.1.1. Different regions in Canada have different economies (natural resources, manufacturing, and finance) making a blanket number for unemployment for the entire country misleadin 40 7.1.2. Age Disparities 7.1.2.1. Canada has a higher unemployment rate in the 15-24 age range than almost any other country in the world, as a result of increased levels of education 7.1.3. Ethnic Disparities 7.1.3.1. Newcomers to industrialized countries can find employment harder to obtain compared to those raised within the borders 7.1.4. Gender Disparities 7.1.4.1. Education, discrimination, and social factors can be linked to higher unemployment rates amongst women in developed countries 7.2. Costs of Unemployment 7.2.1. To Unemployed 7.2.1.1. Lack of employment benefits and often a lower standard of living 7.2.1.2. In the long-term, can lead to higher stress, anxiety, and/or depression 7.2.2. To Society 7.2.2.1. Links to poverty, homelessness, higher rates of crime in certain areas 7.2.3. To the Economy 7.2.3.1. Lower aggregate supply, lower labor supply, lower production than possible, and lower supply of tax dollars for government expenditures 7.3. Factors Impacting Unemployment Rates 7.3.1. Factors Increasing Unemployment 7.3.1.1. Job loss 7.3.1.2. Resignations 7.3.1.3. Graduates yet to find work 7.3.1.4. Those returning to work from absences 7.3.1.5. Newcomers yet to find employment 7.3.2. Factors Decreasing Unemployment 7.3.2.1. Job gain 7.3.2.2. Retirements (investment/pension) 7.3.2.3. People who leave to get higher education 7.3.2.4. Emigration to foreign countries 7.3.2.5. Declining population 7.4. Disequilibrium and Equilibrium Unemployment 41 7.4.1. Labor Force is not at full capacity, this is called natural employment 7.4.2. Wages forced up, higher AsL, but less demand for workers 8. Measuring Employment 8.1. Unemployment Rate 8.1.1. Employment is a measuring tool for the state of the economic climate in Canada 8.1.2. Definition 8.1.2.1. Those in the labor force not currently working at any given time 8.1.2.2. To be in the labor force you have to be willing and able to work, without a job (excluding choosing not to work, e.g. school, leave, etc.) 8.1.3. Calculation 8.1.3.1. Step 1: Eliminate those under 15 or institutionalized 8.1.3.2. Step 2: Eliminate those eligible but choosing not to work 42 8.1.3.3. Step 3: Include those eligible and actively seeking or holding employment 𝑁𝑢𝑚𝑏𝑒𝑟 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 8.1.3.4. 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 (𝑅𝑎𝑡𝑒) = 𝐿𝑎𝑏𝑜𝑟 𝐹𝑜𝑟𝑐𝑒 × 100% 8.1.3.5. Full employment: unemployment rate is less than inflation rate 8.2. Criticisms 8.2.1. Includes workers, but not workers working at below their desired work level/output (e.g. part-time instead of full-time) 8.2.2. Does not include workers who want to work but have stopped looking for work 8.2.3. Does not equate for people working below their level of training or expertise 8.3. Natural Rate of Unemployment 8.3.1. Used interchangeably with full employment 8.3.2. Includes structural, frictional, but not cyclical unemployment 8.3.3. Usually its measured in relation to inflation rate 8.3.4. Rate of unemployment < inflation rate → full employment 8.4. Types of Unemployment 8.4.1. Structural Unemployment 8.4.1.1. Occurs when skills or location of workers no longer matches the patterns of labor demand in the economy 8.4.1.2. Technological unemployment: results from industries using more technology and reducing the need for workers 8.4.1.3. Replacement unemployment: firms moving labor-intensive production to countries where labor costs are cheaper 8.4.1.4. Geographical unemployment: affects a specific region of a country, also known as regional unemployment 8.4.2. Frictional Unemployment 8.4.2.1. Results from people moving between jobs, including graduating students looking for jobs and workers choosing to switch jobs 8.4.3. Cyclical Unemployment 8.4.3.1. Results from a reduction in overall consumer spending, demand for goods and services decrease, leads to lower derived demand for labor 8.4.4. Seasonal Unemployment 8.4.4.1. Seasonal variations in climate over the year 8.4.4.2. E.g. fishing, farming, construction, and recreational camps see declines in winter months 43 8.4.5. Classical Unemployment 8.4.5.1. ‘Real wage’ unemployment 8.4.5.2. Occurs when wages are drive two high, causing a surplus of workers 8.4.5.3. E.g. minimum wage laws above equilibrium rates 8.5. GDP Gap Formula (𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 𝑅𝑎𝑡𝑒 − 𝑁𝑎𝑡𝑢𝑟𝑎𝑙 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡) × 2 8.5.1. 𝐺𝐷𝑃 𝐺𝑎𝑝 = 𝐴𝑐𝑡𝑢𝑎𝑙 𝐺𝐷𝑃 × 100 9. The Business Cycle 9.1. Background Information 9.1.1. The business cycle is the periodic fluctuations in economic activity measured by changes in GDP 9.1.2. The phases are known as boom, recession, trough, and recovery 9.2. General Affects of Each Stage 9.2.1. Economy is Expanding 9.2.1.1. Businesses are hiring, growing, becoming more efficient, and focused on developing new products 9.2.1.2. Standard of worker living is going up 9.2.1.3. People are spending freely 9.2.1.4. Supply and demand of/for goods are increasing 9.2.1.5. Prices tend to drop 9.2.1.6. GDP is growing 9.2.2. Economy has Peaked 9.2.2.1. Business are neither hiring nor laying off staying put, becoming less or staying the same in terms of efficiency, and focused on improving production of existing products 9.2.2.2. Standard of worker living is staying the same 44 9.2.2.3. People are spending freely or carefully 9.2.2.4. Supply and demand of/for goods are staying put 9.2.2.5. Prices tend to stay the same 9.2.2.6. GDP is staying steady 9.2.3. Economy is in Recession 9.2.3.1. Businesses are laying off, cutting back, becoming less efficient, and improving production of existing products 9.2.3.2. Standard of worker living is going down 9.2.3.3. People are cutting costs 9.2.3.4. Supply and demand of/for goods are decreasing 9.2.3.5. Prices tend to rise 9.2.3.6. GDP is shrinking 9.2.4. Economy is in a Trough 9.2.4.1. Businesses are neither hiring nor laying off, staying put, becoming less or staying level in terms of efficiency, and improving production of existing products 9.2.4.2. Standard of worker living is staying the same or going down 9.2.4.3. People are spending carefully 9.2.4.4. Supply and demand of/for goods are staying put 9.2.4.5. Prices tend to stay the same 9.2.4.6. GDP is staying steady 9.2.5. Economy is Recovering 9.2.5.1. Businesses are hiring, growing, becoming more efficient, and developing new products 9.2.5.2. Standard of worker living is going up 9.2.5.3. People are spending freely or carefully 9.2.5.4. Supply and demand of/for goods are increasing 9.2.5.5. Prices tend to drop 9.2.5.6. GDP is growing 10. Introduction to Fiscal and Monetary Policy 10.1. Business Cycle and Aggregate Demand and Supply 10.1.1. Governments have a pair of broad categories of policies to impact the aggregate demand of an economy 10.1.2. These are known as fiscal and monetary policy 10.1.3. Fiscal policy is the government’s policies relating to direct taxes (income) and indirect taxes (goods and services) 10.1.4. These can both be raised or lowered to impact spending in the economy 10.1.5. Monetary policy is the official policy around the money supply and the interest rate 45 10.2. Changes in Aggregate Demand 10.2.1. AD = GDP 10.2.2. Ad1 = T + S + M > G + I + X 10.2.3. Ad2 = T + S + M < G + I + X 10.3. Expansionary Fiscal Policy 46 10.3.1. Emphasizes spending increases 10.3.2. Can involve tax cuts 10.3.3. Tax cuts increase disposable income 10.3.4. Can involve increased government spending 10.4. Contractionary Fiscal Policy 10.4.1. Tax increases or less spending 10.4.2. FE is full employment at Ad2 meaning FE causes an average price rise (labeled as inflation output) 10.5. Implementation of Policy Being Held Back 10.5.1. Recognition Lag: time required to identify a problem 10.5.2. Decision Lag: time required for the specifics of a decision to be put in place 10.5.3. Implementation lag: allocating money, jobs, and resources to the problem (post-decision) 10.5.4. Impact lag: self-correction may occur without intervention or through business cycles 10.6. Keynesian Economics Policies 10.6.1. Keynes used the Great Depression as an example of what a lack of government intervention can do to an economy 10.6.2. During the 1930s, cutting the G portion to balance the budget led to a decrease in C and lowering of national GDP 10.6.3. In theory, when a government runs a budget surplus they should be saving money for future use 10.6.4. When the economy is not doing well they can use the saved money to increase G and promote GDP growth to take the economy out of recessionary periods 47 10.7. Types of Budgets 10.7.1. Cyclically Balanced 10.7.1.1. During recessions, taxation decreases, government spending increases, and debt/consumption increases or stays the same 10.7.1.2. During inflationary periods, taxation increases, government spending decreases, and debt/consumption decreases or stays the same 10.7.2. Deficit Surplus 10.7.2.1. During deficit periods, taxation decreases, government spending increases, and debt/consumption increases 10.7.2.2. During surplus periods, taxation increases, government spending decreases, and debt/consumption decreases 10.7.3. Full Employment 10.7.3.1. Taxation increases, government spending decreases or stays the same, and debt/consumption decreases and stays the same 11. Introduction to Money 11.1. Basic Introduction 11.1.1. What is money? 11.1.1.1. Money is a good that acts a medium of exchange in transactions 11.1.1.2. By medium, we mean the means by which an exchange could take place 11.1.1.3. Without money, you would always have to find someone willing to trade you for exactly what you wanted and vice versa 11.1.2. Why does money have a value? 11.1.2.1. Money has value because of its supply 11.1.2.2. It is also influenced with supply and demand 11.1.2.3. The pieces of paper, plastic, or cotton really have no value 11.1.2.4. Humans and the economy place a value on money because it can be used as a medium of exchange 11.1.2.5. Value of any good is determined by supply and demand and the supply and demand for other goods 11.1.2.6. A price of any good is the amount of money it takes to get that good 11.1.2.7. Inflation occurs when the price of goods increases, and that occurs when money becomes less valuable relative to those other goods 11.1.2.8. This occurs when the supply of money goes up, the supply of other goods goes down, demand for money goes down, and demand for other goods goes up 48 11.1.3. What is exchange? An exchange rate? 11.1.3.1. Exchange is a transfer of goods and/or services between people and businesses 11.1.3.2. The purpose is to give multiple parties what they want through the medium of exchange 11.1.4. Why do currencies have exchange rates? 11.1.4.1. Prior to economic growth and globalization, each country had its own currency 11.1.4.2. Since you cannot use any currency you want, in any country you want, exchange rates give a relative value of one currency against another 11.1.4.3. An exchange rate is the current market price for which one currency can be exchanged for another 11.2. Double Coincidence of Wants 11.2.1. Exchange relies on double-concidence of you have something of value you wanted to trade and someone else having something of value you wanted to trade for 11.2.2. Paper Money Introduction 11.2.2.1. Travelling merchants found it safer to deposit their coins or precious metals with a local goldsmith, and accept a receipt of the deposit 11.2.2.2. Receipts could be transferred to someone else to take payment 11.2.3. Run on the Banks 11.2.3.1. A run on the bank(s) occurs when everyone attempts to remove their money from the banks at the same time due to speculation of a declining value of a given currency or money supply 11.2.3.2. A certain amount of money must be spent (in circulation) or it hinders the economy 11.2.3.3. The opposite occurs when too much spending is taking place (inflation) 11.2.3.4. This happened during the 19th and early 20th centuries, causing banks to collapse and declare bankruptcy 12. Bank of Canada 12.1. Functions and Roles 12.1.1. Directory of Monetary Policy 12.1.1.1. Controls growth of money supply by regulating credit, currency, and interest rates 49 12.1.2. Banker to the Chartered Banks 12.1.2.1. Uses accounts to settle debts, lend money for investment, support chartered banks by cash advances 12.1.3. Issuer of Currency 12.1.3.1. Issue of paper currency, design of notes, gauges amount required at various times of the year 12.1.4. Banker to the Federal Government 12.1.4.1. Buys and sells federal government bond and makes interest payments to bondholders 12.2. Lending and Interest Rates 12.2.1. Interest is the cost to the consumer for the privilege of using money 12.2.2. Interest rate is the percentage of the money used that will be returned to the lending person or institution 12.2.3. Interest and Interest Rates follow theoretical supply and demand laws 12.2.4. Graph Information 12.2.4.1. At I1: interest rate is too high, less demand 12.2.4.2. At I2: interest rate is too low, more demand 12.2.4.3. I1: recessionary behavior, pushes average price down 12.2.4.4. I2: inflationary behavior, pushes average price up 12.2.5. As rates increase, value of the dollar increases, demand for loans decrease, price of loans decrease, and interest decreases 12.2.6. As rates decrease, value of the dollar decreases, demand for loans increase, price of loans increase, and interest increases 12.3. Loans and Rates Relationships 12.3.1. Aggregate demand and aggregate supply in recessions and inflationary periods (not causing) 50 12.4. Interest Rates in Relation to Loans 13. Tax 13.1. Canadian Tax Brackets 13.1.1. 15% on the portion of taxable income that is $57,375 or less, plus 13.1.2. 20.5% on the portion of taxable income over $57,375 up to $114,750, plus 13.1.3. 26% on the portion of taxable income over $114,750 up to $177,882, plus 13.1.4. 29% on the portion of taxable income over $177,882 up to $253,414, plus 13.1.5. 33% on the portion of taxable income over $253,414 13.2. Provincial Tax Brackets 13.2.1. 5.05% on the portion of taxable income that is $52,886 or less, plus 13.2.2. 9.15% on the portion of taxable income over $52,886 up to $105,775, plus 13.2.3. 11.16% on the portion of taxable income over $105,775 up to $150,000, plus 13.2.4. 12.16% on the portion of taxable income over $150,000 up to $220,000, plus 13.2.5. 13.16% on the portion of taxable income over $220,000 13.3. Tools for Redistribution 13.3.1. Progressive Tax System (Marginal Rates) 13.3.1.1. A tax rate that increases as taxable income increases 51 13.3.1.2. Reduces income inequality, funds government initiatives, lowers tax burdens 13.3.1.3. Discourages entrepreneurship and investment 13.3.1.4. Encourages self-employed, businesses to show ‘less money’ in the books to cheat taxes 13.3.2. Welfare Benefits 13.3.2.1. Financial assistance for basic needs like food and shelter 13.3.2.2. Provides a safety net for vulnerable populations 13.3.2.3. Disincentivizing work and creates financial strain 13.3.2.4. Could lead to dependency and complacency with guaranteed welfare benefits 13.3.3. Senior Benefits (GIS and OAS) 13.3.3.1. Monthly benefits provided to residents of Canada once they reach 65 years old 13.3.3.2. Considered taxable income, may cause loss if you are still working at that age 13.3.3.3. Allows for security in income and finance for older dependency load 13.3.4. Canada Pension Plan (CPP) 13.3.4.1. Public pension system designed to replace income during retirement, death, or disability 13.3.4.2. Stable income, provides additional benefits if you choose to continue working 13.3.4.3. Reduces take home income as a result of taxes, contributions are deductible but not benefits 13.3.5. Employment Insurance 13.3.5.1. Temporary Assistance to Canadians who have paid benefits for >= 1 year due to job loss, birth, illness, etc. 13.3.5.2. Financial support, high economic stability 13.3.5.3. Reduces anxiety of unemployment 13.3.5.4. Allows employers to create more jobs, lower participation in labor force, and may hinder economic growth 13.3.6. Child Tax Credit 13.3.6.1. Provides money back for families with kids under the age of 18 13.3.6.2. Reduces child pove
