ECON 1150 Notes PDF

Notes Week 1 Economics: - Economics examines how we behave with each other to provide us with what we need and want - Business behavior - Consumer behavior - Government behavior (impact of things related to government like taxes, providing incentives like tesla in...

Notes Week 1 Economics: - Economics examines how we behave with each other to provide us with what we need and want - Business behavior - Consumer behavior - Government behavior (impact of things related to government like taxes, providing incentives like tesla incentive of 9000 to encourage people to buy electric cars therefore increasing demand) Issues of Pressing Concern: - Productivity Growth (Ability to produce things faster and cheaper using by investing in better tech) - Population Aging (Number of people retiring is higher than number of people of in labor force which means very few people in the job market to fill spots) - Climate Change - Accelerating Technological Change - Rising Protectionism (Integrated North American Auto Sector. Cars with production badge of China will be charged with a tariff of 100% especially EVs) - Growing Income Inequality ( Different Tax brackets) - Unemployment - Inflation Economics Definition: - Concerned with allocations of scarce resources among competing ends. - Study how individuals, firms, and governments make optimal choices from among a set of alternatives when facing scarce resources. Resources: Land - Forests, grains, agricultural land, water, oil, natural gas, minerals, fishing Labour - 40 million, diverse, human capital (higher % of educated people compared to other countries) Capital - Infrastructure, equipment, technology, machines. Wants: - Housing - Social services, entertainment, sports - Medical, hospitals, doctors, nurses - Cars, clothing - Safety - Education, teachers, schools - Food Economic and Market forces: Scarcity - Our resources are limited Our wants are unlimited Economic activity is the way we deal with scarcity - Money Private property Government Police, courts  Week 2 Notes: Marginal Cost and Benefits: Decisions are based on costs and benefits Marginal Cost ○ Additional Cost to you beyond the cost you have already incurred ○ Sunk Cost: cost which cannot be recovered (costs that do not or should not influence our decision) Marginal Benefit ○ Additional benefit to you beyond the benefit you have already incurred Economic decision making: - Opportunity Cost: The opportunity cost of using resources in one activity is the value of those resources used in their next best alternative. - ‘Opportunity lost’ - ‘Value of highest opportunity forgone’ Decision Makers: 1. Households: a. Consumers maximize utility or satisfaction 2. Firms: a. Businesses acquire factors of production. b. Firms act to maximize profits. 3. Government a. Various levels of government provide infrastructure and public goods Economics Models: Simple representation of the important elements of the behavior of individuals ○ Allows economists to make predictions of the economy in the future. Assumption: ○ Rational choice: all individuals act in their own interest Business (actions to make profits) Consumers ( actions which lead to happiness and satisfaction) Production Possibilities Model: A model which illustrates all possible combinations of goods and services which can be produced with a fixed set of resources Assumptions of the model: 1. Production is efficient. 2. Fixed resource stock. 3. Fixed current level of tech. 4. Only two goods in the model. Marginal Cost: The opportunity cost of producing one more unit of the good or service. ○ It is the slope of the PPC (production possibilities function or curve) Law of increasing opportunity cost: Sometimes called: law of increasing relative cost  ‘The opportunity cost of producing additional units of one product rises as more that product is produced’ ○ Why? Not all resources are equally productive. Resources are used indifferent quantities (proportions) for different products. Week 3 Notes: Factors that can shift the PPF: Increased Population Investment in physical capital Increased education Better technology More natural resources Efficiency: Productive efficiency: producing on the PPF ○ Efficient use if resources and technology Allocative Efficiency: when we are producing at a point on the PPF that we prefer above all the other ones. Trade and Production: Comparative Advantage: We have a comparative advantage in production if we are able to produce a product at a lower opportunity cost than someone else. Absolute Advantage: We have an absolute advantage in production if we are able to produce all products at a lower cost (fewer resources) than someone else. Theory: Theory is a shorthand way of telling a story ○ Focuses on the important relationships Positive Statements: ○ Statements and theories which are based on facts. ○ ‘What is’ statements Normative Statements: ○ Statements about what “should be” or “ought to be” ○ Opinions and judgements Methodology: Hypothesis Variables Predictions, Policy The Market: Supply and demand ○ Represent exchange between the buyer and seller Represent consumer wants: demand Represent producers’ ability to offer the product or service: supply Demand: Explain the behavior of the consumer What things determine whether you will buy something today?  Demand: The relationship between the quantity demanded and the product price, holding everything else constant ○ ‘Ceteris paribus’ condition Quantity demanded: The exact amount of the product that the consumer purchases at a moment in time and at a particular price, holding everything else constant. Law of demand: The quantity demanded and the price of the product are inversely or negatively related, holding everything else constant. Shifts in the demand curve: Change in ceteris paribus conditions Can be caused by any factor other than the price Average Household income ○ Inferior goods: A rise in income causes a decrease in demand ○ Normal goods: A rise in income causes an increase in demand Price of related goods ○ Substitutes: Two goods of similar use. ○ Compliments: Two goods which are used together. Tastes ○ Personal preference and wants Distribution of income ○ Rich, poor, and average income Population ○ Number of consumers  Expected future prices ○ Higher prices in the future means more spending today. Law of supply: An increase in the market price of the product leads to an increase in the quantity supplied, holding everything else constant. The price and quantity supplied are positively related, holding everything else constant. Shifts in the supply curve: Prices of inputs ○ Wages, rental rates, and income Tech Number of sellers Expected future prices Price of related goods ○ Complements in production (byproducts) i.e tv metal frame and scrap metal ○ Substitutes in production I.e 36 inch and 50 inch tv’s Equilibrium: - The stable price, P, and quantity, q, at which the quantity demanded and the quantity supplied are equal. - ‘Market-clearing’ competitive equilibrium - All market tend towards an equilibrium - Comp equilibrium - Nash equilibrium - Co-operative equilibrium - Equilibrium is important for predicting changes in the future Examine exogenous shocks to the market (TV business example): 1. Increase in income taxes: It would have a negative effect on demand i.e it will decrease demand causing the curve to move to the left 2. Increased cost of materials: It would have a negative effect on supply i.e it will decrease the supply causing the curve to move left (or up) 3. Price of Netflix falls: 4. New technology for manufacturing: It will have a positive effect on the supply i.e it will increase the supply causing the curve to move to the right. 5. Lower interest rates: It will have a positive effect on the demand i.e it will increase demand causing the curve to move to the right. However, it will also positively affect the supply curve since businesses borrow money too and it would be cheaper for them to produce their products now. - The importance of the model is to provide a rational explanation to any event which can affect the market. Week 5 Notes: Price Elasticity of Demand measures the response of consumer demand to changes in the product price. E = percentage change in the quantity demanded / percent change in price Arc elasticity formula (midpoint) E =(change in quantity demanded) /(average quantity) (change in price) /(average price) We lowered the price of a product from 6 to 5 and the quantity demanded went up from 100 to 200. E = (100/50) = -3.67 (-1 / 5.5) Elastic demand: A change in price causes a more than proportional change in quantity, thus: lower price leads to higher revenue and higher price leads to lower revenue Inelastic demand: A change in price causes a less than proportional change in quantity, thus lower price leads to lower revenue and higher price leads to higher revenue. What factors affect the price elasticity of demand? - Closeness and availability of students - Portion of income spent on the product - Length of time for consumers to respond to a price change. - Cross price elasticity of demand measures the relationship between two products. - EXY = (percentage change in the quantity of X) (percentage change in the price of Y) - Income elasticity of demand measures the response of consumer demand to changes in income - Ey = percent change in the quantity demanded / percent change in income -