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ECONOMIC NOTES: Ruvinka Srishanmugathasan Chapter 1 EC the science of scarcity and choice Opportunity Costs: sum of whats lost

st over taking another decision Wants: need or desire for g&s. 2 types o Physical (needs) o Psychological (cars, jewels) Scarcity: fact of Ec wants >resources Resources: used to produce G&S o Human; skills/ work force o Capital; machines, equipment o Natural; land, wood Two branch of Ex: Analytical(+) E: deals with facts and direct observation Normative (policy) E: statements with value judgments Fallacy: principles that sound true but are not principles that sound true but are not Fallacy of Composition: indv. Benefit translates to social benefit PotHoc Fallacy: occurred after A, B caused by A a.k.a cause and effect fallacy Fallacy of Single Causation: single factor or person caused event to occur Production Possibility Curve: Can produce additional qty of desired product by shifting resources of another Consumer goods: p&s that directly satisfy want Capital good: goods used in production PPC Curves
Linear PPC, constant relative cost. Constant transformation ratio. Rarely occurs in real life

o o o o o o

Should specialize in making one product: decreasing relative costs

Ec Choice: Relative costs: cost of producing on item A, expressed in terms of another B Law of Increasing Relative Cost: outputs The opportunity cost of each extra unit of goods rises as goods produced (concave) Law of diminishing returns: inputs
Eventual decline in rate of extra output produced when one input used in production of the output held constant and others increased

Law of increasing returns to scale:


As the qty of inputs (resources) are increased, the output level will rise at an increasing rate

Ceteris Paribus: all things staying the same 4 causes of EG: tech, resources, specialization of labour and education Frontier: curve in PPC rep max # of two items that can be produced with given amount of resources Effective: resources/ use of resources that achieve desired end such as consumption Efficiency: firms ability to produce at the lowest possible cost, measured by either its cost per unit or unit labour cost What? How? For Whom? To produce Chapter 2 Productive Resources: anything used to make a good Entrepreneurship: ability to organize economic activity, assume risks, and achieve effective results Capital Real capital : facilities, machinery. Equipment Money capital; funds Productivity: firms ability to max outputs firm resources available. Measured as firms output per worker Tangible resources: have physical property can be touched; nickel Intangible: lack physical quality ex. Entrepreneurship Environment for enterprise: countrys social and culture values, political, social and economic institutions to see if they are conductive for doing business Value added: increase in market value resulting from additional refinement in production Economic Systems Traditional o What to produce: needed by family o How: methods taught by elders o Whom: immediate family o Strength: minimal change, decision made together o Weak: no long term plan Command o Central authority o In best interests o Planning, reduce waste, stability, provides for needs o Inflexible, no incentive

Chapter 4 Market has 4 definitions: o A physical place where product is bought or sold o collective sense to refer to buyers and sellers of particular G&S global market for diamonds o demand that exists for a product or service ; market for used cars sluggish o process by which buyer and seller arrive at acceptable price and quantity Law of Demand: Demand: qty demanded for a g&s varies inversely with price Changes in Demand: Price, change in sub. Product, change in complementary product, income, taste and preferences, expectation of future price, # and characteristics of buyer Shift out in demand creates a shortage, opposite= surplus. If demand , price Effects: Income effect: price of g&s , increases leftover spending Substitution : price of g&s , ppl select substitutes that will satisfy Diminishing marginal utility: consume more of product, value of additional decreases. Left Centre Right Marshmallow Communis Socialism Capitalism Fasicm m Utility: measure of value or satisfaction Extreme Moderate Extreme Marginal utility: satisfaction from the next or Setting economic Goals previous indv unit o Price stability Law of total utility: each unit consumed, total utility o Full Employment Political stability: investor confidence goes up o Viable Balance of Reduced public debt Law of diminishing marginal utility: each unit o Payments and Stable Economic growth [more g&s at consumed, marginal utility decreases currency disposal , Law of Supply o Economic Freedom production expands] Supply: qty supplied for a good or service varies Increased productivity and efficiency o Environmental with price Stewardship Equal distribution of income Changes in Supply: Costs, # of sellers, technology, environment, price of related outputs Chapter 3 Shifts out in supply, a surplus opposite= shortage. Adam Smith Supply price Division of labour specialization Market Equilibrium Self interest-profit-competition Surplus is caused by: Invisible hand An increase in Supply David Ricardo Decrease in demand Competition (increased pop) Price > equilibrium price, then Iron law of wages-inevitable surplus Government role declining: distorted self interest Surplus = (QS)- (QD) Enough to keep them alive subsistence living Shortage caused by Labour theory of value A decrease in supply o Production labour relative value Increase in demand o Land/capital fixed Price < equilibrium price o Trade Shortage= (QD)-(QS) Thomas Malthus Determination of Price Population expands faster than food Inferior Goods: last resorts. They are worst than most Inevitable destiny: working people: lots of poor goods cheaper. Backwards effect with supply and Famine, war, natural disaster, birth control-1960 demand Herbert Pure competition: one where everyone is a price Spencer factor, not a price maker Rich and poor 1. There must be many small producers Survival of 2. No barriers to entry the fittest 3. Many small buyers Gov & charity 4. All products identical interfere 5. Everyone must know all about market Wealth Chapter 5 without guiltElasticity of Demand: hands of god Factors affecting elasticity (Els) William Sumner o Substitutes : number and quality Society benefits o Importance: want or need? o Struggle for survival is good for poor o Proportion of Income: is it a big deal to ppl o Rich strive to get rich, get richer o Time to adjust: can we make alternatives? Production and wealth Elasticity of demand: is the extent to which qty Adam Smiths idea at work (self interest, hand) demanded is affected by a change in price Thorstein Veblen Chg in qtyD is LARGER than change in price it is Ridiculed the rich relatively elastic o Low cunning, fraud, deceit Chg in qtyD is SMALLER than chg in price, relatively o Already rich inelastic o Barbaric rituals (way compared rich) Ed= QdPd Economic ideas: money makers profit >production Coeff of D in elasticity Conspicuous consumption: spending money so people cant see Inelastic Demand Curve: If the coefficient < Marx and Socialism 1, then its supply is inelastic. No matter Setting: industrial revolution how big the price change, the cge in qty Class struggle (bourgeoisie vs. proletariat demand hardly changes. . Labour creates all wealth9ricardo) Capitalism destroys itself Elastic Demand Curve: If the coefficient > Immoral, exploitation, inevitable revolt, mechanism 1, then its supply is elastic. This means Communist manifesto: workers unite as price increases, total revenue o Revolutions in Europe China, Cuba decreases, and the other way around John Maynard Keynes Galbraith Setting: great depression 1930s Unitary Demand Curve: If the coefficient is 1, spiral of production then its demand is unitary elastic. This Massive unemployment means as regardless of price, revenue Prevailing market sentiment stays the same o Tighten your belt o Making things worse Marxist communism threatening Coeff of S elasticity Government intervention supplements shortage of Inelastic Supply Curve: If the coefficient is demand <1, then its supply is inelastic. This Counter cyclic policy means that as price sellers cant Reconstruction: peace through prosperity supply many goods Milton Friedman Elastic Supply Curve: If the coefficient is Avoid direct gov intervention, public debt, inflation >1, then its supply is elastic. This laissez-faire means that if price , sellers can supply Negative income tax more goods to take adv of increased Monetarist- stabilize Ec with money supply/ interest prices rates Unitary Supply Curve: If the coefficient is Invisible Hand: Adam Smiths notion used to =1, then its supply is elastic. This describe use to describe the self-regulating nature means that if price , sellers match of the marketplace increase by same % in qty Supplied

Market o Sell most favorable o Efficiently as possible o For consumers willing to pay o variety of goods, competition, profit motivates o profit unevenly distributed, manipulates through advertising Crown Land: state owned Hidden economy: underground business Communism: gov or community ownership Socialism: gov ownership but more democratic i.e. equal Norway, Finland, Denmark Capitalism: everyone gets the same Fascism: force political and social control

S elasticity is affected by: time, ease of storage, and cost factors Utils: units of satisfaction Formula tells you how many of each good should be purchased:

)= (

Consumer Surplus: the value consumers are prepared to pay but dont have to- utility consumers get for FREE Consumer Equilibrium: state of satisfy.. a consumer reaches when MU P= for two or more products bought by consumer Celiing Price: max price one can charge. Creates a shortage. Solution is subsidy Subsidy: grant of money made to particular industry Floor Price: min that one can charge. Creates a surplus. Solved by quota Quota: restriction on amount produced Chapter 5 (Profit)= Revenue- (Total Cost) (T.C)= (Fixed Cost) + (Variable cost) (Profit)= (price)(qty)- [(FC)+(VC)] (Profit) = (PQ)- (FC) (Q*VC) Accounting Profit: what usually think profit is, R-C Theory of the Firm: Total Profit= TR-TC

Monopoly: Market dominated by single firm which has total control over total supply Firm produces unique product with no subs Firm is a price maker Lots of barriers to entry for the market No competitors; no non-price competition Oligopoly Dominated by few, LARGE firms Competing firms may have similar products Freedom to set price varies from small to big Sign barriers to barriers Intense non-price competition Monopolistic Competition Substantial # of firms Firms sell similar but not identical product Indv firms not large enough to influence total supply, have some price influence Little barriers, sig non-price competition Perfect Competition: Many buyers and sellers Indv firms have no control over total supply All firms sell standardized products Producers must accept equilibrium price; firms price takers not makers Little barriers to entry, little non-price comp since all products same Collusion: legal agreement among competing firms to set prices, limit output, divide market, exclude other comp Natural Monopoly: A field with high fixed costs (public utility) in which greater efficiencys happen when 1 firm supplies all Deregulation: opening of a market to more competition by elimination gov regulations Privatization: sale of public assets in a gov enterprise to private firms Firm: Units of ownership engaged by business activity

Business Organizations Sole Proprietorship: business owned / operated by 1 person Partnership: a firm owner by 2 or more people Corporation: busn firm recognized legally as a separate entity in its own right Co-op: bus owned equally by its members who have common relationship/goal/ Ec purpose Crown Corp: business owned by federal gov Charities: no profit Chapter 9 Macroeconomics: study of economics as a whole GDP: total market value of all G&S produced within a country in 1 year

Frictional: people leaving jobs to look for better ones Seasonal: certain jobs occur at some points of year Cyclical: Fluctuating business cycle Natural unemployment rate: some rate of unemployment us normal (seasonal, frictional, structural) Okuns Law: For every percentage unemployment is below he natural unemployment rate, there is 2% GDP gap (e.g: U=7%, NU= 6%, GDP Gap= 2%) Canadas natural unemployment rate is higher than the USs because of our social net ) 100 Unemployment rate= ( Chapter 10 Critics of Welfare: Loss incentive to work Inequalities, abuse inefficiencies Effectiveness and Cost Taxation Methods Progressive: tax rate takes higher % for higher income earners Regressive: TR takes lower% for higher income earners Proportional: tax rate takes constant % for all Countercyclic Policy: Government policy aimed at reducing or neutralizing anti-social effects of economic cycles. Such policies encourage spending during downturns, and tighten credit during inflationary periods. Downward curve: The aggregate demand curve= GDP Upward curve: Aggregate supply curve Aggregate curves are the sum of all other curves If employment gets too far above the natural rate, GDP increases, but inflation is the penalty

Creation of Money: Money supply is expanded when banks have excess reserves. Borrowing/lending increases supply, withdrawals reduces Characteristics of money: portable, durable, available, dividable, distinguishable, difficult to counterfeit, retains value, accepted by buyers and sellers Money Supply: total amount of money in circulation outside bank plus bank deposit Monetary Policy Tools Administered by the Bank of Canada Policy Decrease Increase Overnight rates Raise Lower Gov. Bond Sell Buy More gov Bank of Chartered bank deposits Canada Moral suasion lend less Lend more Bank reserve Raise Lower requirements Interest rates Higher Lower Interest rates are the common way that gov manipulates money supply

Shows how many goods are constantly flowing in a circle around the c. How large the rotation measures Ec GDP Expenditure Approach: Add up the total that is spent on all final goods and services in a year Income Approach: add up all income that is earned by diff factors of production (wages, rent, interest, profits Real GDP: GDP adjusted with price changes such as inflation. All called constant dollar GDP GDP= C + G + I + (X-M) G= (Gx-T) All of the segments and their affect on GDP: (c)apital(+) (I)nvestment (+) (s)avings (-) (Gx)overnment Spending (+) (T)axes (-) E(x)ports (+) I(m)ports (-) (+)= increase in GDP (-)= decrease in GDP (I-S) is the balance of investment and savings (Gx-T) is the gov budget balance. A deficit makes the value +, and surplus (X-M) is the nations trade balance. Deficit makes the value +, surplus The Business Cycle

Business Cycle Terms Boom: part of expansion phase, rapid increases in output and employment Contraction: follows peak. Output begins to contract and income decreases Depression: prolonged contraction; falling incomes, very high unemployment, deflation Expansion: first part of expansion phase where national and investment spending begin Peak: end of the expansion phase. The economys resources have reached capacity Recession: first part of the contraction phase- defined as contraction lasting at least 6 months Recovery: phase that follows the trough. Output begins to grow and income increases. Trough: lowest point or bottom of the cycle Economic Indicators Economic Indicators: Economic stats that give clues to changing economic conditions Leading: decisions already made that will affect the future performance of the economy (ex: TSX composite index) Coincident: measure of Ec performance showing conditions (eg. Unemployment. GDP) Lagging: provides evidence on changes in economy Major Indicators: GDP, Real GDP, Unemployment Rate, CPI, business capital spending, consumer spending The Multiplier Effect ( )= MPC ( )= MPW MPW: Marginal Propensity to Withdraw (money from economy), and includes MPS(savings), MPT(taxes), MPI(import). Multiplier=1/MWC. The multiplier measures how many times extra money goes around the circular flow Employment and Unemployment (Labour Force)= total of all Canadians holding jobs plus those looking for work Eligibility to work in Canada: must be between 16-69 o 20% are ineligible 27& do not want to work o 53% in labour force, 49% employed Types of Unemployment Structural: caused by changes in the nature of economy, hob available and skills Technological: tech makes some jobs obsolete Replacement: outsourcing

Fiscal policy Change G in GDP equation o GDP = C + I + G + (X-M) o Shifts AD left or right Govt surplus? Govt deficit? Fiscal Policy Monetary Policy Using interest rates to change GDP equation o GDP = C + I + G + (X-M) o Shifts AD left or right Money Market Interest, i , is the price of money If in recession? Keynes said that the gov job was to being economy out of recession. The G value is the only one in the GDP formula that the gov has control over, so the gov must either increase spending or reduce taxes Increase G when GDP low (recession) Decrease G when GDP is high (inflation) Automatic Economic Stabilizers: progressive income tax, employment insurance. The gov, must spend to get out of recession Recessionary gap is when there is not enough employment Inflationary Gap: when there is too much employment causing inflation Money F(x) of Money: improvement over barter system; medium of exchange; measure of value; store of value (sell now, buy later) Near Money: other types of deposits act as a store of value and cant be converted in to a medium of exchange <narrow, small money supply> Hard Currency M1: cash, demand deposits, cheques, current bank accounts M2: Savings accounts, term deposits M2++: deposits in near banks, money market, mutual fund, individual annuities M3: business term deposits, foreign currencies <broad, large money supply> What prevents money supply from collapsing? Confidence in bank system Branch banking Collateral Bank of Canada short term funding Government deposit insurance Role of money 1. Governments bank Deposit accounts Debt and borrowing Canada Savings Bonds, T-bills 2. Bankers bank Short-term funding lender of last resort Overnight rate 3. Manage monetary policy and money supply Inflation Exchange rates Interest rates 4. Currency Royal Canadian Mint Bank notes

Definitions Aggregate demand/supply: total demand/supply for all g&s in a year Bank rate: rate of interest charged by BofC to chartered bank Bear Market: stock market under the influence of traders expecting prices to fall Bond: financial asset that rep. debt owed by cop to the holder Bull Market: market influenced by investors waiting for price to rise Business cycle: swings in national economic performance characterized by Chain Fisher volume index: uses formula to rebase the GDP each quarter instead of comparing it to a base year Consumption: extreme left, based on theories of Karl Marx that says gov/community ownership of means of production Contractionary: Gov. policies that decrease AD through tax increases/ decrease spending CPI: a price index that measures change in $ of consumer goods Cyclical deficit: part of deficit that is incurred when gov is trying to pull an economy out of recession Deposit multiplier: amount by which a change in the monetary base is multiplied o deft the resulting change in money supply Discretionary: deliberate gov action to stabilize Ec in the form of taxation or policy Expansionary: Gov increase AD through tax cuts Fiscal policy: gov taxation, spending, and borrowing policies to try an stabilize Ec Foreign exchange reserve: are 'only' the foreign currency deposits and bonds held by central banks and monetary authorities. Fractional reserve banking: type of banking whereby the bank does not retain all of a customers deposits within the bank. Full employment equilibrium: This is the level at National Income at which everyone who wants to work is able to. GDP Deflator: a broad price index to measure price changes on all g&s in the GDP not just consumer goods Hidden unemployed: total # of underemployed workers plus discouraged workers Indexing: adjustment made to some wages to offset year to year price increases using CPI as a guide Inflation premium: That part of the nominal interest rate which compensates for (strictly speaking expected) inflation. Inflation: general rise in price levels of economy Injection: any expenditure that causes money to be put into the income-expenditure stream of Ec Investment: business purchase of capital goods, to increase production and profit Leakage: any use of income that causes money to be taken out of expenditure-income stream Liquidity: The availability of liquid assets to a market or company Marginal Propensity to Consume: Measure in change in consumption divided by change in income Marginal propensity to withdraw: change in withdrawals from national income due to savings, taxes, and buying imports divided by a change in income Marginal tax rate: That point in income at which any additional income will be taxed at a higher tax rate. Multiplier Effect: multiplied effect upon GDPO that results from a change in peoples income Nominal GDP: total value of GDP before it is adjusted for price increases; aka money GDP Nominal interest rate: The interest rate in terms of nominal (not adjusted for purchasing power) dollars. Paradox of Value: luxurious items Participation rate: the people in the labor force (or labour force) are the suppliers of labor. Phillips Curve: A supposed inverse relationship between the level of unemployment and the rate of inflation Prime rate: The lowest rate of interest at which money may be borrowed commercially Product differentiation: brands Prosperity Cycle: increase in AD leading to a cycle of higher production, more jobs, more income, greater consumption, results in higher AD Rate of return: the amount returned per unit of time expressed as a percentage of the cost Real rate of interest: The nominal rate of interest minus the inflation rate. Social Cost: transfer of part of firms production cost (clean up pollution) to the public Stabilization Policies: Gov intervention in the Ec to try to stabilize it, using fiscal and monetary policies Standard of Living: level of wealth, comfort, material goods and necessities available to a certain socioeconomic class in a certain geographic area. Store of value: A commodity, currency or other type of capital that is tradable and can be stored for future use. Structural deficit: Structural deficits occur when growth in spending needed to maintain current services and growth in revenues from current taxes and other revenue sources are inconsistent.