Chapter 1: Introduction to Economics/Making and Using Graphs Scarcity is our inability to satisfy all our wants Microeconomics is the study of the choices that indiiduals and businesses make! the way these choices interact in markets! and the influence of goernments Macroeconomics is the study of the performance of the national economy and the global economy Choices made in economics determine what! how! and for whom goods and serices are produced- "he what #uestion is $%hat goods and serices do we produce&'- "he how #uestion is $(ow do we use the factors of production to produce these goods/serices&'- "he for whom #uestion is $%ho consumes the goods and serices that are produced&' )ou make choices that are in your self-interest * choices that you think are best for you +actors of production:- ,and earns rent- ,abour earns wages- Capital earns interest- Entrepreneurship earns profit Choices that are the best for society as a whole are said to be in the social interest . tradeoff is an e/change * giing up one thing to get something else . rational choice is one that compares costs and benefits and achiees the greatest benefit oer cost for the person making the choice- 0nly the wants of the person making a choice are releant to determine its rationality "he opportunity cost of something is the highest1alued alternatie that must be gien up to get it Choices respond to incenties * a change in marginal benefit or a change in marginal cost- If the marginal benefit of 0ption 1 is greater than its marginal cost then you will choose 0ption 1- If the marginal cost of 0ption 2 is greater than its marginal benefit than you will not choose 0ption 2 Positive statements are about what is- . positie statement might be right or wrong but can be tested by checking it against facts Normative statements are about what ought to be- "hese statements depend on alues and cannot be tested .n economic model describes some aspect of the economic world and includes only those features needed for the purpose at hand "o disentangle cause and effect! economists use economic models and look for natural e/periments! conduct statistical inestigations! and perform economic e/periments to test the predictions of those models . natural experiment is a situation that arises in the ordinary course of economic life in which one factor of interest is different and other things are e#ual 3or similar4 . statistical investigation looks for correlations .n economic experiment puts people in a decision1making situation and aries the influence of one factor at a time to discoer how they respondChapter 2: "he Economic 5roblem "he production possibilities frontier 355+4 shows the limits to production1 5oints outside the frontier cannot be attained without technological change or capital accumulation1 .ny point inside the 55+ and on the 55+ can be produced! so they are attainable1 "he 55+ illustrates scarcity by showing that that firm cannot produce at points outside the 55+! and as the firm moes along the 55+ increasing production of Good .! it must decrease the #uantity of Good 6 %e achiee production efficiency if we produce goods and serices at the lowest possible cost1 .chieed at all points on the 55+ 0pportunity cost e#uals the decrease in the #uantity produce of one good diided by the increase in the #uantity produce of another good as we moe along the 55+1 0pportunity cost increases because not all resources are e#ually productie in all actiities as shown by the bowed1out shape of the 55+1 . ratio e#ual to the #uantity of the good gien up diided by the increase in #uantity of the other good produced as we moe along the 55+ Marginal cost of a good is the opportunity cost of producing one more unit of the good "he marginal cost is plotted at the /1alue midway between the two alues that generate it Marginal benefit from a good or serice is the benefit receied from consuming one more unit of it1 Measured by the most that people are willing to pay for an additional unit of said good or serice1 "he more we hae of any good or serice! the smaller is its marginal benefit and the less we are willing to pay for an additional unit of it Allocative efficiency is achieed when we cannot produce more of any good without giing up some other good that we alue more highly * the point on the 55+ that we prefer aboe all other points Economic growth comes from technological change and capital accumulation1 Technological change is the deelopment of new goods and of better ways of producing e/isting goods and serices1 apital accumulation is the growth of capital resources! which includes human capital "he opportunity cost of economic growth is greater the faster we make our production grow In 1789! the production possibilities per person in Canada were more than :/ those in (ong ;ong Canada deotes 1/upply . relative price is the ratio of one price to another "he opportunity cost of a good is the relatie price of that good to another good "he !uantity demanded of a good or serice is the amount that consumers plan to buy during a gien time period at a particular price1 Bot necessarily the same as the #uantity actually bought "he law of demand states that! other things remaining the same! the higher the price of a good! thesmaller isthe#uantitydemanded- andthelowerthepriceof agood! thegreater isthe#uantitydemanded . demand curve is a willingness1and1ability1to1pay cure and the willingness and ability to pay is ameasure of marginal benefit1 "ells us the ma/imum that someone is willing to pay for an additional unit of a good or serice . normal good is one for which demand increases as income increases .n inferior good is one for which demand decreases as income increases "hesubstitutioneffectdisplays that as the opportunitycost of agoodrises! the incentietoeconomi?e on its use and switch to a substitute becomes stronger "he income effectdisplays that as the price of a good either increases or decreases consumers caneither afford to buy less or more of a good relatie to their income . substitute is a good that can be used in place of another good . complement is a good that is used in con@unction with another good "he !uantity supplied of a good or serice is the amount producers plan to sell during a gien timeperiod at a particular price1 Bot necessarily the same as the #uantity actually sold "he law of supplystates that! other things remaining the same! the higher the price of a good! thegreater is the #uantity supplied- and the lower the price of a good! the smaller is the #uantity supplied . supply curve can be interpreted as a minimum1supply1price cure * a cure that shows the lowestprice at which someone is willing to sell and this lowest price is marginal cost "hee!uilibrium!uantityis the#uantityat whichthe #uantitydemandede#uals the #uantitysupplied "he e!uilibrium price is the price at which the #uantity demanded e#uals the #uantity supplied .t any price below the e#uilibrium price! the #uantity demanded e/ceeds the #uantity supplied and ashortage e/ists .t any price aboe the e#uilibrium price! the #uantity supplied e/ceeds the #uantity demanded and asurplus e/istsChapter =: Elasticity "heprice elasticityof demandis a units1free measure of the responsieness of the #uantitydemanded of a good or serice to a change in its price 5rice elasticity of demand C D change in the #uantity demanded E D change in the price "hetotalrevenuetestisamethodofestimatingthepriceelasticityofdemandbyobseringthechange in total reenue that results from a change in the price Aemand is elastic 3F14 if a price cut increases total reenue Aemand is inelastic 3G14 if a price rise increases total reenue Aemand is unit-elastic 3C14 if a price rise or cut leaes total reenue unchanged "he fewer the substitutes for a good or serice! the more inelastic is the demand for it "he smaller the proportion of income spent on a good! the more inelastic is the demand for it "he shorter the time that has elapsed since a price change! the more inelastic is demand .long a straight1line demand cure! demand is unit1elastic at the midpoint! elastic at all prices aboethe midpoint! and inelastic at all prices below the midpoint "he price elasticity of demandis a measure of the responsieness of the demand for a good to achange in the price of a substitute or complement 5rice elasticity of demand C D change in #uantity demanded E D change in price of a substitute or complement "wo goods are substitutes if the cross elasticity of demand between them is positie "wo goods are complements if the cross elasticity of demand between them is negatie "he income elasticity of demandis a measure of the responsieness of the demand for a good orserice to a change in income F1 3normal good! income elastic4- HG1 3normal good! income inelastic4- 1 3inferior good4 "he elasticity of supplyis a units1free measure of the responsieness of the #uantity supplied of agood or serice to a change in its price Elasticity of supply C D change in #uantity supplied E D change in price >ome goods and serices can be produced by using uni#ue or rare productie resources- these itemshae a low! een perhaps a ?ero! elasticity of supply "he greater the amount of time aailable after a price change! the greater is the #uantity suppliedChapter upport minimum wage laws1 >upport immigration restrictions . unioncanrestrict supplybycontrollingentryintoapprenticeshipprogramsbyinfluencing@ob#ualification standards . monopsony is a market in which there is a single buyer of labour1 "he monopsony hires the #uantity of labour at the point where the marginal cost of labour e#ualsthe alue of marginal product1 In a monopsony! there is one employer and the wage rate is the lowest at which the firm canattract the labour it plans to hire 6ecause a monopsony only demands the amount of labour where the MC, e#uals the MM5 3A4 thenit doesnJt want to produce at the e#uilibrium point In a monopsony! a minimum wage makes the supply of labour perfectly elastic and the marginal costof labour the same as the wage rate * the firm hires the #uantity of labour at which the minimumwage line intersects the demand cure "he demand for capital is deried from the alue of marginal product of capital1 5rofit1ma/imi?ingfirms hire the#uantity of capital serices thatmakes the alueof marginalproduct of capital e#ual to the rental rate of capital "he demand for land is deried from the alue of marginal product of land1 5rofit1ma/imi?ing firms rent the #uantity of land at which the alue of marginal product of landis e#ual to the rental rate of land1 "he supply of each particular block of land is perfectly inelastic because its #uantity is fi/ed sothe #uantity supplied cannot be changed by peopleJs decisions "he demand for a non1renewable natural resource is determined in part by the e/pected future priceof the resource and the alue of marginal product of the resource1 "he higher the e/pected future price of the resource! the greater is the present demand for theresource "he supply of a non1renewable natural resource is determined by:1 "he known reseres1 "he scale of the current production facilities1 "he e/pected future price "he market fundamentals price and the e#uilibrium #uantity are determined at the intersection of theMM5 cure and the MC cure If e/pectationsabout thefuturepriceof anon1renewablenatural resourcedepart fromwhat themarketfundamentalsimply!speculationcandrieawedgebetweenthee#uilibriumpriceandthemarket fundamentals price creating a new e#uilibrium price at the intersection of > and A "he 'otelling Principle is the idea that the price of a non1renewable natural resource is e/pected torise at a rate e#ual to the interest rateChapter 17: Economic Ine#uality Mar&et incomee#uals the wages! interest! rent! and profit earned in factor markets before payingincome ta/es Total income e#uals market income plus cash payments to households by goernments After-tax income e#uals total income minus ta/ payments by households to goernments 'uman capital is the knowledge and skill that people obtain from education! on1the1@ob training! adnwork e/perience ,ealth is the alue of the things that it owns at a point in time! while income is the amount that thehousehold receies oer a gien period of time1 %ealth is distributed more une#ually than income because wealth data does not include the alueofhumancapital! whiletheincomedatameasuresincomefromall wealth! includinghumancapital -ow-income cut-off is the income leel below which a family normally spends 8:L8D or more of itsincome on food! shelter! and clothing "he *ini ratioe#uals the ratio of the area between the line of e#uality and the ,oren? cure to theentire area beneath the line of e#uality1 .s the Gini ratio increases! the distribution of income becomes more une#ual 5eople who are most likely to earn large incomes hae a post1graduate or professional degree! aremembers of the labour force! and lie in middle1aged households with a smaller number of children 5eoplewhoaremost likelytoearnsmall incomeshaenot completedhighschool! receietheirincome in the form of a payment from the goernment! and lie in a household with a single femaleparent "he increase in the gap between the real aerage income of the richest and poorest Canadians tells uswhat happened on aerage but it does not tell us what happened to the distribution of income1 Income ine#uality might hae increased! decreased! or not changed . typical householdJs income and wealth changes oer its life cycle1 Income and wealth start out low! grow to a peak when the householdJs workers reach retirementage! and then fall after retirement "echnological changehas decreasedthealueof marginal product of high1skilledworkers anddecreased the alue of marginal product of low1skilled workers Incomes can become more une#ually distributed within countries when urban middle classes becomericher at a faster pace than rural farmers Incomes can become more une#ually distributed within countries when aerage incomes in poorercountries rise much faster than aerage incomes in rich countries CurrentlyL "he gap between the rich and the poor is widening within countries and narrowing acrosscountries "he greater the human capital ac#uired! the smaller the supply of labour! the higher the wage rate If agroupis discriminatedagainst! their alueof marginal product decreases andthealueofmarginal product cure shifts leftward * the wage rate falls and employment decreases Indiiduals who are pre@udiced hae more incentie to buy from those of whom they are pre@udicedagainst due to their generally lower prices %inner1takes1all contests e/plain the trend toward greater ine#uality with an increasing share of totalincome going to the super rich * the key is that globali?ation has increased the market reach of thewinner and increased the spread between the winner and the runners1up Ifagenerationhasahighincomeandsaesalargepart of that incomeandleaeswealthtoasucceeding generation that has a lower income! this transfer decreases the degree of ine#uality .feature of intergenerational transfers of wealth that leads to increased ine#ualityis wealthconcentration through marriage * people tendto marrywithin their own socioeconomic class3assortatie marriage4 "he three main ways in which goernment in Canada redistribute income are through income ta/es!income maintenance programs! and subsidi?ed serices . progressiveincometaxisonethat ta/esincomeat anaerageratethat increasesasincomeincreases . regressiveincometaxisonethat ta/esincomeat anaerageratethat decreasesasincomeincreases . proportional income tax 3flat1rate income ta/4 is one that ta/es income at a constant aerage rate!regardless of the leel of income Income redistribution in Canada increases the share of total income receied by the lowest 89D ofhouseholds and decreases the share of total income receied by the highest =9D of households . ma@or welfare challenge in Canada today is women who hae not completed high school! hae achild 3or children4! and lie without a partner1 >hort1run solution is welfare! long1run solution is education and on1the1@ob training Social Securityensure a minimum leel of income for senior citi?ens as well as cash payments tretired or disabled workers or their suriing spouses Employment insuranceproides anincome tounemployedworkers fundedbyemployee andemployer contributions ,elfare proides income maintenance for low1income families and persons