Economics

Definition: it is the social science that studies the choices that individuals, businesses, governments and societies make as they cope w/ scarcity and the incentives that influence and reconcile those choices. all econ questions arise b/c we want more then what we can get (scarcity) Scarcity: a situation in which human wants are greater than the capacity of available resources to provide for those wants b/c scarcity - must make choices in a world w/o scarcity all goods would be free, and as a result the issue of market would be irrelevant choices depend on the incentives we face Incentive: reward that encourages/penalty that discourages an action The stakeholders who make and are affected by economic decisions: 1. Individuals: consumers/ households 2. Businesses: firms 3. Governments MICROECONOMICS -the study of choices made by individuals and businesses and the influence of government on those choices Factors of production: land (trees, property, minerals, water...) - rent labour (work, time and effort that people devote to producing goods and services) - wages capital (human capital: knowledge an skill that people obtain from education, on-the-job training and work experience) and (tools, instruments, machines, buildings and other constructions that are used to produce goods and services ) - interest entrepreneurship (human resource that organizes land, labour and capital) - profits Opportunity cost: the highest valued alternative that we give up to get something the production possibilities frontier (PPF) - boundary b/w those combinations of goods/serv that can be produced in a country and those that cannot comparing two goods while all else is constant the econ way of thinking : opportunity cost and choosing at the margin every choice is a tradeoff- an exchange-giving up one thing to get something else governments choose how to spend their tax revenues and businesses choose what to produce

 incremental change: steady changes role of institutions(govn't) is creating incentives to behave in the social interest NOTE: positive statement: checked against facts normative statement: cannot be tested Marginal analysis points inside and on the frontier are possible/ /points outside the frontier are not production efficiency : we cannot produce more of 1 good w/o producing less of another points inside frontier are inefficient possible to produce more of one good w/o producing less of the other good resources are unemployed/missallocated B/c resources are equally productive, the ppf bows outwards (concave) as the Q produced or each good increase so does its opportunity cost Efficiency occurs when marginal benefit = marginal cost which point is most efficient? - compare the costs and benefits Marginal cost: the opportunity cost of producing one more unit of it Marginal benefit: the benefit received from consuming one more unit of it Principal of decreasing marginal benefit the more we have: smaller its marginal benefit & willing to pay less for 1 more unit of it Efficient use of resources cannot produce more of any one good w/o giving up some other good that we value more highly , we have achieved allocative efficiency and we are producing at the point on the ppf that we prefer above all other points Types of econ systems communism/planned econ: all major decisions related to the production, distribution commodity and service prices are all made by the government (North Korea, Cuba...) capitalism/market econ: the consumers and their buying decisions drive the econ (United states, Russia...) mixed : certain features from both market and planned econ are taken to form this type of econ (Canada, UK...) Three major econ problems 1. What are we going to produce? 2. How is it produced? 3. For whom? Who receives and how much? Social Goals: Efficiency Equity Freedom

Growth Security Stability

Econ Growth is the expansion of production possibilities and the increase in the standard of living effects of econ growth results in the increase of amounts of goods that can be produced technological change and capital accumulation are key factors of econ growth Technology: the way you go about doing things TRADE countries trade b/c it allows them to consume outside of their ppf therefore increasing the standard of living comparative advantage: having a relative cost advantage in the production of one type of good/serv. as compared to another good/serv. Autorkey: countries being self sufficient Trading: countries not in state of autorkey DEMAND -the ability to pay and willingness to pay and want/need/desire as price goes down the Quantity Demanded (QD) increases QD: amount that consumers plan to buy during a particular time period and at a particular price movement along the demand curve is caused by the increase/decrease of the price the law of demand states that, all else constant, the higher the price of a good, the smaller is the quantity demanded Factors that change demand (shift the curve) 1. prices of related goods substitutes (as the QD for a substitute goes down the demand for the good goes up) compliments (as the QD for a compliment goes up the demand for the good goes up) 2. income reward from the factors of production normal good: a good for which demand increases as income increases inferior good: a good for which demand decreases as income increases 3. expected future price 4. expected future income 5. population 6. preferences

Relative price: is the price of a commodity such as a good or service in terms of another; i.e., the ratio of two prices. RP= money price / next best money price Consumer Surplus - at each and every price how many people are willing to buy - difference b/w what the consumer is willing to pay and the actual price of the good - when calculating find the area of the rectangle under the curve between the prices for individual intervals - when calculating for entire area account for triangles above the rectangles *A= 1/2 b h* Utility demand curve is also the marginal benefit curve benefit=utility=satisfaction/pleasure derived from the consumption of a production willingness + ability to pay curve - demand curve Marginal utility: the change in total utility that results from a 1 unit increase in the QD of a good consumed as the Q consumed of a good goes down, the marginal utility goes down total utility will be level when marginal utility equals 0 total utility decreases when marginal utility is -ve diminishing marginal utility is the decrease in marginal utility as the quantity of the good consumed goes up SUPPLY if a firm supplies a good/serv then the firm has the resources and the technology to produce it can profit from producing it definite plan to produce and sell it law of supply refers to the entire relationship b/w the quantity supplied (QS) and the price (P) of a good Factors that effect supply 1. the price of resources needed to produce the good (ex. ttc fare goes up as gas prices go up) 2. price of related goods a substitute in production - produced using the same resources compliments in production - must be produced together 3. expected future prices (if the price of a good is expected to decrease in the future the current supply will increase and the supply curve shifts to the right) 4. the number of suppliers (the higher in the # of suppliers of a good, the higher is the supply of a good, shift to the right ) 5. technology (advances in technology create new products and decrease the production costs so supply increases, shift to the right)

MARKET EQUILIBRIUM equilibrium price - the price at which the QD=QS equilibrium quantity - the quantity bought and sold at the equilibrium price Producer Surplus: difference between what producers are willing to supply at and what the actually supply at. Shortage: QD > QS Surplus: QD < QS Price mechanism involves two main actors, producers and consumers producers plan to make decisions independent of consumers consumers plan to make decisions independent of producers when the price mechanism works, shortages and surpluses don't exist functions of the price mechanism rationing functions - ability to pay signalling function - producer shortage/surplus incentive function problem w/ price mechanism market equilibrium price is too high Q is too high PRICE CEILING/ FLOORING price ceiling creates a shortage price flooring creates a surplus the black market price is higher then the price ceiling and the equilibrium price the black market price is lower then the price ceiling and the equilibrium price those who are able to buy at the controlled price might be able to resell at the black market price and thus make a profit dead weight loss is the loss to society

PERSONAL FINACIAL PLANNING - looks @ the decisions made by the households (individual consumers and producers)

 choice: spend or save save: households, firms, governments Savings: income not spend or deferred consumption motives for saving life cycle savings precautionary motive target savings motive inheritance motive invest: firms and governments Government bonds: issued in smaller amounts w. smaller interest and they're not taxed Corporate bonds: pay a higher interest rate and have a higher risk both are issued when there is a shortage of money Stock: share (ownership) of a company BP = payment (1-1/(1+i)^n)/i + C/ (1+i)^n BP=bond payment payment - coupon payment i - interest rate n - # of payments Simple interest SI = (P * R * T )/100 P- principal amount R - rate of interest T - time duration for which the money is borrowed CI = P(1+r/n)^nt n - # of times the interest rate is compounded every year t - # of years (period) Interest : the payment made and income received for the use of financial capital Corporations : publicly owned firms corporations issue stocks to load the savings so they can use to increase their capital Diversification: investing into different assets, different countries and industries Firms 1. provide tax revenue to the governments 2. create job opportunities who would be otherwise unemployed

 3.

people use their income to support other businesses which intern provides jobs for other people - +ve never ending cycle

provide the opportunity for countries to become self reliant and thus can act independently in pursuit of their self interest 4. involved in many community activities an therefore provide capital for infrastructure development an human training 5. provide and facilitate access to goods and services that consumers/firms/gov'nts want/need 6. compete with each other which intern benefits society by way of lowering prices, widening the variety, superior products and higher incomes 7. provide the necessary motivation for individuals to do well in schools, colleges and universities thereby enhancing the realization of your full potential 8. give back by donations - goal of a firm is to maximize profit - cost of a firm : the cost of the factors of production Explicit costs: require outlays of money Implicit costs: the opportunity costs of resources the firms owner makes available for production w/ no direct cash outlay Types of firms sole proprietorship (one owner that takes on all the risk) partnership (2-20 partners and take on all the risk) private limited company or limt. (share holders, limt # of shares issued, owed by family and friends of the business * limited liability) public limited company (buy stocks on secondary stock market, * limited liability) Decision time frame firms make many decisions to achieve its main objective: profit maximization short run time frame in which the Q of 1/more resources used in production is fixed capital is usually fixed (firm's plant) long run the Q of all resources including plant size can be varied a sunk cost incurred by the firm and cannot e changed Market structures Perfect competition may firms each sell an identical product no restrictions on entry of new firms

 both firms and buyers are all well informed about the P and products of all firms in the industry How perfect competition arises when firms minimize effect scale and small relative to market demand so there is room for many first in the industry consumers don't think about who to buy from price taking firms no single firm can influence price each firms output is a perfect substitute of another firms so the demand for each firms output is perfectly elastic Econ profit and revenue total cost is the opportunity cost of production firm's marginal revenue is the change in ttl revenue that results from a 1 unit increase in QS The firm's decisions in perfect competition short run produce or shut down if produce then how much long run where to increase or decrease plant size stay in industry or leave it Short run cost avg. cost : measures can be derived from each of the ttl cost measures avg. fixed costs (AFC) is the ttl fixed cost per unit of output avg. variable cost (AVC) is the ttl variable cost per unit of output avg. ttl cost (ATC) is the TC/unit of output *@ any point in time, the firm must always be in the short run*

Long run avg cost the coloured arcs are the avg ttl costs of a firm

Min. efficient scale: the smallest Q of output @ which the long-run avg. cost reaches its lowest level

MONOPOLY a single firm is the sole producer

 no competition for the monopolists price setter Barriers to entry Economic barriers extensive start up costs high fixed cost makes entry hard technical barriers hard for other firms to duplicate a monopolists production methods b/c he's the only owner of a resource/technique legal barriers prevention by force of law

- the economic profit will stay b/c no other company can enter the market even though the profit is pretty - consumer surplus is gone

MACROECONOMICS Real GDP: (real gross domestic product) (Y) the value of the ttl production of all the nation's farms, factories, shops and offices, measured in the prices of a single year. intermediary goods: ones that are not consumed by the ultimate consumer final goods: are consumed by the ultimate consumer NOTE: second hand goods are not counted in the GDP while any service performed on it counts. factor market: market for factors of production product market: for consumer goods/serv financial market: money market

Y = C + I + G + (X - M) Real GDP = consumption + investments + government spending + (exports - imports) transaction take place in factor market,goods market and financial market between households, firms, governments and rest of the world consumption : the expenditure of households on goods and services (takes up biggest part of GDP) Income approach: factors of production working getting income GDP= rent + wages + profit + interest Expenditure approach spending of households Financial Flows if G exceeds NT (net taxes) the there is a deficit and the govn't borrows from financial market if NT exceeds G there is a surplus and it flows through the financial markets How investments are financed: private savings: S government surplus borrowing from rest of world Depreciation : the decrease in the capital stock that results from wear and tear and obsolescence Nominal GDP: value of goods and serv. produced during a given year at the prices that prevailed in that same year - CPI is used to adjust nominal GDP TO CALCULATE real GDP: 1. last year's production and this years production at last years price and the growth rate 2. last years production and this years production at this years price and the growth rate 3. avg of the two rates 4. calculate the GDP using the avg rate changes in GDP is a measure of governance policies work? GDP will show w/ an increase of GDP doesn't earn that the standard of living goes up GDP/capita = GDP/population improve standard of living in a country with full employment by shifting the LAS (potential)

Sources of econ growth: the quantity and quality of its labour resources amount of physical capital available rate of technological growth amount and quality of this natural resources

Economic Growth in Canada potential GDP: what the country could be producing at its allocative efficiency the value of real GDP when all the economy's factors of production are fully employed Business Cycle - a periodic but irregular movement up and down on production and jobs a recession (GDP is decreasing for at least 2 successive 1/4s) expansion (real GDP increases) peak trough

UNEMOLOYMENT

Labour force: people who want to work and those with jobs Unemployed: 1. w/o job but looking for one 2. waiting to be called back from previous job 3. starting a new job within 4 weeks Unemployment rate = (people who want jobs/labour force) four types frictional (normal market turnover) structural (changes in technology) seasonal(summer jobs) cyclical (fluctuation due to business cycle) Full employment : when there is not cyclical unemployment (natural rate of unemployment) (macroeconomic equilibrium)

Government policies FISCAL POLICY - changing taxes, spending,deficit and debt policies tax cuts= more disposable incomes more spending shifts the AD curve since AD= Y and when G increases so does AD Aggregate supply: the ttl Q of goods/serv that firms in the econ. would be willing and able to produce at various prices MONETARY POLICY - changes in interest rates and Q of money interest rate decreases AD shifts right GDP goes up more houses bought cost of increases of AD is inflation Interest rates and real interest: nominal interest rate : % return on an asset Real interest rate: % return on an asset in terms of what $ will buy Real interest rate = (nominal interest rate) - (inflation rate) Inflation: the process in which the price level is rising and money is losing value w/ inflation the value of $ goes down inflation rate : % change in the price level

((P-P`)/P`) x 100% P- current price level P` - last years price level DEMAND PULL INFLATION results from an initial increase in AD COST PUSH INFLATOIN results from an initial increase in SAS Interest rate and opportunity cost nominal interest rate is the opportunity cost of holding money (aka doing nothing tapped to the back of your toilet) real interest rate : opportunity cost of spending money Consumption expenditure other things the same, the decrease in the real interest rate, the greater the amount of C and the lower the amount of savings Investment other things the same, the decrease in real interest rate, is the increase in amount of investments Net exports and interest rate change b/c a change in the interest rate change the exchange rate - other things the same. the increase in interest rate, increase in exchange rate a change in the exchange rate changed the net exports - other things same. the increase in the exchange rate is the decrease in next exports MONEY - legal tender that facilitates transactions (medium of exchange that is accepted by all) - any commodity/token that is generally accepted as a means of payment Characteristics of $ store of value held for a time and later exchanged medium of exchange object that is generally accepted in exchange unit of account a measure stating the prices Official measures of money M1 - currency outside banks and deposits at chartered banks that are owned by individuals and businesses M2 - M1 plus personal savings Good luck!

You know more then you think you do. Abbreviations : b/c - because w/ - with w/o - without Q - quantity P - price