Principles of Microeconomic textbook chapter 1-17 notes PDF

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Chapter 1 Scarcity: the inability to satisfy all our wants, forces us to make choices Tradeoff: choosing one option at the cost of losing out on the other Incentive: a reward that encourages or discourages an action, helps us decide between choices Rational choice: comparing benefits and costs and c...

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Chapter 1 Scarcity: the inability to satisfy all our wants, forces us to make choices Tradeoff: choosing one option at the cost of losing out on the other Incentive: a reward that encourages or discourages an action, helps us decide between choices Rational choice: comparing benefits and costs and choosing the most beneficial option Economics: the social science that studies the choices that people, businesses, societies, etc. make Microeconomics: study of choices that individuals, businesses, governments, etc. make Macroeconomics: study of national and global economies Two big economic questions:

1. How do choices determine who, how, and for who goods and services get produced? 2. When do choices made for self-interest also promote social interest? ○ Self interest: choices made for the best of you ○ Social interest: choices made for the best for the society Four categories of factors of production:

1. Land ○ "gifts of nature", natural resources, physical locations 2. Labour ○ work time and effort from people ○ human capital: knowledge and skill people obtain from education, job training, work experience, that benefit production 3. Capital ○ tools, machines, buildings, etc. used to produce 4. Entrepreneurship ○ the human resource that organizes and manages all the land, labour, and capital Efficiency: ● Use of resources if deemed efficient once it reaches a point where it is not possible to make someone better off without making someone worse off. Globalization: ● Definition: the expansion of international affairs (such as trading, borrowing and lending, investing) ● This is done in pursuit of cheaper alternatives (labour in Asia is cheaper than labour in North America) Opportunity Cost:

● The highest-valued alternative that was given up when a choice/tradeoff is made Marginal benefit: the benefit from pursuing one more of a product/service/action Marginal cost: the opportunity cost of pursuing that one more ● if the marginal benefit from one more exceed the marginal cost, then it is a rational choice to do so Positive statement: what is

Normative statement: what should be ● a positive statement can be tested since it is a fact, and a normative statement is an opinion and cannot be tested Economic models: applying statements into economic descriptions/predictions and is tested through experiments by economists Chapter 2 Production Possibilities Frontier, PPF:

● the limit/boundary of production between two goods in ceteris paribus (when all other factors remain the same except the two goods in question) ● below: PPF between colas and pizzas ○ any point on or inside the PPF is attainable ○ any point outside the PPF is unattainable

● ● Production Efficiency: when we can't produce more of one good without producing less of the other ○ all points on the PPF are efficient ○ all points within the PPF are inefficient ■ because, at such point, it is still possible to produce more of one without less of the other ■ resource use if not maximized, some are being used but some are being unemployed/misallocated ● Tradeoffs: every choice that affects the PPF involves a tradeoff; choosing to make more of one results in less of the other ● Opportunity Cost: the opportunity cost of making more pizza is the cola forgone ○ example: in moving from E to F, ■ the quantity of pizzas increases by 1 million ■ the quantity of colas decreases by 5 million ■ so, the opportunity cost of the extra 1 million pizzas is 5 million colas ■ so, one pizza costs 5 colas. ○ the opportunity cost varies based on where the choice is being made due to the outward bow of the PPF ■ the PPF bows outward because not all resources are equally productive

■ the opportunity cost increases as the production of one more of one item reaches it's maximum ○ Marginal Cost: the opportunity cost of producing one more unit of something ■ it increases as more pizzas are being produced

■ Marginal Benefit Curve:

● Marginal benefit: the benefit received from consuming one more unit of it ○ it is measured by the amount that a person is willing to pay for one more unit ○ Principle of decreasing marginal benefit: the more people have of one good, the less people are willing to pay for one more of it ● Marginal benefit curve: depicts the relationship between the marginal benefit and the quantity of that good consumed ○ slope is decreasing Allocative Efficiency:

● finding a balance between what people are willing to pay for one more pizza and how much it costs to make one more pizza ● where the marginal cost equals the marginal benefit

● Gains from Trade:

● Comparative advantage is when a person can perform an activity at a lower opportunity cost than anyone else, involves comparing opportunity costs ● Absolute advantage is when a person is overall more productive than others, involves comparing productivity

● some people are specialized in one aspect of production (lower opp cost), and when various people with various specialties work together, it can increase their productivity (increased absolute advantage) Economic Growth:

● the expansion of production possibilities, an increase in the standard of living ● two key factors influence economic growth: ○ Technological Change ■ development of new methods of producing ○ Capital Accumulation ■ the growth of human capital improves production ● economic growth is not free! ○ resources and research must be used in present day in order to produce new capital in the future ○ the opportunity cost of economic growth is the current consumption that is lost Economic Coordination:

● the choices of individuals must be coordinated ● four complementary social institutions have evolved over the centuries: 1. Firms ■ hires, organizes, manages factors of production ■ ex. Loblaws buys buildings, installs shelves, hires workers, and directs how they sell their goods 2. Markets ■ a place/event where buyers and sellers do business with each other 3. Property rights ■ social arrangements such as ownership ■ promotes specialization and innovation, allows for comparative advantage ■ Real property: land, buildings, plant, equipment ■ Financial property: stocks, bonds ■ Intellectual property: creative effort, such as books, music, ideas, protected by copyrights and patents 4. Money ■ payment, usually in cash, sometimes in other forms Chapter 3 Competitive market: where there are many buyers and many sellers, no single buyer/seller who can influence the price Money price: the amount of money needed to buy a good/service Relative price: the ratio of its money price to the money price of the next best alternative, aka the opportunity cost of that item

Demand:

● This is defined by a person's choice that: they want it, they can afford it, and they have decided to buy it. ● Wants are the unlimited desires people have for goods, demand is a decision on which wants to satisfy. ● Quantity Demanded is the amount that consumers plan to buy at a particular time for a particular price. ● The Law of Demand: ○ the higher the price, the lesser the quantity demanded ○ the lower the price, the higher the quantity demanded Substitution Effect: ● when the opportunity cost (cost difference with the next best option) of a good/service increases, people seek substitutes for it, so the quantity demanded of that good decreases (and the quantity demanded of its substitute increases) Income Effect: ● when the price rises compared to income, people can't afford all the things they previously demanded, so the quantity demanded of the good/service decreases (for normal goods) Demand Curve: ● demand is the value given the price or the quantity demanded, it is represented by points ● the demand curve shows the relationship between the quantity demanded and its price (when all other factors remain the same)

● ● when the prices rises (increase in y-axis), the quantity demanded decreases ● when the price falls (decrease in y-axis) the quantity demanded increases ● this can also be seen as a willingness-and-ability-to-pay curve ○ willingness to pay measures Marginal Benefit ○ the smaller the quantity available, the price that someone is willing to pay for one more unit increases ● changes in demand: shifts the entire curve right/left (like a function translation)

○ increase in demand shifts the curve rightward ■ because increase in demand means people will pay higher prices for the same quantity of product ■ imagine it in your head, a curve shifted rightwards, and compare the two points at x=15. the old price would be $1.00, and the new price will be increased. ○ decrease in demand shifts the curve leftward Six main factors that affect demand:

1. The prices of related goods ○ a substitute is a good that can be used in place of another good ■ ex. energy bars and energy drinks are substitutes ■ when the price of a good increases, the demand for the good decreases, and the demand for its substitute increases ○ a complement is a good that is used in conjunction with another good ■ ex. a wii console and a wii remote ■ when the price of a good increases, the demand for the good and for its complement decreases 2. Expected future prices ○ when the price of a good is expected to rise in the future, the current demand for the good increases 3. Income ○ Normal Good: a level of good that is purchased by people with a certain income to afford it ■ when income increases, the demand for a normal good increases because people have more money to spend ○ Inferior Good: usually the cheaper, lower-class option that people who cannot afford a normal good will instead purchase ■ when income decreases, the demand for an inferior good increases because more people can't afford normal goods anymore ○ example: a plane ticket is a normal good. when income decreases, less people can afford plane tickets, so they buy bus tickets instead 4. Expected future income and credit ○ when income is expected to be good, people will be more willing to spend now 5. Population ○ the larger the population, the greater the demand for all goods/services ○ age of population factors demand for certain goods/services as well ■ ex. demand for hospital care increases as a population gets older 6. Preferences ○ personal preference of consumers that is often influenced by: weather, trends, etc. ■ ex. greater awareness for reducing plastic waste has increased the demand of metal straws

Supply:

● Defined as a firm who has the resources, can profit from, and has decided to produce an item ● Quantity Supplied is the amount that producers plan to sell during a particular time and at a particular price ● Law of Supply: ○ when the price increases, the quantity supplied increases ■ when the quantity of good produced increases, the marginal cost of producing a good increases (think back to efficiency and the curved bow of the PPF), and so the price increases ○ when the price decreases, the quantity supplied decreases Supply Curve: ● supply is a point given the quantity supplied or the price of the good, represented with points ● the supply curve shows the relationship between the quantity supplied and the price of the good

● ● when the price rises, the quantity supplied increases ● when the price falls, the quantity supplied decreases ● this is also a minimum-supply-price curve ○ as the quantity supplied increases, the price increases, and so the lowest price that someone is willing to sell an additional unit rises ○ this lowest price is the Marginal Cost ○ if a small quantity is produced, the price is cheaper, and so the lowest price that someone is willing to sell is lower ○ when a larger quantity is produced, the price increases, and so the lowest acceptable selling price increases Six main factors that affect supply:

1. The prices of factors of production ○ when it costs more to produce a good, the supplier will only accept higher prices to produce that good 2. The prices of related goods produced ○ a substitute in production for a good is another good that can be produced using the same resources

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■ when the price of a substitute decreases, the less quantity of substitute is produced, so the more resources can be allocated towards producing the good, which increases the price of the good ○ a complement in production for a good is another good that can be produced together ■ ex. beef and leather are complements ■ the supply and price of a good increases if the supply and price of a complement increases Expected future prices ○ if the price of a good is expected to rise, the quantity of supply's price is thus expected to rise, which will be higher than today, thus today will show a lesser supply that is shifted to the left The number of suppliers ○ the more suppliers, the more supply of that good Technology ○ advancements in technology make production more efficient and so increases quantity supplied and increases supply State of nature ○ natural forces that influence production, such as natural disasters, droughts, strikes

Market Equilibrium

● Equilibrium is obtained in a market when the price balances the plans of buyers and sellers ● the equilibrium price is the value where the quantity demanded equals the quantity supplied ● the equilibrium quantity is the quantity bought and sold at the equilibrium price

● the equilibrium price is reached at 1.50, when the quantity demanded and the quantity supplied are equal ● Surplus: quantity supplied exceeds quantity demanded and there is leftover stock ○ then, the supplier will bring the price down so that quantity demanded increases and reaches equilibrium

● Shortage: quantity demanded exceeds quantity supplied and there are customers being left empty handed ○ then, the supplier will increase the price so that the quantity demanded decreases and reaches equilibrium ● changes in demand and supply: ○ a change in demand or a change in supply will affect where the equilibrium price is ○ a change in both demand and supply will vary: ■ if the change is in the same direction ■ the equilibrium quantity will increase/decrease ■ the equilibrium price is uncertain because the degree that the supply/demand changes is uncertain ■ if the change is in opposite directions ■ a decrease in demand (moves left) and an increase in supply (moves right) makes the equilibrium price decrease ■ the opposite, when both move closer, results in an increase in equilibrium price

Chapter 4 Price Elasticity of Demand

● measures the responsiveness of the quantity demanded of a good to a change in its price

● it is a units free measure, when influences on buying plans remain the same ● Formula: % change in qd / % change in price = %ΔQ / %ΔP ○ note: % change is calculated as a percentage from the average price %ΔQ = (ΔQ / Qaverage) x 100% ● we observe the magnitude of the value, disregarding -'ve or +'ve, to reveal how responsive the change is ● demand ranges from zero to infinity, and is classified as inelastic, unit elastic, elastic, or perfectly (in)elastic ○ Inelastic Demand: ■ when the % change in qd is lesser than the % change in price ■ a decrease in price by 1 unit increases the qd by less than one unit = bad! ■ the price elasticity of demand is less than 1 ■ ex. food is a common purchase, if the price changes, the qd still remains around the same ○ Elastic Demand: ■ when the % change in qd is greater than the % change in price ■ a decrease in price by 1 unit increases the qd by more than one unit = good! ■ the price elasticity of demand is greater than 1 ■ ex. cars are not a common purchase, and if the price changes, more people will want to buy that car ○ Unit Elastic Demand: ■ if the % change in quantity demanded equals the % change in price, the price elasticity of demand will equal 1 ○ Perfectly Inelastic Demand: ■ if the quantity demanded doesn't change when the price changes ■ a decrease in price by 1 unit does not change the qd at all ■ ex. insulin has a high importance to diabetics that no matter what the price is, the quantity that they buy stays the same

■ ○ Perfectly Elastic Demand: (green) ■ if the quantity demanded changes by an infinitely large percentage in response to any tiny price change ■ "infinite elasticity"

■ ex. for a soft drink from two vending machines located side by side, if they normally sell for the same price in both machines, some consumers will buy from one and some from the other. however, if one machine's price is higher just by a little bit, all consumers will buy from the other vending machine, as they are perfect substitutes.

There are 3 factors that affect the price elasticity of demand: 1. Closeness of substitutes ○ the closer the substitute is (soft drink and vending machines example), the higher the elasticity of demand ○ necessities: common purchases such as food and shelter ■ these don’t really have substitutes, since food is necessary, so it is usually inelastic ○ luxuries: top-tier purchases such as plant tickets and exotic vacations ■ these have many substitutes, the main one being not buying it, so it is very elastic 2. Proportion of income spent on the good ○ the greater the proportional income spent on the good, the more elastic / less inelastic the demand is ○ example: ■ if the price of gum rises, you don’t consume more gum than you usually do ■ if the price of apartment rent rises, you'll look for someone to split costs with ■ this is because gum is cheap and after an increase in price it is still cheap, so it is more inelastic ■ the price of rent is expensive, so when it increases, you're more inclined to find cheaper solutions and so it is more elastic 3. Time elapsed since the price change

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the more time that consumers have to adjust to a price change, the more elastic is the demand for that good example: ■ when the price of oil increased largely in the 1970s, people barely changed how much oil they bought, so it was more inelastic. ■ as time went by, more fuel efficient automobiles were invented, and more alternatives were invented, so the demand for oil decreased more and more over time, and the change became more elastic

Elasticity on a Linear Demand Curve ● the midpoint of the linear demand curve is where it is unit elastic ● at prices above the midpoint, demand is elastic ● at prices below the midpoint, demand is inelastic

● ● example: ○ if the price falls from $25 to $15, ○ the qd changes from 0 to 20 pizzas ○ so, using %ΔQ / %ΔP, ■ %ΔQ = (ΔQ / Qaverage) x 100% = (20 / 10) x 100% = 2 ■ %ΔP = (ΔP / Paverage) x 100% = (10 / 20) x 100% = 0.5 ■ %ΔQ / %ΔP = 2 / 0.5 = 4 ○ so, the price elasticity for this change is 4 Total Revenue and Elasticity

● the total revenue from the sale of a good is the price of the good x the quantity sold ● so, when the price changes, the total revenue also changes, based off of elasticity ○ if demand is elastic, a 1% decrease in price increases the qd by more than 1%, so total revenue increases ○ if demand is inelastic, a 1% decrease in price increases the qd by less than 1%, so total revenue decreases

○ is demand is unit elastic, a 1% decrease in price increases the qd by 1%, and total revenue remains the same ● Total Revenue Test: a method of estimating the price elasticity of demand by observing the change in total revenue from a price change ● graphical interpretation:

● Income Elasticity of Demand

● measures how the quantity demanded of a good responds to a change in income ● formula: % change in qd / % change in income ● if income elasticity if greater than 1, demand is income elastic and the good in question is a normal good ● if income elasticity is greater than 0 but less than 1, demand is income inelastic and the good is a normal good ● if the income elasticity is less than 0, the good is an inferior good ○ the qd of an inferior good decreases as income increases ○ as people make more money, they move away from inferior goods and purchase normal goods

Cross Elasticity of Demand